禮來公司 (LLY) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q2 earnings conference call.

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

Later, we will conduct a question-and-answer session with instructions being given at that time.

(Operator Instructions)

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

I would now like to turn the conference over to our host, Vice President Investor Relations, Phil Johnson.

Please go ahead.

Good morning.

Thank you for joining us for Eli Lilly and Company's second-quarter 2012 earnings conference call.

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

Joining me are John Lechleiter, our Chairman, President and CEO, Derica Rice, our Chief Financial Officer, Dr. Jan Lundberg, our President of Lilly Research Laboratories, Dave Ricks, President of our Lilly Bio-Medicines business, Enrique Conterno, President of our Diabetes Business, and Ilissa Rassner and Travis Coy from the Investor Relations team.

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

Our actual results could differ materially due to a number factors, including those listed on slide 3, and as 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 with our performance in the second quarter of 2012.

In the face of significant reductions in revenue and earnings due to the Zyprexa patent expiration, Lilly employees around the world continue to focus on execution.

They delivered results that position us to raise our 2012 financial guidance, and to place us on track to meet or exceed our financial minimum goals through 2014.

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

First, two important decisions from Washington.

In a much anticipated ruling, the Supreme Court upheld most aspects of the Affordable Care Act, and the FDA Safety and Improvement Act was signed into law, which included the reauthorization of the Prescription Drug User Fee Act, or PDUFA.

From a commercial perspective, Cymbalta received pediatric exclusivity from the US FDA.

As a result, US exclusivity for Cymbalta will expire in December 2013.

And Amyvid became available to imaging centers in many US cities across the country.

On the regulatory front, the US FDA approved Erbitux in combination with FOLFIRI as first-line treatment for patients with KRAS mutation negative EGFR-expressing metastatic colorectal cancer.

And Europe's CHMP issued a positive opinion recommending approval of Jentadueto, for use along with diet and exercise to approve glycemic control in adults with Type-2 diabetes who are inadequately controlled by Metformin, a sulfonylurea, or a combination of both, as well as those who are already taking linagliptin and Metformin.

I'm pleased to report that we just recently received European Commission approval for this indication.

In clinical news, we presented Phase II data on three compounds.

At the American Diabetes Association Scientific Sessions, we presented data on our novel basal insulin analog from phase II studies in patients with both Type 1 and Type 2 diabetes.

At the meeting the American Society of Hypertension, we presented data from a large phase II ambulatory blood pressure monitoring safety study of Dulaglutide.

And along with Incyte, at the European League Against Rheumatism's annual European Congress of Rheumatology, we presented 12-week data from the phase II-B trial of Baricitinib in patients with active rheumatoid arthritis.

We believe that these phase II data support the decisions we've made to move our novel basal insulin analog and Dulaglutide into phase III testing, and in the case of Baricitinib, if supported by the 24-week data, of moving that molecule into phase III testing in rheumatoid arthritis later this year or early next year.

In other clinical news, we also announced the first of two pivotal trials for Pomaglumetad Methionil as monotherapy treatment for schizophrenia did not meet its primary efficacy end points.

Interim data from the second pivotal monotherapy trial and final data from a phase II adjunctive trial are expected later this year, and will inform future development plans for the molecule.

At the meeting of the American Society of Clinical Oncology, we presented overall survival data from the phase III PARAMOUNT trial with Alimta induction therapy, followed by Alimta maintenance therapy.

Patients on the Alimta continuation maintenance arm achieved a median overall survival of 13.9 months from randomization, compared to 11.0 months from randomization for patients on the placebo arm.

We expect FDA action later this year on our SNDA for this indication.

There were a few other important events over the past few months.

Our Board of Directors authorized the resumption of the share repurchase program begun in 2000.

We expect to purchase the remaining $420 million in shares by the end of this year.

Following the completion of the current program, we anticipate resuming share repurchases with size and timing subject to board approval.

The District Court judge provided a ruling in the Markman hearing held as part of litigation on Alimta's method of use patent, which expires in the US in 2022.

The judge's ruling was in line with Lilly's interpretation of the two disputed terms, patient and vitamin B-12.

The trial will now move into the discovery phase.

A trial date has not yet been set.

Finally, we took a number of actions to reinforce Lilly's vibrant long-term presence in China.

Specifically, we opened a Lilly China Research and Development Center, focused on discovering innovative diabetes medicines, tailored to the Chinese population.

We inaugurated the Lilly China East Lake manufacturing site, which will provide insulin capacity for anticipated growth in our sales of Humulin and Humulog.

And we announced an expanded collaboration with Novast Laboratories, a generic and specialty pharmaceutical company based in Nantong, China.

Lilly will increase its equity position in Novast by $20 million, while Novast will increase the manufacturing capacity at its Nantong site over the next several years.

We expect this expanded collaboration will enhance our efforts to build a portfolio of Lilly-branded generic medicines in China.

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 7, you can see that revenue in Q2 was $5.6 billion, a decline of 10% from Q2 of last year.

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 worldwide revenue grew 8%.

Gross margin as a percent of revenue decreased 0.9 percentage points from 80.4% to 79.5%.

The gross margin percent was negatively affected by lower Zyprexa sales.

However, this was largely offset by the impact of foreign exchange rates on international inventories sold.

Excluding this effect of FX from both 2011 and 2012, gross margin as a percent of revenue declined by nearly 4 percentage points, from 81.7% in Q2 of 2011 to 77.9% in Q2 of 2012.

As in past quarters, we've included a supplementary slide providing our gross margin percent for the last 10 quarters with and without this FX effect.

Moving down the income statement, this quarter's total operating expense, defined as the sum of R&D and SG&A, declined 2%.

Within operating expenses, marketing, selling, and administrative expenses fell 5%, while R&D expenses grew 5%.

The reduction in marketing selling and administrative expenses was driven by lower marketing expenses, and, to a lesser extent, by lower administrative expenses.

The growth in R&D expense was largely driven by higher late-stage clinical trial costs.

Other income and deductions was a modestly smaller net expense in this year's quarter.

in Q2 last year, we recognized a write down in the value of liprotamase that was only partially offset by a gain on sale of investment securities.

Our tax rate was 22.1% this quarter, an increase of 1.2 percentage points from Q2 2011, primarily due to the expiration of the R&D tax credit at the end of 2011.

At the bottom line, our non-GAAP EPS decreased 30% to $0.83 per share.

In summary, our Q2 results clearly reflect Zyprexa patent expirations outside of Japan.

At the same time, we've continued to drive revenue growth for many products and prudently manage expenses in the rest of our Business, putting us on a solid financial footing going forward.

We'll continue that same focus, and we'll rigorously prioritize investments to achieve our midterm financial targets and position the Company to return to growth post-2014.

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

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

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

Thanks, Phil.

As you can see on slide 10, the total revenue decline of 10% for the quarter was driven by a negative volume impact of 9%, and a negative foreign exchange impact of 2%, partially offset by a favorable price impact of 1%.

By geography, you'll notice that US volume decreased 20%.

This was entirely due to Zyprexa sales erosion.

Excluding olanzapine from both 2011 and 2012, volume in the rest of our US business was up about 1.5%.

Similarly, in Europe, the volume decline of 12% was entirely due to the Zyprexa patent expiration.

Excluding Zyprexa from both 2011 and 2012, volume growth for the rest of our European products was 6%.

The year-on-year European price change of negative 8% was also heavily influenced by Zyprexa.

Excluding Zyprexa, European price declined 3%.

Historically, we've experienced a 1% to 2% price decline in Europe, so this 3% decline confirms that we've not seen significant new austerity measures that impact our products.

Staying in Europe, accounts receivable, particularly in Southern Europe, has been a hot topic lately.

In thinking about our exposure, keep in mind that the majority of our European sales are to private sector wholesalers.

Payments by these customers have remained timely throughout the European crisis.

A smaller portion of our sales are to government entities, particularly sales to hospitals.

Receivables from these customers have been, and continue to be, immaterial to our financial position.

Currently, our European receivables, and the percent of receivables that are overdue, are lower than they've been for many years.

Given the economic situation, we will continue to closely monitor and manage our European receivables.

Turning to Japan, robust volume growth of 18% was driven primarily by Forteo, Alimta and Zyprexa, while the negative 5% price impact reflects a full quarter of the biannual price decreases, with Alimta and Gemzar seeing the largest impact.

Within the ROW line, I'd highlight continued strong growth in China, which grew 28% this quarter, with strong growth across multiple products.

Most notably Humalog, Humulin and Zyprexa, as well as Alimta, Cialis and Cymbalta.

More generally, emerging market sales declined 3%, driven by a 5% decline from weaker foreign currencies.

Excluding FX, emerging markets' revenue grew 2%, despite a significant impact of generics, particularly in Brazil and Mexico.

As we discussed when providing 2012 guidance in early January, in 2012, we expect generics to negatively affect our emerging market sales by about $250 million, or roughly 10% of 2011 emerging market sales.

Excluding the effect of generics in Q2, our emerging markets business would have grown 12% in performance.

Elanco Animal Health once again delivered strong growth, with volume increasing 26%.

Driving the strong quarter were continued growth of Trifexis, the inclusion of Janssen and ChemGen animal health sales, and continued strong demand for our food animal products.

Elanco continues to outperform the broader animal health market, and is poised to deliver double-digit income growth during the YZ years and beyond.

Finally, the 13% decrease in collaboration and other revenue is due to the transfer of US exenatide rights to Amylin.

Excluding exenatide, collaboration and other revenue grew 22% in the quarter.

Slide 11 slows 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.

Before I run through the specific numbers, however, I want to highlight that despite weaker foreign currencies, FX contributed positively to EPS growth in Q2.

This is because the negative effect of FX on our revenue was more than offset by the positive effect of FX on operating expenses and on international inventories sold that flows through cost of sales.

As we've discussed in the past, this effect on cost of goods sold provides a near-term natural hedge against movements in FX rates.

Getting into the details, I'll focus on the second column of numbers, since the numbers in the first column are the same as those on slide 7. In Q2, FX movements reduced growth in revenue and operating expenses by only a couple of percentage points.

You can see that excluding FX, revenue declined 8%, and operating expenses were flat.

While FX had a relatively modest impact on revenue and operating expenses, that was not the case for cost of goods sold.

As I mentioned earlier, cost of goods sold was significantly affected by the impact of FX on international inventories sold.

Specifically, in Q2 of last year, this FX effect substantially increased cost of goods sold, while in this year's second quarter, it substantially decreased cost of goods sold.

It was this effect that drove cost of sales as reported to decrease 7% year-on-year.

Excluding FX, cost of sales grew 10%.

Compensation and benefits and depreciation make up the majority of our manufacturing expenses, and these items actually declined versus last year.

The 10% performance increase in cost of goods sold was driven by a host of miscellaneous items.

At the bottom line, you can see that excluding FX, Q2 EPS declined 37%.

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 effect of foreign exchange rates.

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

Slide 13 shows our pipeline as of July 15th.

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

You'll see that we began phase II testing of our once daily oral beta secretase inhibitor for the treatment of Alzheimer's disease.

In addition, we began phase II testing of two potential oncology medicines.

One is the JAK2 inhibitor Jan discussed at last June's investment community meeting, while the other is a Chk1 inhibitor, and we began Phase I testing of potential medicines for osteoarthritis and chronic kidney disease.

Finally, we terminated development of a phase I diabetes molecule.

We believe our pipeline of 12 potential new medicines in phase III testing, 8 of which are bio-tech molecules spanning oncology, diabetes, neuroscience, and autoimmune diseases, positions us 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 we open the call for Q&A.

Derica...

Thanks Ilissa.

As I've done in the past, I'll start with a progress update on key events we've highlighted for 2012.

The green check marks show what we've achieved so far this year, including regulatory approval of Amyvid and of new indications or line extensions for Tradjenta and Erbitux, as well as important data disclosures for Alimta, dulaglutide, Ixekizumab, and our novel basal insulin analog.

In the remainder of 2012, we anticipate an FDA decision on Alimta as continuation maintenance therapy for patients with non-squamous, non-small cell lung cancer.

We also could begin phase III trials for Evacetrapib, our CETP inhibitor, as well as for Baricitinib, our oral JAK1/JAK2 inhibitor for rheumatoid arthritis in partnership with Incyte.

In addition, we expect to complete and disclose data from a number of important phase III trials, including the Expedition studies with Solanezumab for Alzheimer's disease, the Trilogy study with Effient in ACS-medically managed patients and the Point Break study with Alimta, in non-squamous non-small cell lung cancer.

We will also complete a number of the Phase III trials for dulaglutide, and in collaboration with Boehringer Ingelheim for empaglifozin.

We expect to disclose results from some of these trials at the ADA in 2013.

And we plan to disclose 24-week data from the phase II-B trial of Baricitinib at a medical meeting later this year.

As outlined in our press release, we've updated our 2012 financial guidance.

This update takes into account the impact of weaker foreign currencies, strong sales performance for Cymbalta, Cialis, Evista, Forteo, Alimta and Elanco, and the expectation that O-US rights for exenatide transfer in 2013, and not in 2012.

Our guidance does not assume accelerated repayment of Amylin's revenue sharing obligation.

In terms of the individual line items, we still project revenue to be between $21.8 billion and $22.8 billion.

Gross margin as a present of revenue is now projected to be approximately 78%.

Marketing, selling, and administrative expenses are now forecast to be between $7.3 billion and $7.7 billion.

R&D expenses are still expected to be between $5 billion and $5.3 billion.

OID is now expected to be in the range of a net deduction of $75 million, to a net income of $50 million.

The tax rate is still expected to be approximately 21%.

This assumes the R&D tax credit is passed before year-end and is made retroactive to January 1. We believe it is likely that this will occur in the fourth quarter, and will result in a meaningful EPS benefit in Q4, as our Q4 tax rate would be significantly lower than in Q3, or the first half of the year.

Driven primarily by stronger underlying sales performance that offsets the negative effect of FX, as well as by the positive effect of FX on cost of goods sold, EPS is now expected to be in the range of $3.30 to $3.40 per share.

Finally, we still expect capital expenditures to be roughly $800 million.

Now, 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, looking beyond 2012, we've built a solid foundation to bridge this period of patent expirations, and return to sustainable growth post-2014.

Since 2009, we have provided you with our minimum financial performance goals through 2014, and mile markers to track our progress.

We've said we expect annual revenue to be at least $20 billion, net income to be at least $3 billion, and operating cash flow to be at least $4 billion.

We continue to hold these goals.

This will position us to fund R&D that would drive our future growth, recapitalize our physical assets, and engage in opportunistic business development, while paying the dividend at least at its current level.

We said that our top priority was to replenish and advance our pipeline, and that we expected to have at least ten assets in phase III testing by the end of 2011.

As you know, we finished last year with 12 assets in phase III, including four in diabetes, three in oncology, three in neuroscience, and two in autoimmune.

We also have more than 20 assets in phase II testing, and expect to maintain a robust phase III portfolio, which gives us the confidence that we can deliver a more sustainable flow of innovative medicines than in the recent past.

As I mentioned, in the coming months, we could begin phase III testing for Evacetrapib and Baricitinib, both of which have generated very encouraging phase II data.

We also said that we would invest to drive growth in Japan, emerging markets, and Elanco, as well as in brands not losing patent protection during this period.

Brands like Alimta, Cialis, Forteo and our insulins.

We've continued to deliver strong growth in these areas.

Collectively, Japan, emerging markets, and Elanco grew over 11% in Q2, which is nearly 14%, excluding FX, and now represents 30% of our total corporate revenue, up from 24% in Q2 of last year.

In total, Alimta, Cialis, Forteo and our insulins grew 5% in Q2, or 8% excluding FX.

Finally, we said that we would improve productivity across our business, reducing our cost structure to help fund R&D.

We exceeded our goals of reducing our projected 2011 costs by $1 billion, and reducing our headcount by 5,500, excluding strategic additions.

We've put in place the fundamental building blocks necessary to overcome our patent expirations and return to growth.

Now today, I'd like to discuss for the first time at a high level, our outlook for our financial performance in years beyond 2014.

Hopefully, this will provide you with insight into how we view our prospects, and how we intend to manage our business.

At the highest level, we anticipate a return to revenue and income growth post 2014, fueled in large part by our pipeline.

This growth, combined with leveraging our existing infrastructure and managing costs should lead to expanding margins.

More specifically, post-2014, we expect to return to levels of R&D spend as a percent of revenue that are more consistent with our historical averages, in the 18% to 20% range.

Just as we don't intend to reduce our investment in R&D due to temporary reductions in revenue from patent expirations, we will not increase our investment in R&D at the same pace as revenue as we return to growth post-2014.

We believe this will be sufficient to support our innovation-based strategy.

For SG&A, it's reasonable to expect that within a few years post 2014, we'll move more in line with the industry averages in the range of 28% to 30% of revenue.

We've made important investments in commercial infrastructure that we intend to leverage in the coming years.

For example, we've expanded the commercial footprint of our Diabetes business.

With the anticipated launch of some or all of our four phase III diabetes molecules, we'll be able to leverage this investment to expand margins.

We've made similar infrastructure investments in Japan, China, and Elanco that we also expect to leverage to drive future revenue growth and expand margins.

Now, this expected expansion will be helped by anticipated revenue growth.

However, I want to emphasize that expense management will play a significant role, and that we aren't waiting until 2014 or 2015 to take action.

As we discussed in the past, in our manufacturing operations, we're in the midst of implementing a process technology agenda to standardize along common platforms for insulins and devices.

By 2017, and without building a new manufacturing plant, we expect to double capacity to meet projected demands of our entire range of insulins, while reducing capital requirements, reducing unit costs, and improving insulin's gross margin by several percentage points.

On the commercial side of our Business, we're taking steps in Europe to respond to difficult market conditions for branded pharmaceuticals, to better position Lilly to successfully market our future product portfolio, and to optimize future profitability across the continent.

While Europe will continue to be an important market for Lilly, we expect it to decline in value driven by the difficult macroeconomic environment, faster generic erosion than in the past, and excessive hurdles for reimbursement and access of new products.

In the coming years, we also expect our product portfolio to become more focused on specialty care products than on primary care products.

To respond to this external environment and to our evolving portfolio, we're streamlining certain European operations.

Specifically, we're simplifying the organization from 12 to 5 geographic hubs, giving us critical mass and delivering efficiencies across markets.

In addition, we'll organize marketing, medical and other commercial support functions into pan-European therapeutic communities.

These changes will create a more focused organization, one able to respond effectively to customer needs.

We anticipate that these changes will deliver substantial savings in the coming years.

Now to sum up, we continue to execute the plan we first outlined for you in December of 2009.

We've been hitting many of our mile posts, and remaining on track to meet or exceed our financial targets.

And we're approaching these next two years with the same diligence, focus, and commitment as the past two years.

When we prepared for the Zyprexa patent expiration, we took actions early to position Lilly to overcome the challenge posed by the loss of revenue and income, just when we needed to fund our maturing pipeline.

We're now applying this same disciplined approach as we prepare for the Cymbalta patent expiration in the US at the end of 2013, and for our return to growth and expanding margins post-2014.

With more than 30 assets in phase II and phase III, we have tremendous opportunities ahead of us, and we're determined to make the most of them.

In closing, I want to again recognize my Lilly colleagues for their resolve in facing head-on the challenge of the Zyprexa patent expiration.

They've continued to deliver solid financial results in those areas of our Business not affected by patent expirations, and have been diligently executing our strategy to replenish and advance our pipeline, to drive growth in our on-patent brands and in Elanco, Japan and emerging markets, and to drive productivity gains across all areas of our Business.

The progress that we've made to date positions us to meet or exceed our mid-term financial minimum goals, and has given our management team and board the confidence to resume our share repurchase program.

As I outlined, we expect the margin compression caused by patent expirations to be temporary.

Post-2014, we anticipate revenue growth and expense management to expand margins.

We remain committed to our innovation-based strategy, and we believe it is the best strategy to create value for shareholders.

Over the next 18 months, we'll generate a significant amount of clinical data that will help you better gauge our longer-term growth potential.

We'll keep you updated on our progress.

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

Operator, first caller, please?

(Operator Instructions)

The first question will come from the line of Tony Butler with Barclays.

Please go ahead.

Two questions.

Derica, you did make a comment about implementation of standardizations for insulins and devices.

That would actually double capacity for insulin.

I wonder if you could flesh that out more.

Does that actually imply, or does that also include that the basal insulin needs to be on the market in order for gross margins to improve?

And then my second question, which is totally separate is -- you had previously given guidance that Elanco profit would double in YZ, and I wondered if you could actually flesh that out a little bit.

I mean, I understand the word double, but can you give us some idea of the magnitude in absolute numbers?

Thanks.

This is Phil.

Thank you very much for the question.

Since we do have Enrique Conterno with us, we'll actually have him address your first question on the insulin manufacturing agenda, and then come back to Derica for the Elanco profit expansion.

Tony, yes, it does include the full range of insulin.

So, as we think about our manufacturing plant, they will have the capability of being able to make the full range of insulin that we have available today, and the ones that we plan to make available in the future.

As you can appreciate, this provides significant flexibility for us.

And as Derica said, we would be able to support twice the current demand that we have with the same manufacturing footprint that we have today.

And Tony, this is Derica.

In regards to Elanco, yes, we still expect to double the size of our Elanco business over this YZ time period, this 4- to 5-year period.

And at the same time, we're also expanding margins.

So, if you were to look, we're gone from about 18% to about 25% profit margins in our Elanco business over this time frame as well.

So, they're performing quite well.

Paul, can we have the next caller, please?

Certainly.

From ISI, we'll go to the line of Mark Schoenebaum.

Please go ahead.

Congratulations on your long-term guidance; I certainly commend you for that.

I had one question, perhaps for Derica, and that is, I think, a question on a lot of people's minds.

The guidance is predicated on both revenue growth post-2014, as well as expense management, and so, the question on everyone's mind, including mine, is --what if your revenue doesn't grow, or certainly doesn't grow very much?

Should the investor community still expect that you will be able to honor your new R&D and SG&A expense guidance?

And then the partner question, I suppose, is -- is it realistic to expect that you could, if needed, reduce R&D and SG&A dollars, not just the percent of sales.

And then finally just a quick one.

You've said that you expect your phase III pipeline to -- the probability of success to be near industry averages.

I was wondering what your data show the industry average probability of success is?

Thanks a lot, and congrats.

Mark, this is Derica.

Let me try to answer at least two of your first three questions.

First of all, in regards to our expense management and our margin expansion, we are absolutely committed to prudently managing our business, and definitely, obviously today, we're factoring in revenue growth coming out of the 2014 time period, as well as continued prudent expense management.

One could argue that if we are in a scenario where our pipeline is not successful, then it will call for even more prudent management of our expenses.

So, we've still committed to the longer-term outlook that we shared with you all here today.

And we believe it is absolutely achievable.

In regards to your question around -- are we able to reduce SG&A and R&D spend in absolute dollars?

I think that will be one thing we'll have to see how it plays out.

Obviously, as we go through and see how the pipeline matures, especially given some of the therapeutic areas we're in, based upon where we have success and where we have failure, will be a key determinate in terms of what our commercial footprint looks like.

So, if we find that, for example, neuroscience, if we're not successful there, then one could argue do we still need the neuroscience footprint that we have today.

So, we'll have to see how this plays out.

But obviously, we're prepared to be nimble and agile, and respond to the outcomes of our pipeline.

I'm not sure I understand your last question, to be honest, in regards to the probability of success of the pipeline versus industry averages.

I think when we were talking about returning to industry averages in our call text, we were talking about returning for SG&A to more be in line with the industry averages.

And for our R&D spend as a percent of revenue, we said we'd return back closer to our levels of historical averages of the 18% to 20% range.

If I could go ahead and add, and this is Phil, we have had some comments in the past where you cited some of the industry benchmarking data that indicate that in past years you would have seen something like 70% to 80% probably as a more likely success rate for phase III compounds.

That may be, I think, what's what Mark was referring to.

Paul, if we can go to the next caller, please?

Certainly.

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

Thank you.

On your long-term guidance on the spend elements post-2014 -- to give those aspirational percentages, you obviously have to have a revenue forecast.

And any chance you'd be willing to brag that your assumptions for revenue growth in that post-2014 period?

Also, what's embedded in that guidance for Alimta exclusivity?

And then on Solanezumab and the upcoming data release, if you see hints of efficacy that support the beta amyloid hypothesis, but those data are not good enough for approval, can you say whether you'd likely push Solanezumab into the next round of clinical trials, or whether you'd more likely move on to other approaches like BACE inhibition?

Tim, this is Derica.

Let me take your first question regarding post-2014 in revenue.

We're not prepared to share our revenue forecast at this time frame.

Obviously, as we continue to work through YZ, we'll have an opportunity to reengage in that particular specific aspect of our business going forward.

But I did want to get out there today, in terms of what the profile of Lilly should look like, in terms of our business longer-term.

That should begin to hopefully give you guys greater insight to how we will look to manage our business.

Tim, on the Alimta exclusivity, currently we have a compound patent with the pediatric exclusivity and other provisions, would expire in January of 2017.

We believe we have valid IP that we intend to pursue and uphold for the method-of-use patent that would expire in 2022.

Any outcome that would be negative on that method-of-use patent really wouldn't come into play until that 2017 time frame.

And then, in terms of the strategy for Solanezumab data, obviously, if we do, as you're mentioning, fall short of hitting the primary end points, clearly we'll look to see if there are any strong signals and sub-populations.

There has been some talk about this in prior investment meetings we have had.

Obviously, we'd want to discuss that with the agency if we would see such results.

At this point, it would be premature to speculate on whether or not that would require, or whether or not we would pursue additional clinical studies with Solanezumab.

As you mentioned, we do have a BACE compound that just started phase II.

Very encouraged by the data we've seen to-date with that compound, and excited to take that forward in development.

Paul, can we have the next caller, please?

Yes, from Leerink Swann, we'll go to the line of Seamus Fernandez.

Thanks for the question.

Just a couple of quick questions.

The performance in the diabetes portfolio this quarter, can you just comment on, again, the sort of slowing script trends?

Is that entirely due to Caremark in your view, or is there some other contributing feature in that regard?

And then, how would that trajectory -- how do you see that trajectory changing with a basal insulin?

And then separately, I think just following up on one of the earlier questions, I think Tony's earlier question.

Historically, you've kind of, in some meetings characterized the value of having the expanded manufacturing capability as contributing the value of a blockbuster from an operational perspective.

Can you help us think about that?

Should we be thinking about that as kind of a $350 million number relative to a blockbuster in terms of cost avoidance?

Thanks a lot.

Thanks, Seamus.

We'll have Enrique respond.

When we look at the performance in US for diabetes, which is what I think you are referring to, because when we look outside of the US it is pretty clear that when we look at our mealtime share performance, we have share trends that are positive, whether it's in Europe, Japan, or emerging markets.

In the US, we specifically lost -- Humalog got removed from a very large formulary, and the impact that we see is basically very specific to that.

Of course, there's always some spill-over effect that we see, but 80% of the share loss can be directly attributed to basically lives that are covered by that large formulary.

If we were to look outside of that specific segment, for example, we've talked in the past about our hospital share.

Our hospital share continues to go up, and continues to increase with the introduction of the small vial.

The dynamics of our performance outside of this one event continue to be very consistent.

I think it's important to emphasize that we are very much looking at protecting the gross margin that we have when it comes to our insulin business.

Clearly, we are concerned about single-source-type deals, and this dynamic that is happening in the marketplace, but we're monitoring this very, very closely.

At the end of the day, we need to make sure that patients are going to be in Lilly insulin products.

Clearly when we look at the future portfolio, additional critical mass and starting patients on a basal insulin will make us more competitive.

We know that patients start insulin on a basal product, so to the extent that is Lilly insulin, that would make us even more competitive when we're able to have that.

As far as the impact, the financial impact from manufacturing, we have characterized this, which we should be thinking about a gross margin expansion of several percentage points, whenever we look at our overall insulin business.

So, this is very significant, but it's going to take time for this to materialize.

One other thing, Seamus, I'd have you consider on the overall financial benefit of this manufacturing technical agenda, as Enrique mentioned, we expect to expand margins by several percentage points.

To put that into context, we had a $3.5 billion insulins business last year, and we see that business expanding pretty considerably over time.

And the other thing that contributes very favorably to the overall financial impact is significant capital avoidance.

When we were talking about this having the essential value of a blockbuster, it was the combination of the two things, the reduced costs over time and then significant capital avoidance.

Just to put that into perspective, to put in a new insulin plant, you are talking multiple hundreds of millions of dollars for that -- similar kinds of investment, somewhat smaller, on the fill finish side.

So, Paul, if we can go to the next caller, please?

Yes, to the line of Catherine Arnold from Credit Suisse.

Please go ahead.

I have a question about Alzheimer's, and then I wanted to talk to you about evacetrapib.

On Alzheimer's, could you just share if you know the percentage of patients in EXPEDITION that were ApoE4 carriers, and is it in line with the generally quoted sort of incidence of 60%?

And does the bapi study change your probability of success in any way?

And then on evacetrapib, is there a possibility of partnership for this molecule, given the large scale work and expense, and is that a gating factor before starting phase III?

How does it impact your R&D guidance for the longer term?

Thank you.

Great, Catherine.

Thanks for the question.

This is Phil, I'll take your first one on Alzheimer's, and I'll have Dave Ricks take your second question on evacetrapib.

We have not had any kind of a presentation or publication of baseline characteristics of the patients in the Solanezumab studies.

The one piece that we have commented on over time is that, in the general population, there would be roughly about one-third mild, one-third moderate, one-third severe.

If you recall, our trials are just in the mild to moderate patient population.

And we have said that there is a larger percentage of the mild patients as opposed to moderate.

But we've not presented other baseline characteristics to-date, including the percentage of ApoE4 carrier versus non-carrier.

And then, Dave, on the evacetrapib question?

Thanks, Catherine.

We remain very excited about this program based on the data we released at AHA last year, which shows a compelling benefit on both HDL and LDL.

As mentioned earlier, we are hoping to start this program very soon.

Without commenting specifically on evacetrapib, I can say broadly we always look at our options to maximize a molecule, share risk, and bring them forward through the phase III process with partners or without.

And I think that's certainly an option on this program, as well as others, but we have made no specific determinations at this time.

Thanks.

Paul, next caller, please.

From Cowen, we'll go to the line of Steve Scala.

Please go ahead.

Two questions.

First, apologies if I misunderstood, but the post-2014 guidance, to what years does it apply?

It sounds like it does not contemplate what happens in 2017, when Alimta substance patent expires.

And the second question is, back on Alzheimer's disease, Merck has said its beta-secretase inhibitor lowers CSFA beta by more than 90% in a once-daily oral formulation based on a very early study.

Can you characterize how yours might compare?

Thank you.

Steve, thanks for the questions.

We'll have Derica take the financial question, and then Jan will respond on the BASE inhibitor.

Steve, this is Derica.

In regards to the post-2014, we haven't given a specific time frame, but you've got to think that we're talking about in that 2015, 2016, 2017 time frame as being in the range of years when we should be able to move back into those levels of profitability.

Jan?

Yes, we recently communicated, as you heard, that our new beta-secretase oral inhibitor has entered phase II.

Some data were recently communicated about the effect of this agent on healthy volunteers, and the reduction we reported at the 35-milligram dose was around 60% reduction in the cerebral spinal fluid Abeta.

It's not really known currently how much you need to reduce Abeta to have a significant potential effect.

In the paper about the mutation in APP close to the beta cleavage site, which then has protective components against Alzheimer dementia, and also other aging dementia, the tentative reduction that this mutation caused was around 40% reduction.

That had the protective effect, and realizing, of course, that is present during the whole lifetime, while we then are trying to influence this process by treating people later in life.

So, our molecule is very potent, and we are very encouraged what we have seen so far.

Thank you, Jan.

Paul, can we have the next caller, please?

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

Please go ahead.

A couple things.

Derica, in the past you've talked about that extra $1 billion of cost savings that you guys were going to get out of the business.

And I was curious, your comments about Europe, is this wrapped up in it, or is this an additional type of effort to bring costs down, because of European austerity that's really kind of kicked in so much over the past 6 to 12 months?

And is there any way you can help quantify how much you're talking about taking out of Europe, if it is additional, and will we see it in the 2013 numbers, or when will we start to see that kick in?

Second question is, just from the tofacitinib panel, I was wondering if there was anything that happened or any learnings that you'll have that you could comment on relative to your product?

And then in emerging markets, can you talk about any key launches that will occur, whether it's the rest of the year, or over the next year in 2013 that will drive emerging markets once again?

Thanks.

Thanks for the question.

We'll have Derica start off, and then go over to Jan for the tofa question, and then we'll congregate here and see who can answer your question on the emerging markets piece.

Derica?

Marc, in regards to Europe, just to remind everyone, we said that we would take out the $1 billion by the end of 2011, and we more than exceeded that goal.

So, the actions we're currently talking about in Europe are more in response to the evolving environment and portfolio as we've described it.

So, as we see the austerity measures in Europe and how that market's evolving, as well as when we look at our own portfolio, and it progressing more towards a specialty focus portfolio rather than a broad primary-care portfolio, we see the changes that Dave and his team have outlined as being essential in mitigating those kinds of risks and addressing those kinds of challenges.

In regards to quantification, we haven't put any specific numbers out there at this time.

Real quick on that piece, the $1 billion that I think you may be referring to, Marc, you may be referring to a slide Derica presented last June, where he talked about $1 billion of operating improvement.

That was actually through 2005 to 2010.

The other $1 billion that was talked about on the call today was the $1 billion that we had talked about removing from our 2011 cost structure.

So, this would not have been contemplated in that 2011 cost basis.

This is an action now that we're talking about in 2012, that would impact probably 2013 and beyond.

Jan?

We are very keen to apply the comments from the advisory committee for the Pfizer JAK inhibitor, tofacitinib.

The key learnings were, first of all, that the advisory committee felt that this could be a major advance as a class of drugs, then as new oral disease-modifying anti-rheumatic drugs, actually the first one in 10 years.

Second thing is that different JAK inhibitors may have different safety profiles in particular, and we know that the Pfizer molecule is more a pan-JAK inhibitor including JAK3, whilst our molecule is selective for JAK1/JAK2.

And thirdly, we need now to design the right phase III trials to then exploit this type of reasonings, both regarding efficacy and safety.

As communicated earlier, we anticipate starting those trials before the end of this year or early next year.

And Marc, in terms of the emerging market launches, for sure we'll have continued rollouts of Tradjenta, and I'll follow up offline with our emerging markets business to see if we're missing any major line extensions that could be rolled out during this time frame as well.

Paul, if we can have the next caller, please?

From JPMorgan, we'll go to the line of Chris Schott.

Please go ahead.

The first question, for Derica, and then I very much appreciate those long-term margin targets.

On those targets, what gives you the confidence in providing these updates versus just your prior floor estimate?

Is this based on some of the pipeline data we've seen so far this year, or as you're thinking of (inaudible) your expense base?

And then the second question is, the insulin franchise, can you elaborate more on the feedback you've had on the Caremark formulary change either from patients or employers using that Caremark formulary?

The question is really -- are you getting any sense that other plans are considering moving maybe to a single insulin for their formularies as well?

Thank you.

Great, Chris.

Thanks for the questions, and we'll have Derica and Enrique respond, respectively.

Chris, this is Derica.

It's a great question.

What gives us the confidence is the performance that we're seeing to-date.

The goals that we outlined wasn't just those minimum financial performance, but we also talked, as a part about the -- how we would progress our pipeline.

We talked about how would we address our cost structures we were managing through YZ.

And I can sit here today and say, along many of those elements, we are actually achieving the mileposts that we laid out.

So, we absolutely feel confident about staying above the $20 billion revenue.

We took out the additional $1 billion by the end of 2011, our cost structure.

And if you look at our pipeline, we have 12 assets in phase III.

More importantly, we also have a phase II pipeline that's positioned to sustain that same type of output going forward.

When we look at each of the elements of our business in aggregate, we're seeing the pieces of the puzzle come together.

And that's also what gave us the confidence, even when we talked about capital allocation, that we felt comfortable, both management and the Board, in beginning to return some of our excess capital back to shareholders through the resumption of our share repurchase program.

We feel very good about where we are.

Enrique?

Without commenting about any specific formulary, we do see significant disruption on the patient level.

Diabetes is a complex disease, and while some may think that there is some sort of savings when it comes to the medicine that can be passed to employers, there are significant hidden costs, and we're planning to study these very, very carefully, that go beyond the medicine when it comes to the treatment of diabetes.

So, it is difficult to say where the trends will go, but long-term, the more the disease gets studied, in particular when it comes to patients in late-stage diabetes utilizing insulin, we will see that other costs completely over-burden any type of savings that people believe they may have in the medicine.

I think we have time for one or two more questions.

Paul, can we have our next caller, please?

From Bank of America, we'll go to the line of Gregg Gilbert.

Please go ahead.

First on Alimta, it was good to see the positive Markman ruling, but can you discuss the patent and exclusivity picture for Alimta in key non-US markets, and whether anything's changed there from a ruling standpoint?

Second is on Effient.

It seems that you clearly have a share of voice opportunity with Plavix going generic.

Can you comment on how access and cost of access is shaping up for next year?

And lastly, for Derica, you touched on this in your prior answer.

I wanted to know if you could talk about the Board and management discussion around resuming the share repurchase, and whether there's been a change in how you view that particular mechanism, even beyond the current authorization that's left.

Thanks.

Thanks, Gregg.

We'll have Ilissa handle your first question on the Alimta Markman hearing, and then Dave Ricks for Effient, and then to Derica for the share repurchase.

Ilissa?

Thanks, Gregg.

Yes, as we mentioned earlier, in the US, we had the Markman hearing, and had a positive ruling in Lilly's favor, and we are waiting for a trial date to be set.

In Europe, a similar patent has been challenged, and a ruling was also issued in Lilly's favor in the first instance.

This ruling has been appealed, but no date has been set yet for the appeal.

There was another company that submitted third-party observations in this pending appeal, but we're still in the very early stages of that.

And the patent date in Europe is slightly different than in the US.

That would go into 2020.

On Effient, Gregg, thanks for the question.

As we see in the Q2 results, we reported very strong sales growth for this product, both in Europe and in the US.

I think your question is really referring to the Plavix exclusivity, and clearly, Bristol and Sanofi pulling out of that.

We don't see that as a trend changer, in any case, for Effient.

Effient is used in the cath labs with very sick patients, and the choice making there really is driven by the clinical benefits.

And as you know, from the TRITON-TIMI 38 study, we've got a compelling advantage, we believe, over Plavix generic or branded in patients who -- particularly those with diabetes, with high risk cardiovascular disease and in the STEMI population.

That's where we're driving share, and we're seeing that convert into a nice sales growth across the globe.

Derica?

Gregg, quite honestly, our capital allocation strategy actually hasn't changed.

We've always been very clear that in regards to utilization of our capital, our first protocol was making sure we were properly investing and resourcing the internal opportunities that we had, specifically the pipeline.

Our second protocol was then to pursue opportunistic business development opportunities that were out there, that we felt could complement our existing footprint, in this case bring in revenue and cash-generating opportunities, or augment our pipeline.

And then at the end of that, if we had excess capital, we would look to return that to shareholders.

We believe that we are accomplishing the first two.

We feel very good about where we are with R&D and our resourcing.

As it relates to business development, you've seen the type of deals we've been active in; we continue to look for in-licensing opportunities.

We believe we can still continue to do that, while at the same time, beginning to return some of our excess capital back to shareholders, being a resumption of the share repurchase program throughout the end of this year.

And obviously, going beyond this year, it will be a continual discussion we'll have with our Board around the timing and the amount of any potential future share repurchase activity.

Great.

Since we are a couple minutes past the top of the hour, we'll go ahead and close the call here.

We do hope you found some of the additional commentary that was provided on the post-2014 time frame helpful.

We do recognize there are a few of you still left in queue.

The IR team will get back to you very shortly, and our team will remain available during the rest of the day for any other questions you may have post today's call.

Thank you very much for your interest in Lilly, and for spending time with us today.

Have a great day.

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