禮來公司 (LLY) 2012 Q3 法說會逐字稿

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

Now at this time, all participants are in a listen only mode.

Later, we will conduct a question-and-answer session.

(Operator Instructions)

We do remind you today's call is being recorded.

Your hosting speaker -- Vice President of Investor Relations, Phil Johnson.

Please go ahead Sir.

Good morning.

Thank you for joining us for Eli Lilly and Company's Third Quarter 2012 Earnings Conference Call.

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

Joining me this morning are John Lechleiter, our Chairman, President and CEO; Derica Rice our Chief Financial Officer; Dr. Jan Lundberg, our President of Lilly Research Laboratories; 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 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 pleased with our financial performance in the third quarter of 2012.

In the face of significant reductions in revenue and earnings due to the Zyprexa patent expiration, we've prudently controlled expenses, and we remain on track to meet our 2012 non-GAAP financial guidance and to meet or exceed our financial minimum goals through 2014.

In addition, we continue to advance our pipeline and have begun to produce and communicate important data on key assets.

Let's begin today's call with a review of events that have taken place since our Q2 earnings call in late July.

We've had a flurry of regulatory and clinical activity.

On the regulatory front, we received FDA approval for a new use of Alimta in a continuation maintenance setting for advanced, non-squamous, non-small cell lung cancer; and for Tradjenta, for use as add-on therapy to insulin in adults with Type II diabetes.

Strattera was approved in Japan for adult ADHD; while in Europe, the CHMP issued three positive opinions recommending approval of Cialis, for once-daily use for the treatment of the signs and symptoms of benign prostatic hyperplasia or BPH; Tradjenta, for use as add-on therapy to insulin in adults with Type II diabetes; and Amyvid as a diagnostic tool for imaging beta amyloid neuritic plaque density in patients with cognitive impairments who are being evaluated for Alzheimer's disease and other causes of cognitive impairment.

Turning to clinical news, we had multiple disclosures.

We announced the decision to stop ongoing Phase III studies investigating pomaglumetad methionil, also known as mGlu 2/3, for the treatment of patients suffering from schizophrenia.

For Effient, along with our partner Daiichi Sankyo, we disclosed data at ESC from the Trilogy Study, a Phase III trial in patients who were managed medically without an artery-opening procedure.

The study did not demonstrate that prasugrel was superior to clopidogrel in reducing cardiovascular events in these patients.

We also announced that the Phase III POINTBREAK trial comparing Alimta in combination with Avastin to Avastin alone did not meet its primary endpoint of improved overall survival for patients with non-squamous non-small cell lung cancer.

We also disclosed encouraging data on three of our late stage molecules.

Specifically, we announced both top line and detailed results of the Phase III solanezumab EXPEDITION studies.

Lilly's analysis showed primary end points, both cognitive and functional, were not met in the two Phase III EXPEDITION trials in patients with mild to moderate Alzheimer's disease.

However, a pre-specified secondary analysis of pooled data across both trials showed a 34% reduction of cognitive decline in patients with mild Alzheimer's disease.

We also saw a trend toward a reduction in functional decline in this mild patient population.

The next steps for solanezumab will be determined after discussions with regulators.

We announced that the REGARD trial, a Phase III study of ramucirumab as second line monotherapy in patients with metastatic gastric cancer, met its primary endpoint of improved overall survival, and also showed prolonged progression-free survival.

This is encouraging data of ramucirumab used as a monotherapy in a difficult to treat disease.

We intend to discuss these data with regulatory authorities, and expect to present detailed data at upcoming scientific meetings.

Finally, for dulaglutide we announced that the primary end points related to reduction in HbA1c were met in the Phase III AWARD-1, AWARD-3, and AWARD-5 studies in patients with Type II diabetes.

Having met the primary end points, superiority for HbA1c was examined, and both doses of dulaglutide -- 0.75 milligrams and 1.5 milligrams -- demonstrated statistically superior reduction in HbA1c from baseline compared to exenatide twice-daily injection at 26 weeks in AWARD-1, metformin at 26 weeks in AWARD-3, and sitagliptin at 52 weeks in AWARD-5.

In addition to these data, over the next 12 to 18 months we will generate Phase III data on multiple assets and indications.

These data will provide the investment community with greater clarity on our future growth prospects.

The data on solanezumab, ramucirumab, and dulaglutide reaffirm our confidence in and commitment to our innovation-based strategy.

Finally, there were two other noteworthy events since the Q2 earnings call.

Following the completion of its acquisition by Bristol-Myers Squibb, Amylin paid Lilly $1.259 billion to fulfill its exenatide revenue-sharing obligation.

Amylin also paid off a $165 million loan plus accrued interest.

And the US Court of Appeals for the Federal Circuit affirmed a prior District Court ruling that the Company's compound patent for Alimta is valid.

The compound patent provides protection for Alimta in the US through January of 2017.

In addition, we have a concomitant nutritional use supplement patent expiring in 2022 that is also the subject of litigation.

Now, let's discuss our financial performance for the quarter.

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.

Based on recent investor and analyst questions, I should point out that our non-GAAP results include ongoing costs such as amortization and stock-based compensation.

On slide 7, you can see that revenue this quarter was $5.4 billion, or 11% below Q3 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 several other products, including double-digit growth in the US for Alimta, Cialis, Cymbalta, and our animal health products; and in both the US and international markets for Effient and Forteo.

This quarter, excluding Zyprexa outside of Japan, the rest of our worldwide revenue grew 2%.

Gross margin as a percent of revenue decreased 30 basis points from 78.2% to 77.9%.

Lower Zyprexa sales had a significant negative effect on the gross margin percent.

However, this was largely offset by the impact of foreign exchange rates on international inventory sold that increased cost of sales in Q3 last year but reduced cost of sales in Q3 of this year.

Excluding this FX effect from both 2011 and 2012, gross margin as a percent of revenue declined by 3.6 percentage points, from 80% in Q3 2011 to 76.4% in Q3 2012.

In today's slide deck, you'll find 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 3%.

This reflects continued discipline in managing our operating expenses, while investing in our pipeline to drive future growth.

Specifically, this 3% decline is comprised of an 8% reduction in marketing, selling, and administrative expenses and 5% growth in R&D expenses.

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

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

In addition, this quarter's R&D expense includes a charge of approximately $20 million for estimated future period costs related to the termination of the pomaglumetad methionil Phase III program.

Other income and deductions improved from a net deduction of $83 million in the third quarter of 2011 to a net income of $1 million this year.

This improvement is largely due to the recognition in this year's quarter of the gain on our sale of Amylin stock, as well as a charge taken in Q3 last year due to a partial write-down in the IP R&D value of Amyvid.

Our tax rate was 22.1%, an increase of 4.2 percentage points from Q3 2011, primarily due to the recognition in Q3 2011 of a discrete tax benefit resulting from resolution of the Company's 2007 IRS tax audit and the negative effect in 2012 of the expiration of the R&D tax credit at the end of 2011.

At the bottom line, our non-GAAP EPS decreased 30% to $0.79.

In summary, our Q3 financial results reflect Zyprexa patent expirations outside of Japan.

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

As we've discussed in past calls, 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.

As you can see, for non-GAAP results, we excluded pretax income of $788 million or $0.43 per share recognized in Q3 2012 as a result of the early payment by Amylin of the exenatide revenue-sharing obligation.

This income is related to US exenatide rights.

Currently, we expect to recognize income of approximately $490 million in early 2013, contingent upon transfer of exenatide commercial rights outside the US.

We expect to exclude this future income from our non-GAAP results.

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 10, the total revenue decline of 11% for the quarter shown in the yellow bar on the middle of the page, was driven by a negative volume impact of 9% and a negative foreign exchange impact of 3%, partially offset by a favorable price impact of 1%.

By geography, you'll notice that US volume decreased 17%.

This was due to Zyprexa sales erosion.

Excluding olanzapine from both 2011 and 2012, volume in the rest of our US business was up about 1%.

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

Excluding Zyprexa from both 2011 and 2012, volume growth for the rest of our European products was about 2.5%.

Please note that the 7% price decline in Europe is not solely reflective of government pricing actions.

It is also influenced by the loss of Zyprexa exclusivity.

Excluding Zyprexa, European price declined 4%.

Turning to Japan, robust volume growth of 15% was driven primarily by Forteo, Alimta, and Zyprexa.

The negative 9% price impact reflects the biannual price decreases that took effect earlier this year, primarily affecting Alimta and Gemzar.

Within the rest of the world line, I'd highlight continued strong growth in China, where sales increased 20% this quarter, driven by multiple products, most notably Humalog, Humulin, Zyprexa, and Cialis.

More broadly, Emerging Market sales declined 6%, driven by a 6% decline from weaker foreign currencies.

Excluding FX, Emerging Markets revenue was flat despite a significant impact of generics, particularly in Brazil and Mexico.

As we discussed when providing 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 both FX and the effect of generics in Q3, our Emerging Markets business would have grown 13%.

Elanco Animal Health delivered double-digit volume growth of 10%.

Overall, Animal Health sales growth of 6% was smaller than in prior quarters due to a number of factors, including annualization of revenue from acquisitions, stocking of Trifexis in prior quarters that did not recur in Q3, and weak September food animal sales.

It is unclear if this was a temporary phenomenon or a signal of weakening demand.

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 19% decrease in Collaboration and Other revenue is due to the transfer of US exenatide rights to Amylin.

Excluding exenatide, Collaboration and Other revenue grew 19% in the quarter.

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

As was the case last quarter, FX contributed positively to EPS growth in Q3 despite weaker foreign currencies.

While FX did have a negative effect on revenue, this was more than offset by the positive effect of FX on operating expenses and especially on international inventories sold, which flows through cost of sales.

You can see that FX reduced revenue growth by three percentage points in Q3, while it reduced operating expense growth by two percentage points.

In contrast to these more modest movements due to FX, you can also see that cost of sales decreased 10% including FX, but increased 8% excluding FX.

In part, the FX effect is due to weaker foreign currencies reducing the US dollar value of OUS manufacturing expenses.

However, the vast majority of the FX effect is from the impact of foreign exchange on international inventories sold.

Specifically, in Q3 of last year this FX effect substantially increased cost of goods sold, while this year it substantially decreased cost of goods sold.

As a result, at the bottom line, you can see that the Q3 EPS declined 30% including FX, and 37% excluding FX.

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 October 17.

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 III testing of our once-daily oral CETP inhibitor, evacetrapib, being studied for the treatment of high-risk vascular disease.

Our pivotal trial, called ACCELERATE, began earlier this month.

It's slated to enroll approximately 11,000 patients, and could complete in late 2015.

In addition, we began Phase II testing of a monoclonal antibody for potential use in migraine prevention, and began Phase I testing of three potential medicines for insomnia and cancer.

Finally, as Phil mentioned, we terminated phase 3 development of pomaglumetad methionil.

We also terminated one Phase II asset and three Phase I assets.

We continue to believe that our robust pipeline, including 12 potential new medicines in Phase III testing spanning oncology, diabetes, cardiovascular, neuroscience, and autoimmune diseases, positions us well for growth post-2014.

Our recent data readouts reinforce our confidence in the potential of our pipeline.

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 Travis.

First, I'll provide a progress update on key events we've highlighted for 2012.

Now, as illustrated here, the check marks show what we've achieved so far this year.

We're pleased with the number of green check marks indicating positive progress and outcomes.

Now, since the second quarter earnings call, we've received US approval of the Alimta continuation maintenance indication.

We started Phase III development of evacetrapib in high risk vascular disease; we've terminated Phase III development of mGlu 2/3; and we announced results of a number of Phase III clinical trials, including solanezumab in Alzheimer's disease, Effient in ACS medical management, the Alimta POINTBREAK trial, the REGARD trial of ramucirumab in second line gastric cancer, and top line results of three of the Phase III trials for dulaglutide.

I'd also highlight that later this year, we plan to begin Phase III trials for baricitinib, our oral JAK1/JAK2 inhibitor for rheumatoid arthritis, which we have in partnership with Incyte.

In addition, we plan to disclose 24-week data from the Phase IIB trial of baricitinib at ACR next month.

Along with Incyte, we will also host an on-site investor event to review the data.

Now, as Phil mentioned earlier, we are pleased with the progress we continue to make in advancing our pipeline.

And we look forward to continuing this momentum and sharing both top line and detailed results with the scientific and investment communities.

Turning to our 2012 financial guidance -- our continued solid performance puts us on track to meet our previously issued revenue and non-GAAP EPS guidance.

You'll see that we have made updates to a couple of line items, primarily to reflect the income recognized in Q3 related to accelerated repayments of the exenatide revenue-sharing obligation.

Please note that our GAAP guidance does not assume any additional income is recognized during 2012 related to the exenatide revenue-sharing obligation.

As mentioned earlier, we do expect to recognize income of approximately $490 million in early 2013, which is contingent upon transfer of exenatide commercial rights outside of the US.

Moving to the individual line items, we still expect revenue to be between $21.8 billion and $22.8 billion; gross margin as a percent of revenue to be approximately 78%; marketing, selling, and administrative expenses to be between $7.3 billion and $7.7 billion; and R&D expenses to be between $5 billion and $5.3 billion.

On a non-GAAP basis, OID is now expected to be in the range of a net deduction of $75 million to $150 million.

Due to the early payment of the exenatide revenue-sharing obligation, OID on a GAAP basis is now expected to be in the range of a net gain between $640 million and $715 million.

The non-GAAP tax rate is still expected to be approximately 21%, and the GAAP tax rate is expected to be approximately 23.5%, reflecting the income booked this quarter from Amylin's early payment of the exenatide revenue-sharing obligation.

Both assume the R&D tax credit is passed before year-end and made retroactive to January 1. Should this not occur, our full-year tax rates would be higher and our full-year EPS would be about $0.07 to $0.08 lower.

We still expect non-GAAP EPS to be in the range of $3.30 to $3.40 per share.

GAAP EPS is now expected to be in the range of $3.68 to $3.78 per share.

Capital expenditures are still expected to be roughly $800 million.

Also, during the fourth quarter we intend to repurchase the remaining $420 million of Lilly shares to complete our previously-authorized share repurchase program.

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.

In closing, I want to again to recognize all my Lilly colleagues for their resolve in addressing this challenging period.

They've continued to execute our strategy of advancing our pipeline, of driving growth, and improving productivity.

As a result, we continue to deliver solid financial performance and we are on track to meet or exceed our midterm financial minimum goals.

We also believe we are on track to realize the fruits of our innovation strategy.

Now we know this strategy is not without risk, but we believe it is the best way to improve human health and to create value for our shareholders.

We're very encouraged by the recent data we've generated for solanezumab, ramucirumab, and dulaglutide.

And over the next 18 months, we'll see even more clinical data that will help you better gauge our longer-term growth potential.

As always, we'll keep you updated on our progress.

This concludes our prepared remarks.

And now we'll take your questions.

(Operator Instructions)

Catherine Arnold, Credit Suisse.

Thanks very much, and good morning.

I just wanted to ask you a couple product-related questions.

On the ramucirumab gastric study, I understand you have a combination trial that should be reporting out I believe next year.

But I think you had potentially changed your plans as filing.

You may be filing for the monotherapy trial that you just press released.

Could you confirm what your filing strategy is for gastric?

And then I also wanted to ask you, in terms of your biosimilar Lantus program, can you confirm that you have one or both of those studies in-house, and what your plans are for releasing that data?

And if it met your expectations?

And if I could just throw one more in, on Baricitinib, you didn't identify that going into phase 3, but obviously the phase 2 data on the ACR abstracts are very positive.

I would assume that's just a function of conversations with your partner.

If you could comment there.

Thanks, and I apologize for the multitude of questions.

Absolutely.

Catherine, thank you for the questions.

I'll go ahead and handle your first on the filing strategy for ramucirumab gastric cancer.

We'll have Enrique chime in on the trials for our insulin glargine product, and then Travis you want to give us an update since you'll be out at ACR as well -- on the Baricitinib piece?

So, Catherine, as you mentioned, the original strategy was to have this gastric monotherapy trial be a supportive trial for a submission that would include the gastric combination data once it matures in the latter part of next year.

Based on the strength of the data that we've seen in the monotherapy trial, we will go ahead and discuss with regulators that data and the possibility of having a standalone application.

And we'll keep you guys appraised of our progress in that regard.

Enrique?

Yes, thanks for the question.

Regarding the new insulin glargine product, we are in the process of reviewing the data.

We're not going to be announcing what the results of those studies are.

But so far, I would say that the data looks encouraging.

And with regards to Baricitinib, Catherine, we're obviously very encouraged by the data we saw on safety and efficacy for Baricitinib, and we do anticipate that phase 3 could start imminently.

We look forward to disclosing more of that data at ACR at the investor meeting, and also describing in more detail the phase 3 development program.

Catherine, this is Derica.

If we're able to, and we do plan to start phase 3 for Baricitinib in the fourth quarter, that would also be one quarter earlier than we are anticipating.

So, a credit to our development and regulatory group.

That also comes with that a $50 million milestone payment that we would accelerate payment for as well to Incyte that was planned for Q1 that now will be moved into the fourth quarter.

And that is contemplated, Catherine, in the guidance that we provided as well for the full year.

Kevin, if we could have the next caller, please.

Gregg Gilbert of Bank of America Merrill Lynch.

Thanks.

Good morning.

First, by when should we hear from Lilly what next steps are on Sola?

And then for Enrique, a couple diabetes questions.

First on lin and log, was there any pressure on ASPs or inventory destocking in the quarter, or anything else to comment on that franchise?

Because it seemed a bit soft relative to script trends.

And lastly, the dulaglutide data shared to date -- seems to support approvability but does not really help us understand whether the drug will be competitive against the market leader.

Is there anything you can say about that, other than just wait and see for the actual proof?

Thanks.

Great, Gregg.

We'll have Jan take your first question on Sola, and then I'll go over to Enrique for the two diabetes questions.

Jan?

Well, first, we are encouraged by our data on Sola showing slowing of cognitive decline in the mild Alzheimer population.

What I can say is that we will provide you with an update once we have received the clear guidance from regulatory authorities on the next steps for Sola.

Great, thanks.

Enrique?

Very good.

Let me start with dulaglutide.

We are very encouraged by the results from AWARD one, three, and five.

We were able to demonstrate statistically superiority in the reduction of hemoglobin A1C from baseline versus all of the comparators in some of the secondary endpoints.

When we think about dulaglutide, we think -- what we basically see is a product that embodies the best attributes of the GLP-1 class that we see in the market or the ones we see coming.

We have a very competitive efficacy on tolerability profile.

It is a once-weekly dosing and a very user-friendly device.

So, from our perspective, we like what our chances are when it comes to dulaglutide competing in the GLP-1 market.

Now, related to insulin, clearly this is a very competitive environment.

In the US, we are expecting that Q3 and Q4 will be tough compare quarters.

As you may recall, we were gaining share in the first half of last year, and we lost share in the first half of this year.

That makes Q3 and Q4 difficult from a comparison perspective on a quarter-to-quarter basis versus the previous year.

What we see though is that our share in the US has been stable, flat over the last three to four months, which is encouraging for us.

Outside of the US, we've seen a little bit of a slowdown in the overall insulin market.

We need to watch that a little bit further.

But we continue when it comes to our share trends, we continue with our performance, which is basically some share gains in both the mealtime insulin market where the relevant market is for us, as well as human insulin.

It is difficult to say whether there has been destocking at the wholesaler or the retail level.

We clearly have a little more visibility at the wholesaler level than the retail level, but if you were to look at some of the script trends, I may agree with you.

There might have been some destocking, but we don't have full visibility to that.

Great.

Kevin, next caller, please.

David Risinger, Morgan Stanley.

Thanks very much.

I have three questions on the pipeline.

First, can you just help us understand when we are going to see data on ramu versus a control arm that is on traditional cancer therapies?

And second, with respect to the insulin glargine comment, could you just explain why you're not disclosing that data?

It seems like Lilly has been disclosing more pipeline data this year, and I just wanted to understand why you are not disclosing that data.

And then third, I was hoping that you could provide a framework for the upcoming CTAD conference next Monday on the upcoming disclosures, and your plans for communication and discussion of the CDR sum of boxes and biomarkers.

Thank you.

Great, Dave, thanks for your questions.

We'll have Travis take your question for the ramucirumab data disclosure, Enrique for the insulin glargine, and then I'll finalize it with the CTAD disclosures.

Thanks, Dave.

I'm assuming you're talking about the combination gastric cancer trial that we have in combination with paclitaxel.

So, we'll hope to see that data and complete that trial sometime mid-next year.

Enrique?

Good, yes, in this particular case, I think what we're looking at is basically establishing comparability versus Lantus.

For competitive reasons, we don't have any plans to basically disclose the different trials.

So, as we have shared in the past, we expect to be filing this product sometime next year.

Great, and Dave, in terms of CTAD, as it was at ANA, the group that will be presenting the data is the ADCS group.

It will be Dr. Rachelle Doody again presenting that data that they have analyzed independently.

At this point, we don't know the specifics around what might be presented.

You may recall that at the ANA meeting, she had mentioned that they'd likely be presenting biomarker data, as well as potential other secondary endpoints like the CDR sum of boxes.

In terms of expectations, we did, on our call that Monday evening at ANA, provide sort of a top line, if you will, of what we saw with biomarkers, and that was our slide 18.

It was the second bullet point.

Where we had said that in our analyses, solanezumab did demonstrate target engagement.

You should be thinking there things like plasma and CSF A beta 1 to 40 and 1 to 42 measurements.

We did see evidence of an effect on plaque.

There you'd be looking at things like differential effects on A beta 1 to 42 compared to 1 to 40, as well as the Amyvid scans.

And then we said we did not see evidence of an effect on the cellular pathology of Alzheimer's disease.

I guess it's a more complicated way of saying that things like phospho-tau and your volumetric MRI did not demonstrate treatment effect, and again, more detailed data will be coming at CTAD presented by the ADCS group.

Finally, in terms of just data disclosures in general for ramucirumab, the gastric monotherapy trial that we had the top line release on.

It's still unclear exactly what venue that will be presented in.

But clearly you can imagine that we'd be shooting for things like ASCO mid-next year, as well as potentially the ASCO GI conference that's early in the year.

And then that gastric combination trial, since it won't read out data internally until we get into the second half of the year, it might not have a scientific data disclosure until '14.

And on CDR sum of boxes, Phil?

Yes, CDR sum of boxes, again, our guess is that there will be more details provided by ADCS.

As you know from prior discussions and the presentation we had, we saw great consistency on a number of measurements across both studies -- cognitive and functional.

ADAS cog 11, ADAS cog 14, and MMSE for functional (erroneous comment-should have said "cognition"), as well as things like the ADCS-ADL and in particular the IADL for the functional scale.

The CDR sum of boxes did not show a statistically significant result, and did not behave as we had anticipated or hoped.

Again, we're looking into why that may have occurred and some of the explanations.

And again, it may be that the ADCS present some of their specific data findings and conclusions on that at CTAD.

I would say that in coming months, maybe even yet this year, but definitely early next year, you should expect to see additional presentations and publications likely both by ADCS and Lilly on the solanezumab expedition trials.

Kevin, if we could have the next caller, please.

Mark Schoenebaum, ISI Group.

Hello, guys.

Thanks for the question.

I had to hop off for a minute, so I apologize if this was asked.

I think the next data point for ramucirumab is breast cancer.

I was wondering, and I think that the primary end point in that trial is PFS.

I was just wondering if -- what the Company's position is on the filability/approvability of ramucirumab with just a PFS benefit, given obviously [the vast] experience.

And then my second and final question was -- if I could go back perhaps to the longer-term margin guidance that you gave on your July call, and maybe just follow up on that.

Can you just clarify for us -- is that margin guidance dependent on pipeline success in any way?

And I guess I'll just leave it at that.

Thank you very much.

Great, thanks, Mark.

We'll have Travis handle your first question for ramucirumab, and then obviously Derica for the long-term margin guidance.

Travis?

Hello, Mark.

With respect to ramucirumab and breast cancer, we expect to have that progression.

So, yes, I can confirm the primary end point for that trial is progression-free survival.

We expect to have that data sometime mid-next year.

However, I do need to also mention that we are also looking in conjunction with the progression-free survival for trends in overall survival.

And specifically we'll look at the interim overall survival results, which we intend to have about the same time as the final progression-free results.

So, when I say have those, I mean have those internally.

So, again, this may be similar to the gastric combination trial that Phil mentioned, where we may not be in a position to disclose those results externally until 2014.

Before we go over to Derica, in terms of filability, Mark, our expectations would be that the ability to file based on the final PFS data and interim OS data will depend on the strength of that data.

But yes, if it's extremely strong PFS data and there's a very strong trend on the interim OS, that is certainly a possibility.

Obviously, subject to discussions with regulators.

The trial is in fact powered for OS, even though that is a secondary end point.

So, Derica, if you can comment on the long-term margin guidance.

Sure, Mark.

Mark, we are committed to improving our margins beyond 2014, regardless.

Clearly at this stage, we're planning on driving growth, driven by the output from our pipeline.

And we're very encouraged, as we talked about earlier, by the data that we're seeing.

This was always part of our long-term strategy.

And clearly, if we still have other cards to turn over, but even if the pipeline wasn't successful or as successful as we had hoped for, we would still seek to take actions to improve our margins.

So, that longer-term guidance that we provided is really where we see taking the business regardless of the pipeline outcomes when we look beyond that 2014 timeframe.

And I must say, today when I look at the underlying growth of our business, 9% growth in the US excluding Zyprexa, Japan is still growing 15% volume, Alimta growing 13% volume, China growing 20%.

We're very much on track to meet or exceed those minimum financial goals that we set between -- for 2014.

And that was also very important that our starting point is on the right basis.

And we're very encouraged by the trends that we're seeing.

Great.

Kevin, next caller, please.

Jami Rubin, Goldman Sachs.

Thank you.

Just a couple questions and, again, apologies if this was asked before.

I had to jump off.

But the Humalog and Humulin sales were light relative to our expectations, and in looking at insulin scripts, insulin scripts have been strong.

So, what's happening with the pricing environment?

Is NOVO taking, or is NOVO taking market share from you?

If you can just provide a little bit more granularity on what you're seeing there.

And also, don't know if you answered the question asked previously on ramu for gastric cancer -- what your filing plans are for that indication.

Thanks.

Great, thanks, Jami.

You did ask a little bit more detail than had been asked on the prior question for Humalog and Humulin about some of the pricing environment and things.

So, in the interest of time, if it's okay, we'll have Enrique answer that.

We actually did answer the filing question for ramucirumab.

So, I'll be happy to follow-up with you as soon as the call concludes.

(multiple speakers)

Sorry about that.

No problem.

Enrique?

Sure.

We do see pricing pressure in the US in particular.

What we basically see is that the negotiations that we basically have with some of the major payers are more difficult than we have seen their leverage increase.

And they have the ability to be able to move share as they restrict access to products given the contracts that they are able to establish.

So, yes, there is some pressure.

As we see from our perspective next year, we expect to maintain the access that we basically have.

If anything, maybe a slight net gain when it comes to the lives for both human insulin Humulin and Humalog.

Great.

Kevin, next caller, please.

Tim Anderson, Sanford Bernstein.

Hello, thanks.

Back on the insulin products that lost formulary positioning in the US, it contributed to weaker sales in the quarter.

Can you talk about whether you think there might be further formulary slippage going into 2013?

And then on Alzheimer's disease, I have a question not on solanezumab but rather on Amyvid, your imaging agent.

You bought the company that developed the compound a couple of years ago, and you brought it in-house.

And I'm trying to understand the strategic rationale for doing that, seeing as Lilly doesn't really have a diagnostics business.

Are you expecting that Amyvid could be a significant product in terms of its sales potential as a standalone product, or is the greater value tied to it somehow having synergies from the standpoint of developing your therapeutics?

Great.

Thanks, Tim, for the questions.

We'll go to Enrique obviously for the insulin question, and then to John on the strategy around Amyvid.

Enrique?

So, no, we do not expect to see slips when it comes to formulary.

What we expect is, if anything, a net gain.

A slight net gain when it comes to lives that are covered when we look at both Humulin and Humalog.

With respect to Amyvid, the decision to acquire the company was one that we made independent of our assessment at that time of the likelihood of success with a therapeutic.

We believed then and we believe now that it's going to be important to provide tools like this to help physicians make better diagnoses of people who are presumed maybe, but not proven yet, to have Alzheimer's.

So, this is a company that we invested in through our venture fund, and sort of had a connection with already when we made that decision to acquire Avid.

I think the way in which this plays out, in other words, if the question is -- are there going to be other PET ligands that we develop, other diagnostic tools that we develop?

I will say that we are maintaining an active research program today at Avid across several different diseases, including Alzheimer's.

And we'll continue to move forward with that, and to consider the role that -- or consider this in light of the fact that we have a pipeline that has a number of molecules in it that could emerge as therapeutic agents.

I'd also like to note that in early October, CMS began what will probably be about a year-long process of looking at the question of reimbursabiity of these imaging agents in this category.

Recall that over 10 years ago a rule was put in place that really limited the use of PET imaging reimbursement from the standpoint of Medicare reimbursement to the FDG-type applications.

So, this, as we've said all along, dating back from the approval, it is a very important aspect of us ultimately being able to supply Amyvid to people who could then get and hope to receive reimbursement through Medicare.

Kevin, next caller, please.

Marc Goodman, UBS.

Yes, couple questions.

First, Derica, can you just talk about, with respect to cost cutting, where we are for the immediate term?

I know you mentioned the longer-term guidance, and obviously those changes will be made according to the pipeline.

But right now, when we look at it, have you made most of the cuts?

Are they in the numbers, or are there still a couple more quarters from the original work that you were doing?

Second question is, if you could point to the phase 2 pipeline, which you've got a lot of products in there, and just talk about one or two that are -- your most excited about that we should be focused on.

And then third, back to the GLP-1 market.

If you could just talk about what's going on there in the market?

What you're seeing?

And how excited you are about your product.

I'm looking at Bydureon scripts and they don't seem to be moving as much as you would've expected.

So, I guess I was curious how your product relates to that, and about the overall market in your expectations.

Thanks.

Great.

Thanks for the questions, Marc.

Obviously, Derica, for the first one on the cost cutting.

Jan will come over to you then for the phase 2 pipeline, and then back to Enrique on the GLP-1 market.

Hello, Marc.

In regards to cost cutting, as you will see this quarter, our total expenses actually declined 3%.

Now, that's primarily driven by our SG&A, and then in fact our R&D expense was up 5%.

But the net decline was 3%.

We still see further opportunities to continue to improve our cost base.

We're still employing tools like Six Sigma, and we're still looking at other transformation opportunities.

Obviously, as our pipeline plays out, that will also impact what our footprint and our infrastructure looks like going forward as well.

But we have not let our foot up off the gas in terms of continuing to look for greater efficiencies and more prudent ways to run our business.

And we think that that's really showing in the results that you're seeing.

In regards to where we are versus where we had planned to be, I think we're actually ahead of schedule.

We more than exceeded our $1 billion cost reduction goals last year by the end of 2011.

We're very much on track to be consistent with the cost basis that we were anticipating in this 12 to 14 timeframe.

So, I'm very encouraged by the results and the trends that I've seen, Marc.

Great.

Jan?

Right.

So, let me start by mentioning again, baricitinib, the oral molecule for autoimmune disease developed together with Incyte.

And as you heard, that will be presented in more details and very soon.

The next one is the beta-secretase inhibitor, which is an oral agent in the Alzheimer's disease space.

Again, in the amyloid pathway.

And it has been an interesting study presented now shows that if you have mutations in the amyloid precursor protein at the BACE (inaudible) site, you are protected against Alzheimer's disease, as studied from the Icelandic population.

And we believe our BACE inhibitor could mimic this genetic experiment, so to say, in humans.

And we have a phase 2 study ongoing where we actually have imaging positivity for Amyvid as an inclusion criteria to directly study that population.

The next one is blosozumab, a sclerostin antibody where we are receiving phase 2B data as a bone anabolic, which looks very promising.

And finally, an oral agent in diabetes, a glucagon receptor antagonist where we also see opportunities to lower blood glucose using this very well-established mechanism that actually never had been exploited in diabetes, particularly type 2 treatment.

Marc, in addition -- this is Derica.

One of the other things we're encouraged by is, we don't have to rely on a single asset.

So, much like we've talked about for our phase 3 portfolio where we've got 12 assets sitting there, we're not a one-horse bet here.

Likewise, when we look at our phase 2 pipeline, we've got 22 assets that are sitting there today.

And you're talking about the breadth of both Biologics versus small molecule, and therapeutically we're looking at a span from oncology to still the neuroscience space, as Jan said, with BACE to also diabetes.

And so, we're able to also continue to maintain the breadth in terms of our portfolio outlook that you're seeing today in terms of our current business mix.

Great.

Enrique, for the GLP-1?

Sure.

When we look at the market for GLP-1, outside of the US I would say that we're seeing good growth.

In particular in markets where Bydureon has been launched, whether it's Germany or the UK.

I think the growth overall I think is meeting expectations.

When it comes to the US, we've seen somewhat of a slowdown when it comes to the GLP-1 market.

I won't be able to comment on the Bydureon performance in the US.

That question is probably best addressed by Bristol-Myers and AstraZeneca.

Kevin, next caller, please.

Chris Schott, JPMorgan.

Great.

Thanks very much.

First set of questions just on the [flung] up on some of the insulin dynamics.

I guess my first question is just -- looking at US insulin, you lost some share this year.

It sounds like that stabilized.

You're commenting that pricing environment is getting a bit tougher.

Can you just comment about what ultimately gets that business to reaccelerate as we think about the longer-term franchise?

The second question on insulin, you mentioned in some geographies you were seeing a bit of a slowdown in insulin.

Can you just elaborate what geographies those are, and what you think is behind all that?

And then a final question -- you're shifting gears a little bit to the pipeline.

Talk a little bit about the clinical program for your CETP.

How you're comparing that to anacetrapib I think is running a very maybe a different phase 3 program?

And how you see your CETP differentiating from anacetrapib?

Thank you very much.

Great, thanks for the questions, Chris.

We'll have Enrique handle the first two, and then probably Jan and Travis get into the CETP question that you've asked.

Enrique?

Sure.

When it comes to insulin, the overall insulin market, what we basically see is very significant adoption of DPP4s.

And we commented also on GLP-1s.

To some extent that is delaying the initiation on insulin and some of the earlier use of insulin.

We believe that some of these impacts are more short term.

I think we saw similar impacts when, for example, Metformin was introduced in the US many years ago.

So, my sense is that we will continue to see long-term insulin growth rates that are much more aligned with historical rates, but we're seeing some depressed rates now.

When it comes to the US, clearly we do see some ebb and flow when it comes to the access in the payer environment.

We do expect insulin units to continue to grow.

People that are on insulin utilize about 2% to 3% more insulin every single year.

So, we see a growing market long term in the US, and what we have to do is make sure that we have a level playing field when it comes to access in the US.

Our position when it comes to access is one of open access and having the ability to compete in that environment, and we like our chances when it comes to both Humalog and Humulin within each of its relevant markets.

Now, of course, we're very excited about the pipeline that we have and the two insulins, the basal analogs, which for us is very significant, because for us all of that means incremental revenue.

This is a segment of the market that where we do not compete today, and not only will we compete there but it will make us stronger in the other segments where we do complete today.

Jan?

In relation to CETP inhibitors, our evacetrapib have shown, as you know, impressive elevation of high-density lipoprotein cholesterol HDL and also a lowering of LDL.

Which, you could say, it's relatively similar to what anacetrapib have been publishing.

To directly compare them though, it's harder to do since we really need head-to-head studies.

Both agents have also shown that they don't share the properties of torcetrapib, the Pfizer agent that failed in relation to blood pressure effects.

The type of outcome trials that we have for evacetrapib is in the 11,000 patient trial, and with a MACE outcome that is somewhat different in relation to end points compared to Merck's trial.

And we also have a higher risk population for cardiovascular outcomes.

We are considering potentially here to publish a design paper together with the study investigators to provide more details about this trial.

Great.

Kevin, if we could have the next caller, please.

Seamus Fernandez, Leerink Swann.

Thanks very much for the questions.

So, a couple of questions.

One for Derica and John.

You guys now are operating with a fairly significant net cash position, to my understanding, particularly when you consider some of the investments on the balance sheet.

Can you just give us your thoughts on capital allocation going forward?

You guys have opened up share repurchase possibilities, but that looks like it's going to potentially close out towards the end of this year.

The dividend is obviously there, as well as potential M&A opportunities.

So, just wondering if you could update us as you kind of move towards a larger net cash position.

And the other question for Enrique.

Enrique, can you just maybe give us your thoughts on, again, the opportunity of the larger portfolio in diabetes, and what that really -- not just what it offers but the areas of the world in which you think that will be most impactful.

And then just the last question on the animal health business.

Can you just, again, update us on the slowdown in the animal health business?

And really it sounded like it was coming from more of the feed additives portion of the market.

Which markets in particular was the source of this weakness?

Thank you.

Great.

Thanks for the questions, Seamus.

Derica, you want to start us off with the net cash question and capital allocation.

Sure.

Hello, Seamus.

In terms of our capital allocation strategy, first, it has very much been tied to our business strategy, and it has not changed.

Our first priorities was always to make sure that we were properly funding our R&D opportunities, and I think we're beginning to see the merits of that investment today with the data that we've been able to begin to disclose.

Our second element of our strategy was to make sure that we were from a capital standpoint that we were funding our growth opportunities.

So, you've seen the investments we've made in animal health, both organically as well as some of the business development deals we've done.

We talked earlier with John about the acquisition of Amyvid.

Where we've been able to complement our existing molecular footprint.

And those were our first port of calls.

Given that if we do continue to be very active in the business development space, as we said historically we have not been interested in the large-scale M&A.

But we have been looking for those opportunities where we can either complement our existing commercial footprint and augment it or bring additional scientific value in terms of portfolio.

Having exhausted all those opportunities, our last port of call then will be to begin to return some of that capital back to shareholders.

Given the execution of our business strategy and where we stand today, and the fact that I believe we're actually ahead of where we thought we'd be, this is what enabled us to be able to announce our share repurchase resumption back in June.

And we'll obviously, as we stated at that time, in terms of future share repurchases, that's a conversation we'll have with the Board.

And it will have to be approved each year.

But lacking other investment opportunities, we will seek to return that capital to shareholders.

Enrique, for the opportunity for the larger portfolio in diabetes?

We do see significant opportunities in diabetes across the globe.

We are pursuing a broad and comprehensive portfolio of medicines.

As we think about, for example, the oral classes, we expect the DPP 4 class and the SGLT2 class to be the largest oral classes by revenue by the end of the decade.

We are pleased with the progress that we're making with Tradjenta.

We are gaining share consistently across the world.

In particular, in some of the emerging markets, the product where we have comparable access or out-of-pocket markets, the product seems to be performing very, very well, and we have some of our highest shares in the world.

And I think this speaks very well to what the product can offer in a playing field where we basically have comparable access, which is something that we're very much working and improving in the US market.

We continue to be encouraged by the data that we see on empagliflozin.

We have spoken quite a bit about the GLP-1, and then we have a broad range portfolio of insulins.

The critical mass that this portfolio is going to provide to us is very significant, and we'll be able to have a very significant reach, which is critical when it comes to geographies all over the world.

Because primary care today is the gatekeeper when it comes to diabetes treatment.

So, we will have the right portfolio and the right commercial presence to ensure that we're meeting the needs of people with diabetes everywhere.

Ilissa?

For animal health, we saw growth of 6% in Q3, which was less than the significant double-digit growth that we saw in previous quarters.

In the US, this growth was 16%, and outside the United States we saw a decrease of 4%.

The growth -- the slowing of growth was primarily due to the annualization of revenue from our acquisitions.

So, last quarter that contributed 9 percentage points of growth, and this quarter it only contributed 1 percentage point.

We also, as mentioned on the call, we saw stocking of Trifexis in prior quarters, which did not see in this quarter.

And then we saw weak September food animal sales, and we're still looking to see if that's an anomaly for this one particular month or something that will continue which we'll keep a close eye on.

I just wanted to -- this is John Lechleiter.

I want to just make a comment.

As you saw on one of the slides we showed you earlier, the volume growth for the quarter was 10% with Elanco.

So they were adversely affected by currency to some extent as well.

This is going to continue to be a very important segment for us.

I think that the fact that we have grown up in the last decade or so organically a companion-animal business, really makes us a little less dependent on the ups and downs and the crop cycle and the impact that might have on the food animal part of our business.

So, the secret sauce for Elanco is its pipeline.

And this is a company that has been -- has produced more innovation than anybody else in the space.

That's really what has driven growth thus far, and we expect that to continue.

Great.

This is Phil.

Since we've gone past the top of the hour, we'll close the Q&A session here.

As we break, I would like to recognize an individual who for the investors has toiled behind the scenes.

That has been an invaluable support in investor relations group.

That's Arnie Hanish, our Chief Accounting Officer, who is retiring soon after 29 years with the Company.

So Arnie, thank you for your contributions.

(applause) And we thank all of you that have joined us this morning, and appreciate your interest in Eli Lilly and Company.

Travis, Ilissa, myself will be available in the rest of the day for further questions that you may have.

We look forward to seeing you soon at ACR and other venues.

Have a great day.

Thank you.

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