禮來公司 (LLY) 2011 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by.

Welcome to the Q4 earnings call.

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

Later we will conduct a question-and-answer session and instructions will be given to you at that time.

(Operator Instructions)

And as a reminder today's conference call is being recorded.

I would now like to turn the conference over to Ronika Pletcher, Director of Investor Relations.

Please, go ahead.

Good morning.

Thank you for taking the time to join us for Eli Lilly and Company's fourth-quarter 2011 earnings Conference Call.

I'm Ronika Pletcher, Director of Investor Relations.

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

Jan Lundberg; our President of Elanco Animal Health, Jeff Simmons and Ilissa Rassner and Phil Johnson from Investor Relations.

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

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

The information we provide about our products and pipelines is for the benefit of the investment community.

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

Since our last earnings call, we've had a number of significant events.

Here are some of the highlights.

In regulatory news, the European Commission approved the use of Alimta as continuation maintenance therapy in patients with advanced non-squamous non-small cell lung cancer after initial treatment with Alimta plus Cisplatin.

In the US, we submitted an sNDA to the FDA for the same indication.

The FDA approved the use of Erbitux in combination with chemotherapy as a first-line treatment for recurrent, locoregional or metastatic squamous cell carcinoma of the head and neck.

The FDA approved Jentadueto, the linagliptin plus metformin fixed-dose combination for the treatment of adults with type 2 diabetes.

The FDA also approved Amylin's Bydureon as adjunct to diet and exercise to improve glycemic control in patients with type 2 diabetes.

We submitted Amyvid for regulatory review in Europe for the detection of beta-amyloid plaque in the brains of living patients and we announced the withdrawal of Xigris in all markets following the results of the PROWESS-SHOCK study.

On the business development front we agreed with Amylin to terminate the exenatide alliance.

Amylin assumed full responsibility for exenatide in the US at the end of November while responsibility for OUS markets will transition to them by no later than the end of 2013.

And we signed an agreement to acquire ChemGen Corporation, a privately held company specializing in the development and commercialization of innovative feed enzyme products that improve the efficiency of poultry, egg, and meat production.

This marks our fifth animal health acquisition in the past five years.

And we entered into a six-month agreement with Prasco Laboratories to supply an authorized version of olanzapine upon expiration of the US patent for Zyprexa on October 23, 2011.

In clinical news, let me begin with an update on solanezumab.

The data monitoring committee for the Phase III trial with solanezumab met earlier this month, conducting both safety and futility analyses.

The DMC indicated that futility was not met and recommended that both pivotal trials continue without modification.

Please keep in mind that the lack of futility in an interim analysis does not mean the drug is efficacious.

In these studies not meeting futility simply means that only one of the four primary end-points across the two pivotal studies needed to have more than a 30% chance of being positive upon study completion.

In addition, while the DMC did not recommend any modification to the two pivotal studies, the DMC did recommend that two additional ECG measurements be added to the open label extension study to provide a level of cardiac monitoring that is more consistent with the blinded pivotal trials.

As we've done in the past, we encourage analysts and investors not to read too much into the outcome of the DMC's review.

While we are pleased with the outcome of the DMC's futility analysis, efficacy and safety can only be assessed at the end of the study.

In other clinical news we initiated Phase III trials to study our novel basal insulin analogue for type 1 and type 2 Diabetes.

We also initiated Phase III trials to study our anti-IL-17 monoclonal antibody in psoriasis and we presented encouraging Phase II data at the annual American Heart Association meeting for evacetrapib in patients with hypercholesterolemia or low HDL-C.

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

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

Turning to the income statement on slide 7, you can see that revenue declined by 2% in Q4 to just over $6 billion.

You'll also see that gross margin as a percentage of revenue decreased 2 percentage points from 80.1% to 78.1%.

The decreases in both revenue and gross margin percent were due to lower sales of Zyprexa, and to a lesser extent Gemzar, following their patent expiration.

This quarter's total operating expense, defined as the sum of R&D and SG&A, grew 2%.

Within operating expenses, Marketing, Selling and Administrative expenses grew 7% while R&D expenses declined 6%.

The growth in Marketing, Selling and Administrative expenses was driven primarily by our diabetes collaboration with Boehringer Ingelheim, and to a lesser extent by the Mandatory Pharmaceutical Manufacturers Fee associated with US healthcare reform.

The reduction in R&D expense was due to charges in the base period Q4 2010.

In Q4 2011, we did experience higher R&D expenses from our diabetes collaboration with Boehringer Ingelheim and other late stage clinical trials; however these increases were less than the fourth quarter of 2010 charges related to business development activities and the termination of certain clinical trials.

Other income and deductions improved due primarily to lower foreign exchange rate losses.

Our tax rate in Q4 2011 was 19.9%, an increase of nearly 3 percentage points from Q4 2010.

Recall that our tax rate in Q4 2010 was particularly low as we recognized the full-year benefit of the extension of the R&D tax credits.

Net income and earnings per share each decreased 22%.

For the full year, revenue increased 5% despite the negative impact of the Gemzar patent expiration and the initial impact of the Zyprexa patent expiration.

Net income and EPS declined mid-single digits, driven by a decline of 2 percentage points in the gross margin percent which was largely due to the changes in foreign exchange rates.

In addition, operating expenses increased 8% for the year, primarily driven by expenses associated with our Boehringer Ingelheim alliance and the pharma fee.

For the quarter and for the year, total operating expenses grew faster than revenue.

This is a result of known headwinds we've talked about for some time.

Revenue growth was negatively affected by the Gemzar and Zyprexa patent expirations outside of Japan, as well as by US healthcare reform, while our strategic diabetes collaboration with Boehringer Ingelheim and US healthcare reform added significantly to our operating expenses.

In the face of these headwinds, we continue to drive strong revenue growth and prudently manage expenses in the rest of our business.

To illustrate this point, in the fourth quarter excluding these items, the rest of our business delivered revenue growth of 13% while operating expenses decreased 3%.

Excluding these items for the full year, the rest of our business delivered 14% revenue growth while operating expenses increased only 3%.

We will continue to focus on driving growth in those products and businesses not experiencing patent expiration and will rigorously prioritize investments to achieve our midterm financial targets and to position the Company to return to growth post-2014.

Slide 8 shows our reported income segment while slide 9 provides a reconciliation between reported and non-GAAP EPS.

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

Now, I'll turn the call over to Ilissa.

Thanks, Ronika.

As you can see on slide 10, the revenue decline of 2% for the quarter was driven by a negative impact of 11% from price, partially offset by a favorable impact of 8% from volume.

Foreign exchange had a negligible impact on worldwide revenue.

You'll see that we experienced a material US price decline and a US volume increase.

Both US price and volume reflect the Zyprexa patent expiration and our post-patent strategies.

Despite a decline in sales volume for branded Zyprexa, US volume increased in the fourth quarter of 2011 as a result of the timing of sales of authorized olanzapine to Prasco.

This volume increase was more than offset by significant price reductions attributable both to authorized olanzapine and branded Zyprexa.

Moving to the next row of numbers, you'll see that both price and volume declined in Europe.

Again, this was due to the Zyprexa patent expiration.

We continue to see strong volume growth from our three counter-cyclical growth areas -- Japan, emerging markets and Animal Health.

You can see that in Q4, volume growth in Japan was 19%.

Emerging markets, which is embedded in the ROW line, experienced 16% volume growth.

Finally, Animal Health delivered 10% volume growth.

For the full year, total revenue growth of 5% was driven by growth of 6% from volume and 2% from FX, partially offset by a 3% decline in price.

Volume growth was notable in Japan at 21%, in emerging markets at 12% and in Animal Health at 18%.

Notably, Trifexis, our oral treatment for dogs to prevent and treat flea infestations, prevent heartworm disease and treat and control adult hookworm, roundworm and whipworm infections, achieved Animal Health blockbuster status in its first year on the market, exceeding $100 million in sales.

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

For the quarter, you'll see that FX had a negligible effect on our results.

For the year, while FX did not have a significant effect on our bottom line, it did increase the US dollar value of our foreign revenue and underlying operating income, but this was more than offset by an FX-related increase in cost of sales.

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

Next, I'll briefly cover some highlights from our quarterly pipeline update before turning the call over to Derica.

Slide 13 shows our pipeline as of January 17 and highlights changes since our last earnings call on October 20.

This quarter's progress, shown by green arrows, demonstrates our focus on addressing our patent expirations through innovation.

You'll see that we began Phase III testing of both our anti-IL-17 monoclonal antibody for psoriasis as well as our novel basal insulin analog.

One oncology molecule progressed into Phase II testing and three new molecules began Phase I testing.

In addition, we terminated development of three molecules and have decided not to resubmit Arxxant to the FDA after reviewing the results of the recently completed EYES study.

Our Phase III pipeline now includes 12 potential new medicines, the majority of which are biotech products spanning oncology, diabetes, neuroscience and autoimmune diseases.

Now, I'll turn the call over to Derica to cover some of the key events for 2012, our financial guidance, and some closing comments before we open the call for Q & A.

Derica?

Thanks, Ilissa.

In 2012, we anticipate a number of potential approvals.

We'll continue to advance our pipeline and we'll generate and share clinical data that will help investors better gauge our growth potential post-2014.

We anticipate a number of regulatory actions, including FDA decisions on -- Alimta as continuation maintenance therapy for patients with non-squamous, non-small cell lung cancer; Erbitux, both in first-line non-small cell lung cancer as well as in first-line metastatic colorectal cancer; and Amyvid, for the detection of beta-amyloid plaque.

Now as we mentioned, at AHA in November we shared encouraging Phase II results for our CETP inhibitor.

We anticipate beginning Phase III trials for evacetrapib before the end of this year.

We also expect to complete a number of important Phase III trials in 2012 including -- the EXPEDITION studies for solanezumab for Alzheimer's disease; the TRILOGY study with Effient in ACS medically managed patients; and the PARAMOUNT and POINTBREAK studies with Alimta in non-squamous, non-small cell lung cancer.

In addition, we'll complete a number of Phase III trials for dulaglutide, and in collaboration with Boehringer Ingelheim, for empadgliflozin.

We'll also complete the Phase IIb trial of the JAK1/JAK2 inhibitor being studied for use in rheumatoid arthritis in partnership with Incyte.

Pending the outcome of this trial, our plan is to disclose both three-month and six-month data at medical meetings later this year.

A number of these trial completions will likely generate public data disclosures during 2012, as indicated in red text on slide 14.

We also expect to disclose additional Phase II data for our anti-IL-17 monoclonal antibody being studied in psoriasis and for our novel basal insulin analogue being studied for both type 1 and type 2 Diabetes.

Slide 15 shows a summary of the 2012 financial guidance that we discussed in detail on our investor call on January 5.

We've had no material items occur since that call and today, we're reconfirming all line items of our previously issued guidance.

If you're looking for additional color commentary on our 2012 guidance, please refer to today's press release, as well as the investor section of Lilly.com, where you'll find the slides and audio from our January 5 call.

I would note that some major currencies, including the Euro and the British Pound have depreciated versus the US dollar compared to the rates assumed in our guidance.

Should these FX rates stay at current levels, we could see modest downward pressure on foreign revenues and income offset by a favorable impact on cost of goods sold.

Finally, we worked closely with our external auditors on the proper accounting treatment for the termination of our alliance with Amylin.

Given the complexity of unwinding this alliance, we've decided to proactively consult with the SEC on our accounting treatment.

While it would not have any effect on the underlying cash flows or economics of the termination, it is possible that this consultation could lead to material changes to our accounting treatment and as a result, to our 2011 reported results as well as to our 2012 guidance.

We're working with the SEC to conclude this review process prior to filing our Form 10-K.

Slide 16 provides a reconciliation between reported and non-GAAP EPS for 2011 and the associated growth rates from these numbers to our 2012 guidance.

Now let me summarize.

We've accomplished a great deal in 2011, while rapidly adapting to significant external and internal developments.

Here are some highlights.

For the full year, we again delivered strong financial performance.

We generated 5% revenue growth despite the continued erosion from Gemzar's loss of exclusivity and the initial impact from the loss of exclusivity for Zyprexa in the US and Europe.

Operating expenses grew slightly faster than revenue as we absorbed both the Mandatory Pharmaceutical Manufacturers Fee associated with healthcare reform and incurred additional operating expenses related to our diabetes partnership with Boehringer Ingelheim.

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

We take our commitments to our shareholders seriously, and I'm pleased to report that we exceeded our expense and headcount reduction commitment.

Since mid-2009, we removed over $1 billion from our projected 2011 expense base and we've eliminated approximately 5,600 headcount before strategic additions.

Over the past year, our scientists remained focused on advancing our pipeline and delivered strong results.

Thanks to their efforts, Lilly advanced 10 new molecules into Phase I clinical testing, moved eight molecules into Phase II testing, and advanced four molecules into Phase III testing, including potential novel medicines for psoriasis and schizophrenia and two potential basal insulin analogues for diabetes.

We also strengthened our diabetes franchise, entering a strategic collaboration with Boehringer Ingelheim.

This collaboration added a Phase III compound to our portfolio, empagliflozin, an oral SGLT2 inhibitor, as well as linagliptin, our Tradjenta, which received approval and was launched in several major markets around the world.

Our financial performance.

Our focus on speeding innovation to patients, and our targeted use of business development makes us confident that we'll successfully navigate our patent expirations and emerge with even greater strength and capacity to drive future growth.

We remain on track to meet or exceed our mid-term financial projections -- minimum annual revenue of at least $20 billion, net income of at least $3 billion, and operating cash flow of at least $4 billion.

We ended 2011 with 12 molecules in Phase III development, surpassing our goal of 10 and another 22 in Phase II development.

This is the most robust mid- to late-stage pipeline in our history.

It includes a balance of small molecules and biologics and exciting candidates in each of our therapeutic areas.

We believe this pipeline will drive strong growth post-YZ

This year, we'll generate and disseminate important data that will help investors and analysts better gauge our long-term growth potential.

We're confident in our strategy and focused like never before on its effective execution.

This concludes our prepared remarks and now we'll take your questions.

Operator, first caller, please.

Thank you.

(Operator Instructions)

Tim Anderson, Sanford Bernstein.

Thank you, I have a few questions on solanezumab.

The first is, can you confirm that if the two Phase III trials are positive that you would file the product for approval in the current year?

The second comment is on the ECGs that you've added -- this seems to suggest that maybe somewhere along the way, there may have been a CV signal of some sort.

Is that the case, or is this just routine monitoring?

And then lastly, on the futility analysis that was done, is it a hard and fast rule that if you fall below the threshold of futility that the trials would have to be stopped or is there flexibility on this sort of thing that might allow the trials to go on even if you were below that threshold?

Thank you very much for the questions.

I think we'll have Jan take a crack at those.

In relation to filings, we first need to see the data before we can really commit to exact data in that area and we will communicate data second half this year.

In relation to the ECG comment, first of all, the data monitoring committee recommended that the two EXPEDITION trials continue as planned and the ECG comment was related to the extension two-year trial.

Currently, there are two ECG recordings in the extension trial at 12 and 24 months and the Data Monitoring Committee wanted us to add 1- and 3-months monitoring as well.

This is consistent with the level of monitoring we actually have in the blinded clinical trials.

If we look at the population of Alzheimer patients, the average age is around 75 years in the studies.

In previous trials that we've had, for instance, with semagacestat, placebo responses for cardiovascular events were 6.5%, and so far in the EXPEDITION studies, we have 6.4% of patients that have reported a cardiac adverse event, although we do not know currently if these subjects are receiving active treatment with solanezumab or placebo.

But remember again, the data monitoring committee recommended we continue the studies as planned.

The futility analysis was done in the way that was pre-agreed and if we wouldn't have met the agreement, we would not have continued.

So futility was not met according to the defined rules.

We had been regularly monitoring cardiac adverse events in the pivotal studies and we'll continue to do so obviously with the enhanced testing in the extension study as well.

Jami Rubin, Goldman Sachs.

Just to follow-up on solanezumab.

Ronika, you may have mentioned this and I may have missed it, but what probability hurdle was used in assessing the futility of solanezumab?

Can you give us a sense for what probability of success the futility analysis showed?

And also Derica, in your 2014 guidance just curious to know what probability of success you have built in for solanezumab in your revenue guidance by 2014?

We'll have Jan take the first and Derica, the second.

Futility was defined that all four of the primary end-points, two in each of the two pivotal studies having a 30% or lower probability of being positive at study completion, so this I think repeats what Ronika said.

And Jami, on your question with regards solanezumab's impact on 2014.

It's fairly immaterial, given the probability that we were assuming.

We had not put that absolute number out there, but what I can say is that if solanezumab is not successful, it will not cause us to change our 2014 outlook.

I guess Jami, one of the ways to think about the futility is as you're probably aware we're measuring ADAS-COG and ADCS-ADL scales as the two co-primary end-points in each of the two pivotal studies.

If all four of those endpoints had a 30% or lower probability of being positive upon completion of the studies, then the futility criteria would in fact have been met and as we said those criteria were not met.

Marc Goodman, UBS.

Yes, couple questions.

One is can you comment on any major inventory changes in the quarter?

Second, can you talk about the SGLT2 market, your product, how you think about your trials just given what happened with dapa?

And then third on Effient, can you tell us if the TRILOGY trial does work, how does that change your spending?

Derica, you want to handle major inventory change question, Ilissa, the SGLT2 and then either Derica or I will handle the TRILOGY investment question for you.

Marc, in regards to inventory changes in the quarter, we did see some inventory build -- excuse me, in the wholesaler and a little bit in retail in the fourth quarter in December.

It's a little bit higher than what we've typically seen, but we've also seen that basically being burned off here in the first few weeks of the month of January, so we didn't see anything significantly out of whack but was higher levels than we've seen historically.

Regarding our SGLT2 molecule, we are aware of the FDA concerns on dapagliflozin, although we do not know if those concerns are related specifically to the molecule or to the class.

We do believe that the SGLT2 inhibitor class is an important alternative treatment option for adult patients with type 2 diabetes.

We are continuing our Phase III trials and we will evaluate efficacy and safety at that time when they complete.

And then on TRILOGY, obviously this is a trial that will give us some very interesting and we think useful information about using the dose of [5.0 milligrams] (corrected by company after the call) for maintenance as opposed to a higher maintenance dose in elderly and low body weight patients that were those patients in the TRITON-TIMI 38 trial had a much higher incidence of bleeding.

So we're looking very much forward to getting this data later this year, having a chance to present it at a medical meeting in the second half of the year, hopefully, as well.

In terms of the investment required, I would not want to indicate to you that it requires a significant additional investment; we have a footprint already for this product with the ACS PCI indication.

We have a sales force also selling other cardiovascular drugs and the data could be very helpful to substantiate the clinical profile of Effient but would not necessarily lead to any significant ramp up in marketing or selling expenditures behind the drug.

Gregg Gilbert, Bank of America.

Jan, what will the field learn in 2012 about the CETP mechanism that will be important for your program, if anything?

Is a large outcome study in Phase III already factored into your midterm outlook, Derica for that product?

And if John is on the line, was curious if you're seeing increased likelihood of tax or repatriation reform, thanks?

Great, Jan, you want to start?

I guess my comment is it remains to be seen what we will be learn.

I think to really learn the essence of the CETP mechanism we need to have the outcome data for these top molecules that really affect HDL over 100% and in addition, lower LDL.

So we need to do the final outcome studies to make the definitive conclusions.

Gregg, in regards to your budgetary question around CETP, CETP is just one of many molecules that we have within our clinical portfolio.

As I've highlighted on other calls, the group is very adept here in our R&D organization with doing good portfolio management and managing within the budgetary guidelines that we've established and we make tradeoffs all the time.

As we go forward, depending upon what the decision is around CETP, that will be looked at in conjunction with other molecules that we have in development and we'll make the necessary decisions to be able to make the right funding.

As it relates to tax repatriation, for us and -- the thing that we've been most focused on, Gregg is not necessarily repatriation because that's still a one-time deal.

The more systemic or sustainable element that we think is most important is the US moving toward territorial system.

And this is where we will essentially be on a level playing field with our competitors who are not domiciled in the US, and I think that's the most important element of tax reform as I look for it.

David Risinger, Morgan Stanley.

I think you had mentioned the four primary end-points for solanezumab.

If you could just run through those again, please, that would be helpful.

My second question -- and I have three on solanezumab -- is with respect to the timing completion, clinicaltrials.gov indicates the two Phase III trials will be concluding in the second quarter.

Is that still correct, and would that imply an early third-quarter disclosure?

And then finally, with respect to solanezumab, how many end-points have to be positive to declare the trial a success?

For example, would you be able to file if you only hit one of the four primary endpoints?

Jan, you want to take that first and third question and I'll be happy to fill in on the CT.gov portion.

There are four primary endpoints, as was stated, two in each of the two EXPEDITION trials.

The first one is the ADAS-COG, which measures cognitive function with an emphasis on memory.

The second one is ADCS-ADL, which measures the ability to independently perform daily activities such as eating, bathing, or using the telephone.

It's a cognitive subscore and an activity of daily living inventory, and there are one of each done in each study making it four all together.

And in terms of how many of the endpoints need to be positive for filings, want to comment on that, Jan?

The studies have been powered so that we need to hit statistical significance on all four primary end-points across the two studies.

On the other hand, there are secondary end-points and there could be subgroup analysis being done and it will end up in a discussion with the FDA, remembering also that this is a disease area with a very high unmet medical need and there are no disease-modifying treatments available.

And of course it's about the benefit/risk judgment overall.

And then Dave, on the clinicaltrials.gov information, you're right.

It shows both trials completing as is stated on clinicaltrials.gov in April and June of 2012.

Just for clarity, that would be the last patient visit that would generate the data necessary to go ahead and actually close that database.

In many trials that takes a number of weeks.

This may take a bit longer given the number of tests that are being done and different kinds of imaging that are being done, so it will be a larger number of weeks post-last patient visit before we actually close those databases, clean and validate them and begin to have a read out of the data.

I don't know that I'd indicate to you the early Q3 disclosure.

We typically have been trying to set the expectation we will present this data before the end of the year at a medical meeting and then we'll evaluate with our team, with the SEC council based on the data, what is an appropriate disclosure strategy if any prior to a scientific disclosure at a medical meeting.

Steve Scala, Cowen.

I have three questions.

First, does Lilly know how many of the solanezumab end-points achieved the 30% hurdle and you are simply not disclosing this or does Lilly not know?

Secondly, what is the nature of the cardiovascular events seen in the trials?

Are they of rate or rhythm?

And what is the hypothetical mechanism by how these disturbances would be delivered?

And then third, Lilly has said in the past that for financial modeling considerations, solanezumab had a low probability of success.

Having crossed this interim hurdle, does Lilly still feel that the product has a low probability of success?

Jan, would you like to handle the first two and I'll take a crack at the last one.

The data monitoring committee did not say how many of the primary end-points exceeded the threshold for futility, so we cannot comment on that.

In relation to the nature of the cardiovascular events, we cannot be more specific at the current stage.

I refer back to my previous comment that overall there was a similar occurrence of CV events in the EXPEDITION trials which are blinded compared to the placebo events in the semagacestat trial.

And in terms of the financial modeling, Steve, you're correct with the saying in the past, that continues to be the case.

Again this is a disease state where there are no disease-modifying therapies, things that would delay the progression of Alzheimer's disease symptoms.

Amyloid-beta hypothesis, while it's probably the leading hypothesis, is still that.

We think this is one of the first molecules that will give that hypothesis a real test and we're optimistic about the potential for helping to improve care for Alzheimer's disease patients as well as their families.

But this remains a very high risk area of research.

We've also discussed the fact that it's particularly risky since we did not generate in Phase II the kind of efficacy data that you typically would have at that particular point in time.

So for that reason, if this relatively high risk, relatively lower probability Phase III assets were not to work, that would not have a significant impact on our future financial projections given that relatively low probability.

If, however, it were to work, there could be a more meaningful upside to our financial projections.

I'd go back to Derica's comment as well, given the timing for completion of studies and potential submission and approval this is not a molecule that would be impacting our 2014 guidance in either of the two cases of either working on not working in these Phase III studies.

John Boris, Citi.

Question on manufacturing and sourcing strategy for solanezumab.

Are you currently sourcing your clinical trials from smaller clinical batches or have you done three large-scale production batches on the product?

And has the FDA inspected the site?

Where will you manufacture it from?

And then second question for Derica.

Japan obviously a bright spot in the quarter.

I think some price cuts go into effect there, greater than 6% in April.

Can you walk us through what the potential implications of that are across your therapeutic categories that you participate in Japan?

I'll go ahead and handle your first question and pass it to Derica for the second.

In terms of manufacturing and sourcing strategy, we don't have a lot of details we can share at this point in time.

We can say that this is something we're producing internally to Lilly and would be expecting to not only for the clinical trials but for commercial production as well.

At this point I do not have an update for you in terms of FDA being inspect.

I would not anticipate that type of an inspection to occur until you have an active review ongoing.

Obviously since the trials are not yet completed we've not yet submitted.

We're not at that stage in the process with the agency.

John, as you saw, we had very strong performance in Japan, both for the quarter and for the year.

And for the year, we grew 31% there; for the quarter 27%, and key brands driving that were brands such as Cymbalta, Zyprexa, Alimta, and Forteo.

As we think about 2012, we are anticipating the biannual price decrease.

This year, as you heard on our January 5 earnings call, we anticipate the impact of that price decrease being much larger than what we've seen historically to the tune of approximately $200 million.

We won't know specifically until we actually see the price list that comes out.

But it's across brands like Alimta where we've had huge volume growth there, and potentially Zyprexa.

Tony Butler, Barclays Capital.

Back to solanezumab quickly.

I realize this is not prospectively defined but if in fact in post hoc analysis, ApoE4 status actually indicates that carriers or non-carriers, whatever the case may be, demonstrate significance but the overall trial were to fail the primary outcome, would that be a feasible outcome as well?

And I'm sorry to be specific, but clearly this is experimental and there are obviously some post hoc opportunities.

I'm just curious how you think about that.

It could be an option, but this will be a discussion with the regulators again referring back to the unmet medical need and the benefit risk of this molecule but we are doing this analysis and it could be one option.

Barbara Ryan, Deutsche Bank.

Oh, thanks, mine was the 32nd question on solanezumab and it got answered, thank you.

Seamus Fernandez, Leerink Swann.

Can you update us on the emerging market performance in the quarter?

Second, on solanezumab, the median on-treatment time for solanezumab at the interim look as well as at completion?

And then if you can just give us your thoughts on the Obama administration's argument that the mandate could potentially be removed without striking down PPCA.

Can you update us on what the industry's position is there?

And then if it were to be removed, but PPCA stayed in place what would that mean to the potential volume opportunity for the industry if any?

Off the bat let me tell you we don't have the data on median time on treatment either at the interim or upon completion.

I don't know that we'll have that.

We can certainly check and follow up after the call.

Derica, can you handle the emerging markets question and John to you for the healthcare reform.

We continue to see strong underlying volume growth in the emerging markets.

Our total growth was 7% for the quarter; emerging markets 10% for the year.

If we look specifically at markets like China, we grew there 43% in the quarter and 31% for the year, and we're seeing us move or increase our competitive positioning in the area of diabetes as well as oncology and those were two key drivers of that growth.

We would anticipate seeing continued strong volume growth in 2012 as well, but you will begin to see also the impact of some of the patent expiries in markets like Brazil and Mexico on products like Gemzar and Zyprexa that will dampen the overall revenue growth, but not the volume growth.

With healthcare reform with the Affordable Care Act there are a lot of things up in the air right now.

We've been implementing this obviously from the beginning.

It's had an impact on our income statement beginning several years ago and we're feeling a little bit more of that impact this year because it's the first year the fee has kicked in.

We're following all of this with great interest obviously.

We're prepared for whatever eventuality.

If someone is talking about removing the mandate, I think that calls into question how the system is going to avoid the selection bias and in essence, operate in a way that's affordable.

But we'll continue to monitor that and we're prepared to deal with any eventuality.

Seamus, just a quick follow-up as well on the emerging markets.

As Derica has mentioned we had 7% growth in Q4 and 10% for the year.

If you look at that volume growth, it's been quite strong.

As Derica mentioned it was 16% in Q4 and 12% for the full year.

To place in context the $250 million potential hit from generics, that would equate to about 10% of our overall emerging markets business.

It would be a relatively substantial hit, but may mask some of the underlying volume growth in other products that aren't affected by patent expiration.

Jeff Holford, Jefferies.

I wonder if you can give us a brief update on your insulin business in the US in the fourth quarter, just if there are any changes in market share or just general changes on pricing activities that happen between you and Novo Nordisk in the fourth quarter.

For the insulin business we saw continued strong growth in Q4, both in Humalog and in Humulin.

In Humulin, we saw not only continued strong growth with the Humulin ReliOn brand with Wal-Mart, but as some of that annualized out, a bit more of our price dropping to the bottom line.

Humalog, we continued to see very strong growth in a number of market segments including some of the hospital and long-term care segments.

As we have indicated we do expect that given some of the decisions that were made, CVS Caremark principally for example, for commercial as well as Part D, that we'll likely see some erosion in market share at the very beginning of the year.

We remain very encouraged by the progress we've made to date and the trajectory that we're on.

Chris Schott, JP Morgan.

Just a couple quick ones.

First on solanezumab and sorry if I missed an answer to Steve's question earlier, is there any theoretical CV concerns with solanezumab or just the mechanism in general?

Second question was on pipeline and how you guys are thinking about the abeta antibodies relative to the base inhibitors earlier in development.

And then final question was on business development.

The Company has got a growing cash balance.

Can you talk about the priorities at this point and what range of transactions you'd consider, specifically how large you'd go?

And as we think about BD, on the human pharma side of the business you have got very big data read outs with solanezumab and other assets ahead.

How are you thinking about BD given that how that data might play out could significantly alter the direction the Company is headed and the type of assets you might pursue?

Jan, the first two are probably for you and Derica, the business development one at the end.

If we get back to the cardiovascular concerns potential for solanezumab, as far as we understand, there are no real theoretical risks identified with the particular mechanism of binding the amyloid as a peripheral sync, so we need to be driven by the outcome data then from these patients.

If we look at the pipeline, there are a number of antibodies addressing beta amyloid even at the mid-portion of the molecule like solanezumab, the internal portion like some other agents and earlier, there are oral agents base inhibitor, which we have one.

If we look at the positioning of these molecules, the base inhibitor prevents the formation of amyloid while then solanezumab actually removes or prevents aggregation of amyloid, so they are partly a different mechanism of action.

It's also an opportunity for the next generation of amyloid agents to more prospectively use beta-amyloid imaging to actually identify amyloid-carrying patients that have mild cognitive impairment for instance and that could be the next step then to look into how you can really modify Alzheimer's disease progression.

Our focus on business development and direction has not changed.

Going forward, we expect it to be fairly consistent with what you've seen from us historically.

Our footprint has been we've done deals like Axiron, which we can easily slot into our ED business and footprint, commercial footprint.

We did the deal in the collaboration with Boehringer Ingelheim where we're able to bring in two molecules that we could leverage our diabetes focus.

At the same time outside of human pharma, we followed the same approach as it relates to our Elanco Animal Health business and most recently we acquired ChemGen, which was an enzyme business, feed additive business, that we were able to slot into our existing Animal Health footprint.

So those are the kinds of deals that we've been focused on historically and I would see us following that similar pattern going forward.

I would just build on that.

We've, as mentioned, five acquisitions in five years, all of those to build on Derica's strategy were strategic in nature bringing us into the vaccine business, the companion animal business, expanding our European business with Janssen last year, dairy with the Monsanto acquisition and this recent one to allow Elanco to continue with double-digit growth through YZ.

It will accelerate us in this great interesting space of enzymes.

Catherine Arnold, Credit Suisse.

One quick question on solanezumab.

The volumetric MRIs that you're doing, are those likely to come out in tandem with the broader results of Phase III?

Is there any chance of before or after?

On evacetrapib, I was wondering if you could give a little bit of color about how you're thinking about a Phase III trial.

There's a big variance between the Roche program, the Merck program of number of patients in their Phase III trial.

Are you thinking more on the 30,000 patient level or the 16,000 patient level?

Are you thinking about a partnership or not?

And then could you remind us whether or not you guys have an open label for your Phase II for evacetrapib?

Jan, you want to try to handle the first two questions on the volumetric MRIs and on evacetrapib?

Volumetric MRIs is a read-out that certainly we will try to include with all the other read-outs that we have for the solanezumab trial.

For evacetrapib, we are in regulatory discussions about our Phase III programs and we cannot share any comment today about this outcome, which also includes then potential business development.

One thing we have said about the programs for evacetrapib, while we're still in the planning phases we did go ahead in Phase II and look at this in combination with a number of statins that are commonly used whereas I believe some of the others have been looking at combination with a single statin.

So we'll also be evaluating that as we set our Phase III plans.

And I believe there is an open label extension to the Phase II but I think we'll need to and double check on that for sure with you.

Cynthia are there anymore callers or have we exhausted the list?

I'll turn it back over to you, sir.

Before we conclude the call I would like to take a moment to thank our colleague, Ronika Pletcher for her contributions to our Investor Relations efforts over the last 3.5 years plus a little bit.

I know many of you have worked with her pretty closely and we appreciate her contributions.

Also want to thank you that have dialed in today for your interest in Eli Lilly and Company.

We definitely look forward to keeping you appraised of the progress we make during the course of 2012 and the IR team, as always, will be available post the call to answer any questions you may have.

Thank you very much and have a great day.

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