禮來公司 (LLY) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Eli Lilly Q1 earnings call.

At this time all participants are in a listen-only mode, and later we will conduct a question-and-answer session.

(Operator Instructions) As a reminder this conference is being recorded.

I will now turn the conference over to your host, Vice President of investor relations, Mr.

Phil Johnson.

Please go ahead, sir.

Good morning.

Thanks for taking the time to join us for Eli Lilly and Company's first-quarter 2012 earnings conference call.

I'm Phil Johnson, Vice President 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 Lundburg; and Ilissa Rassner and Travis Coy for investor relations.

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

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

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

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

We're very pleased about our performance in the first quarter of 2012.

In the face of significant reductions in revenue and earnings due to the Zyprexa patent expiration Lilly employees around the world have remained focused on execution.

They delivered results that solidly position us to meet our 2012 financial guidance and have placed us on track to meet or exceed our mid-term financial minimum goals.

Let's begin with a quick review of events that have taken place since our previous earnings call.

From a commercial perspective we're pleased that Jentadueto, the linagliptin plus metformin fixed-dose combination for treatment of adults with type 2 diabetes is now available in US pharmacies.

On the regulatory front Japan's Ministry of Health, Labor and Welfare approved Zyprexa for treatment of depression in bipolar disorder, and Cymbalta for treatment of diabetic peripheral neuropathic pain.

Amylin's Byetta received European Commission approval as an adjunctive therapy to basal insulin, with or without metformin and/or pioglitazone, for the treatment of type 2 diabetes in adults.

We received a complete response letter from the FDA for Erbitux in first-line non-small cell lung cancer.

Lilly and Bristol-Myers Squibb do not plan to further pursue this FLEX submission but will continue to market Erbitux in the US for certain types of head and neck and colorectal cancer.

And lastly, the FDA approved Amyvid for use in patients being evaluated for Alzheimer's disease and other causes of cognitive decline.

In clinical news we announced the result of a phase III study that showed both Cialis and tamsulosin significantly improved scores on the International Prostate Symptom Score in men with signs and symptoms suggestive of benign prostatic hyperplasia.

And we announced new phase II data published in the New England Journal of Medicine that showed ixekizumab, an anti-IL-17 monoclonal antibody, met its primary endpoints in patients with moderate-to-severe plaque psoriasis

Now let's move on to discuss our financial performance.

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 in our business.

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

Turning to the income statement, on slide 6 you can see that revenue declined by 4% in Q1 to just over $5.6 billion.

This decrease in revenue was due to the loss of patent exclusivity for Zyprexa in most major markets outside of Japan, partially offset by growth from other products.

Excluding Zyprexa outside of Japan, the rest of our revenue actually grew 10%.

Gross margin as a percent of revenue decreased 1.2 percentage points, from 79.8% to 78.6%.

This decrease in gross margin percent was primarily due to lower sales of Zyprexa, partially offset by the impact of foreign exchange rates on international inventories sold.

This quarter's total operating expense, defined as the sum of R&D and SG&A, grew 3%.

Within operating expenses, marketing, selling, and administrative expenses grew 3% while R&D expenses grew 2%.

The growth in marketing, selling, and administrative expenses was driven by the diabetes collaboration with Boehringer Ingelheim and increased expense for new pharmaceutical and animal health products, partially offset by lower administrative expenses.

The growth in R&D expense was largely driven by the Boehringer Ingelheim collaboration, as well as other late-stage clinical trial costs.

When thinking about our year-on-year growth in operating expenses keep in mind that in Q1 last year we only add partial quarter's worth of expenses for the Boehringer Ingelheim collaboration.

The level of operating expenses in Q1 of this year is squarely in line with our expectations and our full-year guidance.

Other income and deductions was a higher net expense this year compared to last year due to recognition in the first quarter of 2011 of a gain on an equity investment and an insurance recovery, partially offset by increased interest income in the first quarter of 2012.

Our tax rate was 24.4% this quarter, an increase of 3.5 percentage points from Q1 2011, primarily due to the expiration of the R&D tax credit at the end of 2011, as well as a discrete item that increased taxes in the first quarter of 2012 due to changes in estimates concerning certain prior-year tax items.

The bottom line, our non-GAAP EPS decreased 26% to $0.92 per share.

Please note that, as planned, we did retire the $1.5 billion of debt that came due this March, and with no additional short-term or long-term borrowing.

In summary, our Q1 results clearly reflected Zyprexa patent expirations outside of Japan, as well as the additional operating expenses associated with the Boehringer Ingelheim collaboration.

In the face of these known headwinds we've continued to drive revenue growth from many products and prudently manage expenses in the rest of our business, putting us on a solid financial footing going forward.

We will continue that same focus and we will rigorously prioritize investments to achieve our mid-term financial targets and position the Company to return to growth post-2014.

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 I'll turn the call over to Travis.

Thanks, Phil.

As you can see on slide 9, the revenue decline of 4% for the quarter was driven by a negative volume impact of 7% partially offset by a favorable 4% price impact.

Foreign exchange had a negligible impact on worldwide revenue.

By geography you'll notice that US volume decreased 16%.

This was entirely due to Zyprexa sales erosion.

In fact, excluding olanzapine from both 2011 and 2012 volume in the rest of our US business was up 2%.

Also of note is US price, which increased 12% this quarter following an 18% decrease in Q4 of 2011.

Both periods were affected by our authorized generic olanzapine agreement with Prasco.

In this quarter we recognized our share of Prasco's authorized generic olanzapine revenues with no corresponding units sold by Lilly.

This serves to increase our reported US price by nearly 3.5 percentage points.

In addition, we had favorable adjustments to prior-period rebates and accruals that contributed roughly 3 percentage points to US price.

For Europe, the decrease in revenue was also due to the Zyprexa patent expiration.

Excluding Zyprexa from both 2011 and 2012, the rest of our European revenue was essentially flat, with volume growth of 6% that was offset by a price decline of 3% and an FX effect of minus 3%.

Japan growth of 5% reflects a negative effect of the biannual price decreases.

This includes lower prices on our sales in March, as well as lower customer buying ahead of the price decreases.

Also, in Q1 2011, we saw precautionary buying as a result of the earthquake that increased sales by about $30 million to $35 million.

Excluding the $30 million to $35 million of sales from the Q1 2011 base period, Japan's sales were up 12% to 13% this quarter.

As for emerging markets, which is embedded in rest of world, we began to experience the impact of generic competition that we discussed as part of our 2012 guidance.

In terms of products, the largest impact is coming from Zyprexa, while in terms of countries the bulk of the impact is coming from Brazil and Mexico.

As a reminder, we anticipate that generic competition will reduce our 2012 emerging market sales by roughly $250 million, which equates to 10% of our 2011 emerging market sales.

This quarter the generic impact reduced sales by about 13 percentage points.

Within emerging market, China continued to register strong growth, up 41%, or when excluding FX, 34%.

Elanco Animal Health delivered another quarter of robust performance, with volume increasing 31%.

Driving the strong quarter were continued growth of worldwide Trifexis sales, the inclusion of Janssen animal health sales and a combination of strong demand and customer buying patterns.

We expect Elanco to deliver to deliver double-digit income growth during the YZ years and beyond.

Finally, the 26% increase in collaboration and other revenue is due to royalties from telaprevir, as well as gross margin sharing with Boehringer Ingelheim for Trajenta, neither of which were present in the Q1 2011 base period.

Slide 10 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.

I'll focus on the second column since the numbers in the first column are the same as those on slide 6.

As discussed earlier, FX had negligible impact on worldwide revenue.

It also had a negligible effect on underlying foreign currency operating expenses.

However, FX did have an impact on cost of goods sold through its effect on international inventories sold.

Recall that this is an accounting effect only that has no impact on cash flow.

This FX effects increased cost of goods sold in Q1 2011 while it slightly decreased cost of goods sold in Q1 2012.

Excluding the FX effect on international inventory sold, cost of goods sold increased 10% and EPS decreased 30%.

For your information, on slide 11 we've provided the year-on-year growth of select line items of our reported income statement with and without the effect of foreign exchange rates.

Next, I'll provide a brief pipeline update before turning the call over to Derica.

Slide 12 shows our pipeline as of April 18.

Changes since our last earnings call are highlighted, with green arrows showing progression and red arrows showing attrition.

As Phil mentioned, earlier this month the FDA approved Amyvid for use in patients being evaluated for Alzheimer's disease and other causes of cognitive decline.

Beginning in June, a limited number of radio pharmacies will be distributing Amyvid with a goal of making the product available in more areas as soon as possible.

When Amyvid becomes available in June the scan will not be covered -- will not be a covered service under the Medicare benefit.

This is due to a center for Medicare and Medicaid services policy, which has been in place since December 2000.

Lilly is working diligently with a broad group of stakeholders to explore and collaborate with CMS to define a path forward for coverage.

You'll also see that we began phase II testing of two potential oncology medicines.

One, a hedgehog antagonist and the other a cyclin-dependent kinase inhibitor, and we began phase I testing of three new molecules spanning oncology, diabetes, and cardiovascular disease.

In addition, we terminated development of four molecules; three in phase II and one in phase I.

We now have 12 potential new medicines in phase III testing, eight of which are biotech molecules spanning oncology, diabetes, neuroscience, and autoimmune diseases.

We believe this pipeline positions us well for growth post-2014.

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 opening the call for Q&A.

Derica?

Thanks, Travis.

I'll start with slide 13.

Now while I'll focus my comments on events expected to occur later this year, we will now use this slide to report our progress on achieving key events we've highlighted to you for the year.

Now hopefully this provides with you greater transparency on how we're doing.

In the remainder of 2012, we anticipate a couple of FDA decisions.

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 FDA decisions on Alimta as continuation maintenance therapy for patients with nonsquamous non-small cell lung cancer and Erbitux for first-line metastatic colorectal cancer

We anticipate beginning phase III trials for Evacetrapib, our CETP inhibitor.

In addition we could begin phase III trials yet this year for our oral JAK1/JAK2 inhibitor for rheumatoid arthritis in partnership with Incyte.

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

The overall survival data from PARAMOUNT will be disclosed at ASCO in June.

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

Now we recently generated key data from two important phase II studies and we plan to disclose these data at upcoming medical meetings.

The first is a dulaglutide phase II hemodynamic study.

Our plan is to disclose data from the study at ASH, the American society of Hypertension, in May.

The second is the phase IIb trial of the JAK1/JAK2 inhibitor being studied for use of rheumatoid arthritis in partnership with Incyte.

Our plan is to disclose three-month data at EULAR in june and six-month data at a medical meeting later this year.

In addition, we'll disclose phase II data at the ADA meeting in June for our novel basal insulin analog being studied for both type 1 and type 2 diabetes.

Now moving on to guidance, we're pleased with our solid first quarter results and we're encouraged by the current trajectory of our business.

Based upon this trajectory we are increasing our non-GAAP EPS estimate to range of $3.15 to $3.30.

Now please note that we have now included EPS guidance on both a reported and a non-GAAP basis to reflect the charge taken in the first quarter.

All other line items of our guidance remain unchanged.

Slide 15 provides a reconciliation between reported and non-GAAP EPS for 2011 and the associated growth rates from these numbers to our 2012 guidance.

Now, in closing, we knew 2012 would be a challenging year as we experienced the full effect of the Zyprexa patent expiration in most major markets, and we are well prepared for this challenge.

For many years we've had a relentless focus on executing our strategy.

One to drive productivity gains across all areas of our value chain.

Second, to drive growth in our on-patent brands and in the counter-cyclical growth areas of Elanco Japan, and emerging markets.

And third and most importantly, to replenish and advance our pipeline.

We designed this strategy to enable Lilly to absorb the effect of our patent losses while funding the dividend at least at its current level, as well as the R&D that will drive our future growth.

Thus far we've had solid start to the year.

Our financial performance this quarter positions us well to continue executing our strategy and to meet or exceed our mid-term financial projection.

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 remain committed to our innovation-based strategy.

We'll maintain a productive investment in R&D through this period of patent expirations, and we'll keep our focus on the keys to Lilly's long-term success; advancing our late-stage pipeline and sustaining the flow of innovative medicines in the future.

Now as Travis said, we have 12 molecules in phase III development and another 21 in phase II.

They include a balance of small molecules and biologics and exciting potential new medicines in diabetes, neuroscience, oncology, and autoimmune diseases.

We believe this pipeline will drive growth post YZ.

This year we've already begun to generate and disseminate important data that will help investors and analysts better gauge our longer-term growth potential with much more data to come over the course of 2012 and 2013.

We're confident in our strategy and in our ability to successfully navigate our patent expirations and emerge with even greater strength and capacity to drive growth.

This concludes our prepared remarks, and now I'll turn over to Phil.

Keely, if we could start with the first caller and move into the Q&A session.

Thank you.

(Operator Instructions) Our first question will come from the line of Jami Rubin at Goldman Sachs.

Please go ahead.

Thank you.

Phil, maybe it's time to upgrade your technology.

I have a question related to gross margins.

The gross margin this quarter came in well ahead of what we were expecting.

And just in going back when the Company initially gave guidance for the year back in early January, the Street was, I think, at around $3.60 and you guided $3.10 to $3.20, in large part because of generic Zyprexa, which, of course, wasn't new.

Now you're raising that guidance again by $0.10 and the gross margin came in well ahead of what people were looking for.

So maybe, Derica, if you could talk to some of the variables that have driven your guidance, and help us to think about the evolution of gross margins -- at least, that's what we missed this quarter.

But you're not changing your gross margin guidance, so would you expect Q2 and Q3, because of the onslaught of generic competition, to be meaningfully below your average guidance of 77%?

Maybe if you could just add color there.

And then just on another note with animal health, which performed very well, if you could talk about the variables that are driving that?

And also if you could remind us what the Janssen acquisition provided for this quarter?

Thanks.

Okay, Jami, hi, this is Derica and thanks for your questions.

In regards to gross margin, just a few things to keep in mind.

One, as we move throughout the year, with each quarter of 2012 we will have further declining Zyprexa revenue.

So in 2012 we expect Q1 to have the greatest share of our Zyprexa revenue and then with each subsequent quarter it will decline.

With that decline it has an increasingly negative effect on our gross margin so that's going to be bringing our gross margins down as we move through the period.

Secondly, you also saw that in the first quarter we had a slightly favorable impact just from exchange rate.

So as the euro has been weakening against the dollar, and we've talked about this on past calls, you see that that has a favorable impact on our cost of goods sold of inventories during the period, which obviously has a favorable impact on gross margin.

Don't know if that's sustainable.

And then the third piece is, just when you look at the price effect element of it, we did see in the first quarter, as Travis said, there were some gross-to-net adjustments, so as we were looking at our A&P calculations and based upon new insights we able to -- we made some adjustments to our gross-to-net reserves on the books, which turned out to be -- come outside as favorable in terms of price.

Now, that's what's highlighting and driving our gross margins as we look through the remainder of the year.

In regard to your second question around animal health and what are some of the key things that's driving our guidance and our increase, what we saw in first quarter was very strong revenue growth relative to our expectations.

Animal health alone grew 33%, of which volume growth for that was 31%.

Within that volume growth it was primarily driven by both our companion animal business, as well as our food animal business.

In the companion animal segment we continue to experience an outstanding launch for Trifexis.

This is our flee and heartworm product, as well as we continue to actually have good sales of Comfortis.

And then likewise we've seen good performance on the food animal side, as well.

In regards to the Janssen acquisition, as well as ChemGen, which we completed earlier this year, that attributed about one-third of that total growth, and so if you look at the 33%, two-thirds of that was organically driven.

Jami this is Phil.

One thing I might add in terms of the gross margin percent, as you're aware for awhile now we've been providing a backup slide, this would be slide 18 in this quarter's deck, that strips out from each of the quarter's results this FX effect on international inventories sold.

These are the two lines of numbers at the bottom of that chart.

What that will show is actually in Q1 of last year we had nearly 1 percentage point reduction in the gross margin percent due to FX, so our true underlying base was 80.7%.

When you look at this quarter we're actually seeing 2.4 percentage point reduction in the gross margin percent, so very substantial.

It seems to be in line with what people had been expecting, and I'm wondering actually if people, as they were looking at the base to figure their decline off of and they had been looking at the base that included that negative effect from FX last year that wouldn't necessarily have been the appropriate base to take it down from.

As Derica mentioned, we do expect to see further deterioration through the year, particularly given the Zyprexa erosion that we anticipate largely here in the US.

We have now entered, I think as of today or yesterday, the period where multiple generics can now come to market and now will bring a different dynamic than we saw in the first quarter.

The last thing I will leave with, Jami, is that we were able to drive outside of the Zyprexa patent erosion and the remaining elements of Gemzar.

Good volume growth across the other elements of our business.

So in addition to animal health we saw good growth in China, 41%, as well as key brands like Cymbalta 23%, and even insulins, which grew -- Humalog grew 12%.

So that was always part of our strategy in terms of those three strategic levers, making sure that we were driving growth in those areas where we weren't experiencing patent expiration.

Keely, if we have the next caller, please.

We'll go to the line of Marc Goodman at UBS.

Yes, good morning, a couple questions.

First, can you just tell us what were the key products impacted by that gross-to-net adjustment?

Second, Alimta o-US looked like it flattened out and I was wondering if you could just give us a little bit of insight what was going on there?

And then third, I get this question so I figured I'll ask you.

If Solanezumab ends up being positive data later this year, what do you do differently as a company with respect to R&D, SG&A, and if it fails, what do you do differently as a company with respect to spending?

Thanks.

Marc, this is Phil.

I'll take your first two, then maybe Derica will take a crack, or Jan, at the last one.

So the product on the gross-to-net adjustments, it really was across the board.

This was -- it's a phenomenon, Marc, that we've seen each and every quarter.

Sometimes it's a slight benefit, sometimes it's a slight headwind.

This quarter it was a little larger benefit than we've had in some prior periods due to the size of the adjustments, and would have contributed about 3 percentage points of growth.

It shows up in the price column to our US sales.

The slowdown in Alimta o-US, the primary driver compared to prior quarters really is FX.

If you go back through mid last year and you had FX contributing double digits.

I think in Q2, for example, it peaked maybe at 11% contribution to overall growth, where as it reduced sales by 1 percentage point this quarter.

We also have seen the volume growth in percentage terms begin to decrease somewhat as we have a larger base that we're comparing against.

The last thing I'd highlight is we did have price reductions that go in effect for the public April 1.

It actually went in effect for us on sales to wholesalers as of March 1 in Japan as part of their biannual price adjustment process.

Alimta had a substantial price reduction in the order of magnitude of 25%, so we saw one month of that in the quarter.

Marc, in regards to your question around Solanezumab and how does that effect Lilly in terms of its potential outcomes, it does -- in terms of our overall strategy it doesn't affect us significantly at all.

We've stated all along that Solanezumab was not the home run bet for Lilly and it's one of 12 molecules that we have in phase III development.

So, therefore, if we're unsuccessful with Solanezumab we continue with our action plans as stated.

We will continue to progress the remaining 11 molecules that we have in clinical development in phase III, as well as the other 21 in phase II, and we'll continue to try to invest to drive the growth in our key growth opportunities.

Obviously, if it's successful, given the low probability of technical success, it represents up side for the firm, but R&D innovation is still going to be the cornerstone of our strategy so it doesn't lessen our focus still on those remaining 11 molecules in phase III.

Keely, next caller, please.

That will come from the line of Chris Schott at JPMorgan.

Please go ahead.

Great, thanks very much.

First question was just with regards to your JAK potentially moving into phase III later this year.

Could you just elaborate a little bit about how you see that product differentiating from Pfizer's product, and maybe more broadly the evolution of the RA market.

How do you see the oral drugs playing?

Do you actually think maybe it's a positive that you could be the second JAK in the market over time given how slow this market seems to evolve over time?

The second question I had is maybe just following up on the expense structure here.

Beyond solanezumab you obviously highlighted a number of important pipeline data releases this year, more coming in 2013.

Does there come a point where you do a broader strategic review of the overall spend level relative to new product opportunities?

Basically should we expect at some point you take a broader look at the pipeline once this data comes in, or is this really an evolutionary process as individual data points come in you evaluate and go from there?

Thanks very much.

Okay, Chris, thanks for the questions.

We'll have Jan handle JAK1/JAK2 and then we'll go over to Derica for your second question.

Jan?

Yes, the overall JAK class is an interesting new opportunity for oral agents in autoimmune disease and the interesting piece coming up here will be how differentiated will these different JAK molecules be.

They do have differences in their selectivity versus various members of the JAK family, at least in pharmacology invitro and I think it needs to be determined what type of clinical significance do the differences have.

We know that the power on the inside molecule is more JAK1/JAK2 selective while the Pfizer molecule is more a [tan] JAK molecule.

We also know that our molecule is likely to be once daily where as the Pfizer molecule is twice daily.

We need to see now in our bigger expanded trials what happens in relation to efficacy and also, in particular, safety, if there are any differences versus the Pfizer agent.

And as stated here, we will communicate our three-month data, as well as six-month data this year, so you will see more data from our agent.

And we're also eager to see what the outcome, which soon is happening then for the Pfizer molecule will give us for in relation to additional information in this important class.

Derica?

Hi, Chris.

Clearly we have plans in place in terms of how we saw navigating our way through this period of patent expiration, and that was all centered around driving growth where we could, which would create the capacity to fund R&D in our pipeline, as well as sustain our dividend.

Now, as those cards begin to be turned over and as we see data unveiled from our pipeline, our plans are not static and so obviously we will adjust along the way.

Now our expectations are that we believe we should be able to yield enough positive outcomes for our pipeline that supports our long-term strategy.

If the result ends up being different than that then we've thought through what the implications of that are, and obviously we'll go and begin to pull some of those levers.

But at this stage we put for you guys -- in our call text, as well as in the slides, we tried to lay out in this transparent manner as we can what are the key events that we're monitoring, both internally, and hopefully you're tracking externally, and we're trying to highlight there in those key events as those cards unfold and turned over, what's the outcome.

And so with each one of those checks we were very encouraged here, both with the approval of Amyvid this quarter, as well as the -- what we believe to be exciting data that we unveiled on our IL-17, our ixekizumab, for the treatment of psoriasis in moderate to severe patients.

As we continue to see data like that, that gives us even more encouragement about the future prospects of Lilly.

Great.

Keely, next caller, please.

We'll go to the line of David Risinger of Morgan Stanley.

Thanks very much.

I have couple questions on the pipeline for Jan.

The first is, Elan is discussing recently, very recently pre-specifying additional analyses for bapineuzumab for phase III, such as mild patients and maybe trying to pool the data on mild patients from the two different trials that they're running in the US and file for approval on that.

I'm just curious about whether Lilly is pre-specifying additional groups for the analysis of solanezumab, or whether essentially all of the weight is on the primary endpoints in the studies?

Then my second question is, with respect to the ImClone pipeline assets, Jan, if you could please update us on the timing of the key readouts I'd appreciate it?

Thank you.

Okay, great.

Dave, thank you very much for the questions.

Jan?

Right.

If you look at the solanezumab primary endpoints it's really about cognition and also activities of daily living and we want to see positive responses from both trials on both of these parameters.

In relation to types of patients, we have both mild and moderate and we have APOE types, as well, so it will be an opportunity here to discuss with regulators then what are the outcomes based on the data that we get.

The ImClone pipeline, as we know, is focused very much on the ramucirumab in phase III, which has five different trials then ongoing in different cancer types, which we'll start to read out next year and in the coming years.

We also have necitumumab for non-squamous, non-small cell lung cancer indications, which also we'll complete those studies most likely next year, but it's event driven so that will be dependent on that.

And before these two agents there are a number of other antibodies then, which are tested in different tumors, and here I think it's still early to say when these will progress further into late-stage development.

We need to generate more data in our signal searching.

Sure.

Dave, this is Phil, just a couple other things.

For ramucirumab I believe the current expectations as reflected on clinicaltrials.gov is that both the first of the two gastric cancer trials, as well as the hepatocellular trial would produce results next year with other indications to follow subsequently.

Necitumumab, the other phase III asset for ImClone, likely we're into early 2014, I believe, for the data readout on the squamous non-small cell lung cancer trail.

And then also keep in mind that we're awaiting word from the FDA on the first-line metastatic colorectal cancer indication for Erbitux, as well.

Keely, next caller, please.

We'll go to the line of Tim Anderson at Sanford Bernstein.

Please go ahead.

Thanks.

On your proprietary basal insulin, if I remember right you said you need to see differentiation to really take that through full development, and I'm wondering if you can call out where you hope to see differentiation based on early work that you've done, is it something like dosing flexibility, or flatter PK PD profile or what exactly?

And then on solanezumab just if I can get an update on timing.

You said in the past it would not make the late July meeting that I think used to be called ICAD.

What would be the next logical medical meeting after that because it doesn't look like there's much in the second half of the year.

ANA is in October, but that's not typically an Alzheimer's meeting and it begs that question of is your goal still to present results for the first time at a medical meeting versus top-line with imminent press release?

Great.

Jan?

Okay.

If we look at our novel basal insulin, we are looking there to differentiate with some clinically meaningful outcomes for our diabetes patients and this could be, for instance, less hypoglycemia versus LANTUS, it could be differences in body weight changes versus LANTUS, and potentially could be even a better glycemic control.

We know from our earlier studies that this agent has a very flat profile with very small inter-individual variation so we are very hopeful about the types of differentiation that we can see from this agent, and we will report at the ADA in June our data from both type 1 and type 2 studies comparing with LANTUS.

The timing for solanezumab communication, et cetera, is as follows.

The first expedition trial has completed, last patient visit now in April.

The second one we'll do with in June.

We will have a quarter four communication of the data in detail, and plan also to have a high-level communication before that on the top-line data.

Tim, this is Ilissa.

Just to give you an update.

The DMC did meet again early this month and they recommended continuing the double-blind and open-label studies without modification.

And the last thing I'd add, in terms of ADA and the information on our novel basal insulin analog, we will have, I think, 10 different abstracts and presentations at ADA this year, spanning pre-clinical phase I and the two phase II trials, and we are anticipating we'll have some is more details for you in the next week or two on having an investor event at ADA to discuss not only the data for the novel basal insulin analog, but the data that we presented earlier in May on our ----hemo dynamics study for Dulaglutide, so look for the notice on that and we look forward to having you participate in the call or some of you live with us at ADA.

Keely, next caller, please.

And we'll go to the line of Mark Schoenbaum at ISI Group.

Hey, guys, thanks a lot for taking the question, I really appreciate it.

And I wanted to ask about something that I think is -- personally I think is Lilly's most important commercial business, which is the insulin business.

I haven't heard any questions on this from the analysts.

And over the last year it has looked like you guys have done a good job of stabilizing the share losses to Novo, so I was just wondering, Derica, I'm not sure who to direct the question to but if you could give us an update and reflect back on 2011 what did you to stabilize that share and how as analysts and investors we should be thinking about share in the US and in Europe for insulin franchise versus Novo?

The then the corollary to that is, if could you update us on what's going on in the emerging markets.

I know in the emerging markets on the insulin business right now you trail Novo quite a bit, but in a sense that that's all room for upside, so maybe if could you give us an update on share and how that market overall is growing?

Then the second question I had was, I think this is the last conference call we're going to have with you guys before the Supreme Court has its way with the healthcare law and I was just wondering in general over the short term and over the long term if the mandate is struck down and if the overall law is struck down what kind of impact you see to Lilly's short-term business and also the long term?

I appreciate any comments you'd have around that.

Thanks a lot.

Great, Mark, thanks for the comments and questions.

Let's go ahead and have Derica take the insulins.

We'll have Travis and Ilissa help, who followed that business with the team over the last quarter.

And then, John, if you'll comment on the Supreme Court ruling.

Derica?

Hi, Mark.

In the US if you look at our insulin business and specifically Humalog, we've had a number of interventions and I think that's have improved our performance there.

If Enrique Conterno, the President of that unit was here he'd probably say one was we obviously have gone back and upped our game in terms of our medical reps and the quality of information they're bringing.

With that, it was accentuated through, one, the launch of the 3ml vile in the hospital setting and that's allowed us to gain much greater traction.

Third, we've been able to really leverage the launch of Tradjenta on our insulin business so therefore we're bringing more comprehensive meaningful solutions to the customer, the physician in this case.

And then last but not least, obviously we've also had some impact on contracting.

Now, what you will see is that year to year that's going to ebb and flow, so last year in 2011 we benefited from some of the contracting work that we have done, and if you look at our Q1 results and you're tracking the shares of Humalog in the US, you'll in the first quarter we've lost some share and this was essentially due to us losing the CVS contract to Novo.

But still, the underlying performance has gone quite steady and we see improvement, and including in our key markets outside the US where we continue to gain share, as well.

Mark, this is Travis.

The only thing I'll add to Derica's comment around the Caremark formulary is that there were really two parts of that that impacted our business; one being the Medicare Part D part and then the other part being the commercial part.

With respect to erosion of share based on loss of that formulary, we do expect that with that is largely behind us on both of those parts, it is worth noting that the custom plans, which are part of the commercial part, we did not see share of market erosion, so I just wanted to leave that point with you, as well.

In terms of emerging market in diabetes, diabetes is an area of great importance for us in emerging markets and our goal is to regain market leadership in diabetes.

This quarter we saw strong growth in Humalog.

In terms of how we perform against Novo, we have approximately a 15% share, and this is something we're going to grow over time but it will take time.

One thing that's of key importance is access.

We've made significant progress on this front, and it now put us on equal footing with Novo.

In terms of growth, just to put some numbers around that, if you look at the last trailing 12 months the latest data is in January, the mealtime insulin market in China was growing 17% and change and our growth, Mark, was over 60%.

John?

Well, everybody else has commented on diabetes so I've got to get my two-cents worth in.

I think you're right, Mark, this is, we view diabetes as being the, figuratively and literally the heart of our business and insulins and continued competitiveness in insulins as the key for our success in the therapeutic area.

I think looking ahead what are the levers that we have and what are the things that we think will amount to critical success factors.

Certainly the BI partnership, which is global in reach, gives us not only additional coverage and presence in key markets, but also access to new molecules.

We're focused on increasing the competitiveness of our manufacturing process and the competitiveness of the delivery devices that more and more are key determinants of patient choice in terms of people starting on insulin therapy and, of course, innovation.

We have a pipeline today in concert with BI that includes the DPP-4 tradjenta, currently the fastest growing class, and empagliflozin now completely phase III.

We have Dulaglutide, our GLP, and of course two insulins.

So I think all of this augers well for us being able to offer a broad range of products to the diabetologist, to the physician to really focus on what the patient needs and not just on what we have to offer.

With respect to the Supreme Court, obviously if the law is upheld we keep on keeping on.

Last year, to put in this perspective, we paid about $586 million out of our treasury as a result of the Affordable Care Act.

That was partly the fee, partly the increased rebate on products sold into Medicaid, and then the additional money needed to help Medicare patients bridge the doughnut hole.

If the law is overturned, obviously we would not have that sort of short.

We would presumably regain what we essentially paid out in 2011, at least going forward.

On the other hand, until something comes along that can replace the ACA I don't think any of us believe there is a, quote, status quo.

It will be unclear how we address the very real needs of 50 million people in this country who are uninsured, and who, therefore, presumably have less access, or no access to products like the ones that Lilly offers.

Great.

Keely, next caller, please.

Next on the line of John Morris at Citi.

Please go ahead.

Thanks for taking the questions and congratulations on the quarter.

First one, and the first couple are just pipeline related for Jan on Solanezumab, can you give any commentary on the dropouts -- or dropout rate out of the clinical trials that are currently ongoing?

The second question on the pipeline has to do with the BI deal.

There certainly is the prospects for attractive combination products, are you and BI exploring a combination of tragenta with empagliflozin going forward it would seem that the hemoglobin A1C lowering effect of that combo could potential be pretty compelling?

Last question for John, just on the political scene.

If we can possibly just get an update there, in particular on how PDUFA is being shaped, and also do you see potentially there being any risk to higher discounts or rebates on dual eligibles and any additional give-backs on Medicare Part D?

Thanks.

Okay, John, thanks for the question.

We'll have Jan start off and maybe Alyssa chime in and then we'll move over to John for the last part of your question.

If you look at the dropout rate for the Solanezumab trial, it's a different pattern than what we saw for semagacestat.

For semagacestat there were many more issues with patients dropping out because of side effects, so the less amount there is a small dropout but that has mainly been to practical reasons with infusion centers, et cetera.

So I think we are quite encouraged by this and also by the follow-on trial where 95% of the patients had continued actually with Solanezumab infusions, so I think that tells about the safety profile of this agent.

I agree that to have both in the DPP-4 and then SGLT-2 in the pipeline is great, and we have opportunities, which we are pursuing there, of combo between these two agents.

John, this is John Lechleiter.

I think on PDUFA we're pleased at this stage with the way in which the PDUFA-5 has been received on Capitol Hill.

Certainly we've engaged in a lot of dialogue with legislators there and we believe that we're make good progress toward the passage of that, including the reauthorization of the pediatric extension, or pediatric exclusivity provision.

With respect to some of the issues that we've wrestled with, certainly in the last year in the context of deficit reduction and other things, the higher rebates for the duals or other changes to Medicare Part D, I expect these are going to continue to be discussed.

I don't expect, in light of this being an election year, that there's going to be action one way or the other, but obviously awaiting as a country is wrestling this long-term deficit and the consequences of that to the ground, and I expect we're going to have to continue to stay very attentive to this issue and tuned in to this and to continue to make the case that Medicare Part D is not only working for seniors, it's wildly exceeding anyone's expectation in terms of its effectiveness and its cost.

Great.

Well, we are nearing the top of the hour, which is our allotted time for the call.

Given technical difficulties we will continue for a few more minutes, so, Keely, if we could have the next call, please?

That will come from the line of Greg Gilbert at Banc of America.

Thank you, a couple for Jan.

First, anything to update us on the timing and design of the Evacetrapib studies?

Secondly, on your GLP-1, given that you have results in house can you comment on your confidence in the safety profile of your drug versus the class or in any way that you feel comfortable disclosing the bigger picture confidence there?

Lastly for John, I can't let you off the hook on Washington matters here.

Which way is the wind blowing on taxation and repatriation and when might we see some action on those fronts, if ever?

Thank you.

Great.

Greg, thanks for the comments and questions.

Jan?

Let's start with Evacetrapib.

As you know we communicated our very promising data then in the fall and we have been doing extensive planning then for the phase III trial, including then interactions with regulators, which we are close to completing.

We have also been preparing the CMC material for the trial so we feel very good about the options we have to start this trial before the end of this year as we have communicated.

In relation to safety of Dulaglutide, Enrique presented some data last year about this agent, and as we said, we have completed the large hemodynamic study, which was originally a potential Achilles heel for this agent, and we will now present the data very soon at the American Society of Hypertension meeting, which I think will clarify the situation for this agent.

But we are very confident.

Greg, with respect to your last question, I'm going to turn it over to our tax expert, Mr.

Rice.

Thanks, John.

Greg, obviously there is discussions and debates that continue.

I think given this being an election year no one anticipates that there's going to be any resolution on the tax front, and likewise, same thing is true in terms of repatriation.

I think everyone is gearing towards that and obviously there's multiple proposals out there, depending upon what member of Congress you're talking to or the Senate.

So this is just a space we're going to have to continue to watch, and we continue to engage.

From our position, our focus is on obviously if we can go to a territorial tax system we believe that will be best for all, and if we can get repatriation relief that would be outstanding, but that's not our number one priority.

Keely, we'll take one more caller, please.

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

Please go ahead.

Thanks very much.

So just a quick question on the Alimta patent situation.

Can you update us on progress, both in Europe and the US, with regard to the patent that could potentially extend the life of Alimta to 2021, 2022, and how that might bake in to your long-term expectations for the business?

The second question is really on the evolution of the potential insulin portfolio.

Can you just give us, again, not just the thoughts on how the COGS could improve from the development or successful development of both the novel basal insulin and the biosimilar, but how you envision the market evolving with both of those product potentially available?

Thanks a lot.

Great.

Seamus, thanks for your questions.

I'll have Ilissa tackle the Alimta patent question and then I think Derica may want to chime in, as well.

Ilissa?

Thanks for the question, Seamus.

The patent for Alimta that you're referring covers the administration of folic acid and vitamin B-12 prior to treatment of patients with Alimta.

In terms of an update there was a Markman hearing that occurred yesterday, and that case was to determine the meaning of two disputed claim terms, Vitamin B-12 and patient.

That hearing happened yesterday.

The judge did state that a decision is expected within 45 days.

Other than that, the case is still in early stages of fact discovery and a trial date has not been set.

Obviously we're not able to speculate on what the outcome will be, but we're prepared to continue our vigorous defense of this patent.

And as you mentioned, would it extend Alimta exclusivity through May 2022 in the US and 2020 in Europe.

And in a first instance overseas in Europe, Seamus, we had prevailed.

That's now in the process of appeal.

I don't know that any hearings are scheduled to occur again in that particular proceeding until potentially into next year.

Derica, do you want to comment at all on how this might play into our planning going forward, if it's upheld or if it's not upheld?

Seamus, if this is upheld then this will be upside for us, and clearly we would reap the benefits of the continuing revenue stream and obviously cash flow from that.

In regards to your next question in terms of the evolution of our insulin portfolio, we actually are very excited about the breadth of portfolio that we have in the diabetes space, going from our presence now in oral to our presence in GLP, to now with the two basal insulins that have and development in the basal space, as well as the mealtime.

So we believe on a competitive front we'd be the only big pharma company that would play in all of the diabetes segments.

As relates to the particular -- the insulin portfolio, in particular, and to focusing more on the basal, we believe just looking at the basal space clearly LANTUS or glargine has become standard of care there and we believe that we'll have a continuing presence there.

So when we look at the market dissection, we believe LANTUS will retain at least about a third of the basal market, we believe that biosimilars, including our glargine-like product, will occupy about that second third, and then we believe there is space for new innovation in that basal space, and this is what we look to play with our novel basal insulin in that last third.

Great, thanks, Derica.

As always we definitely appreciate your interest in Lilly and your participation in today's call.

In particular today we appreciate your patience as we worked through technical difficulties.

If you do have additional questions, the IR team will be available throughout the day.

Hope you have a great day, we'll talk to you soon.

Thank you.

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

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