禮來公司 (LLY) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 earnings call.

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

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

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Good morning.

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

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

Joining me this morning are Derica Rice, our Chief Financial Officer; Dr. Jan Lundberg, President of Lilly Research Laboratories; Sue Mahony, President of our Oncology Business; and Ilissa Rassner and Travis Coy from the Investor Relations team.

John Lechleiter, our Chairman, President and CEO, is traveling overseas and is unable to join us today.

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.

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

Here are some of the highlights.

On the regulatory front, we had three approvals by the European Commission including -- Cialis for once daily use for the treatment of the signs and symptoms of BPH; Amyvid as a diagnostic radiopharmaceutical for the PET imaging of beta-amyloid neuritic plaque density in the brains of adult patients with cognitive impairment who are being evaluated for Alzheimer's disease and other causes of cognitive impairment; and, along with our partner Boehringer Ingelheim, Trajenta for use in combination with insulin in adults with type 2 diabetes.

ERBITUX received two approvals.

In Japan, we along with our partners, Merck Serono and Bristol-Myers Squibb, received approval for ERBITUX for the treatment of patients with head and neck cancer.

In Canada, along with our partners Bristol-Myers Squibb, we received approval for ERBITUX in combination with a chemotherapy regimen as an initial treatment of patients with EGFR-expressing metastatic colorectal cancer.

Turning to clinical news, the Alzheimer's disease cooperative study presented additional data from the solanezumab expedition studies at CTAD.

We also announced that we plan to conduct an additional Phase III study of solanezumab in patients with mild Alzheimer's disease.

At the American College of Rheumatology annual meeting, we presented Phase II RA data for two of our autoimmune assets -- baricitinib, the oral JAK1 and JAK2 inhibitor, in partnership with Incyte; and tabalumab, our anti-BAFF monoclonal antibody.

For tabalumab, we also announced the discontinuation of one of the three Phase III RA registration studies due to insufficient efficacy.

Finally, with our partner Boehringer Ingelheim, we announced top-line results for four Phase III trials of empagliflozin, an SGLT2 inhibitor being studied for the treatment of patients with type 2 diabetes.

In all four studies, the primary efficacy endpoint was met.

In business development news, Lilly along with our partner, Boehringer Ingelheim, announced an adjustment to the scope of our diabetes alliance, with Lilly reassuming sole worldwide development and commercialization rights to our investigational novel basal insulin analog.

And, we received notice from Bristol-Myers Squibb to terminate the collaboration for necitumumab in North America and Japan, which will result in Lilly assuming sole worldwide development and commercialization rights.

There were three other noteworthy events since the Q3 earnings call.

We reached an agreement with the US Securities and Exchange Commission to settle issues regarding compliance with the US Foreign Corrupt Practices Act.

As part of our efforts to align global manufacturing capacity with long-term business needs, we announced we will discontinue manufacturing operations in Mexico by mid 2015.

And, our Board of Directors authorized the initiation of a new $1.5 billion share repurchase program, which we anticipate completing in 2013.

In the fourth quarter of 2012, we repurchased $400 million worth of shares under this program and also completed the $419 million remaining in our previously authorized share repurchase program.

Now, let's discuss our financial performance for the quarter and the full year of 2012.

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

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

On slide 7, you can see that revenue in Q4 2012 was nearly $6 billion, which is 1% below Q4 of 2011.

This decrease in revenue is due to the loss of patent exclusivity for Zyprexa in most major markets outside of Japan, nearly entirely offset by growth from several other products, including double-digit growth in the US for Cymbalta, ALIMTA, and our Animal Health products; in international markets for Forteo, Humalog, and Strattera; and in both US and international markets for Effient.

In Q4 2012, excluding Zyprexa outside of Japan, the rest of our worldwide revenue grew 5%.

Gross margin as percent of revenue increased 90 basis points from 78.1% to 79%.

This increase was driven by the impact of foreign exchange rates on international inventories sold, which increased cost of sales in Q4 2011, but reduced cost of sales in Q4 2012.

Excluding this FX effect from both 2011 and 2012, gross margin as a percent of revenue declined by 0.3 percentage points, from 78.8% in Q4 of '11 to 78.5% in Q4 2012.

Moving down the income statement, Q4 2012 total operating expense, defined as the sum of R&D and SG&A, declined 1%.

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

Specifically, this 1% decline is comprised of a 7% reduction in marketing, selling and administrative expenses and 8% 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, including a $50 million milestone payment to Incyte, based on initiation of the RA Phase III program for baricitinib, and a $30 million charge related to the decision to stop one of the Phase III trials for tabalumab in rheumatoid arthritis.

Other income and deductions was a net expense of $52 million in Q4 of 2012, compared to a net expense of $27 million in the fourth quarter of 2011.

Our tax rate was 22.3%, an increase of 2.4 percentage points from Q4 2011, primarily due to the lapse of R&D tax credit in 2012.

Since the American Taxpayer Relief Act was passed in January of this year, the full-year 2012 R&D tax credit will be recognized as a discrete tax benefit in Q1 2013.

At the bottom line, net income and earnings per share each decreased 2% resulting in non-GAAP EPS of $0.85 for the quarter.

For the full year, revenue decreased 7%, driven by the loss of patent exclusivity for Zyprexa in most markets outside of Japan.

Excluding Zyprexa outside of Japan, the rest of our worldwide revenue grew 6% for the full year.

Operating expenses in 2012 decreased 1%, driven primarily by lower marketing expenses, partially offset by increases in R&D, due to late-stage clinical trial costs.

Finally, net income and EPS each declined 23%, driven by lower sales from the Zyprexa patent expirations.

In summary, our full-year 2012 financial results clearly reflect the impact of Zyprexa patent expirations outside of Japan.

However, 2012 results also demonstrate continued growth in a number of products and businesses not experiencing patent expirations.

Our fourth-quarter results show that we're emerging from the Zyprexa patent expiration period.

And, with continued growth in the rest of our Business, along with prudent expense management, we are on track to return to growth in 2013.

We remain committed to meet or exceed our minimum financial targets through 2014 and are positioned 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 1% in Q4 2012, shown in the yellow bar on the middle of the page, was driven by a negative volume impact of 3% and negative foreign exchange impact of 1%, partially offset by a favorable price impact of 2%.

By geography, you'll notice that US volume decreased 10% and Europe volume decreased 3%.

Both of these decreases were due to Zyprexa.

Excluding olanzapine from both 2011 and 2012, volume in the rest of our US business was flat and was up 3% in Europe.

In Europe, you'll see a positive 1% impact from price.

Normally, price in Europe is negative.

The increase in Q4 was driven by new information that led to accrual adjustments related to prior quarters of 2012.

Excluding these adjustments, European price would have been down about 2%.

Turning to Japan, we had another quarter of robust volume growth of 16%, driven primarily by Forteo, ALIMTA, Zyprexa, Strattera, Cialis, and Cymbalta.

This was partially offset by a negative 10% price impact due to the biannual price decreases primarily affecting ALIMTA and Gemzar.

In our ROW line, China was a significant growth driver in Q4, delivering 22% total growth, almost entirely from volume.

Elanco Animal Health also delivered robust volume growth of 19%, driven by strong organic growth in both the food and companion animal businesses.

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

Finally, the 17% decrease in collaboration and other revenue was due to the transfer of US exenatide rights to Amylin.

Excluding exenatide, collaboration and other revenue grew 24% 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.

For both the quarter and the full year, FX contributed positively to EPS growth, despite weaker foreign currencies that had a negative effect on revenue.

This was more than offset by the positive effect of FX on international inventories sold, which flows through cost of sales.

As a result, at the bottom line, you can see that Q4 EPS declined 2% including FX and 6% excluding FX.

For the full year, EPS declined 23% including FX and 29% excluding FX.

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

Slide 13 shows our pipeline as of January 21.

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

You will see that we began Phase III testing of the oral JAK1/JAK2 inhibitor, baricitinib, which we are developing in partnership with Incyte.

In addition, we began Phase II testing with a small molecule for depression and a cancer biologic.

And, we started Phase I testing of four assets, three for diabetes and one for cancer.

We also terminated development of three Phase I molecules.

I'd also highlight that we initiated a Phase III trial of our anti-IL-17 monoclonal antibody, ixekizumab, in psoriatic arthritis.

With the addition of baricitinib, we now have 13 assets in Phase III, and we continue to believe our robust pipeline, spanning oncology, diabetes, cardiovascular, neuroscience, and autoimmune diseases, positions us for growth post 2014.

We had a number of encouraging data readouts in 2012 that reinforce our confidence in the potential of our pipeline.

As we discussed on our guidance call earlier this month, we expect a lot of pipeline activity in 2013, including our oncology molecules.

We are pleased to have Sue Mahony, President of our Oncology Business, with us this morning to provide an update on the oncology pipeline.

Sue?

Thanks, Ilissa.

We are excited about the progress that we made in advancing our late-stage oncology pipeline in 2012, and we expect to continue this progress in 2013 with a number of data disclosures and potential submissions.

I'll start with update on ramucirumab.

Last week at ASCO GI, we disclosed the first Phase III data of this fully human monoclonal antibody, which is a key late-stage pipeline asset for Lilly.

Ramucirumab selectively targets and blocks the VEGF receptor-2, leading to changes in blood-vessel formation in tumors.

The data was from the from the REGARD trial, evaluating ramucirumab as a single agent compared to placebo and best supported care in the second-line treatment setting for patients with metastatic gastric cancer.

The trial met its primary endpoint of improved overall survival and also showed prolonged progression-free survival.

Currently, there are no agents specifically approved for second-line gastric cancer treatment in the US and Europe.

We believe that the overall efficacy and safety data from the REGARD trial demonstrated that ramucirumab has a promising treatment profile in this difficult-to-treat patient population.

We have been meeting with regulators to discuss our finding strategy, and we intend to submit for regulatory approval in the US and Europe in 2013.

We also intend to have additional data presented and published from REGARD later this year.

Aside from REGARD, three other Phase III ramucirumab trials have completed patient enrollment.

ROSE, the first-line metastatic breast cancer trial; RAINBOW, the gastric-combo trial; and REVEL, our study in second-line non-small-cell lung cancer.

Completion of patient enrollment for the other two Phase III trials in liver and colorectal cancers is expected to be achieved this year.

We also expect top-line data from ROSE and RAINBOW later this year.

Moving on to necitumumab.

Lilly will be assuming sole worldwide development and commercialization rights, following termination of our agreement in North America and Japan with our partner, Bristol-Myers Squibb.

We are fully committed to the development of necitumumab, for which a Phase III study in squamous first-line metastatic non-small-cell lung cancer, called SQUIRE, is ongoing and fully enrolled.

We expect to have data readouts from the SQUIRE trial later this year or early next year.

If the lung cancer trials for necitumumab and ramucirumab are positive, we would be positioned to offer a comprehensive treatment strategy for non-small-cell lung cancer patients with ALIMTA, the standard of care for first-line nonsquamous non-small-cell lung cancer; with necitumumab, the first-line squamous non-small-cell lung cancer; and with ramucirumab, the second-line treatment.

Our third Phase III molecule, enzastaurin, is being studied as maintenance therapy in patients with diffuse large B-cell lymphoma at high risk of relapse after R-CHOP induction therapy.

The prognosis for high-risk patients whose disease recurs is poor, and there are no approved treatments in this clinical setting.

We expect to have the required number of events in the PRELUDE trial in the first half of 2013, and plan to submit later this year, if the results are positive.

In addition to these three late-stage molecules, we have a robust early and mid-stage pipeline with noble mechanisms of action, tailoring potential, and early data in areas of significant unmet need.

We believe that Lilly's large and diverse oncology pipeline positions us for success in the coming years and provides the basis for continued future growth.

Now, Derica will summarize key events across our entire corporate portfolio for 2012 and 2013 and discuss our updated 2013 financial guidance.

Derica?

Thanks, Sue.

When we rolled out our 2012 guidance, we provided you with a list of key events for the year, and we updated that list quarterly so that you could keep track of our progress.

As illustrated by the green checkmarks on slide 14, you can see that we made significant advances with our pipeline in 2012.

Now, as Ilissa mentioned, there is a lot to look forward to in 2013, as well.

Specifically, as shown on slide 15, we anticipate a number of potential external data disclosures at scientific meetings.

These include -- presentation of detailed data from some of the Phase III trials for dulaglutide, and in collaboration with Boehringer Ingelheim for empagliflozin, both potential treatments for type 2 diabetes; presentation of data from the Phase III trial of ramucirumab in first-line breast cancer.

Note the data we expect to receive in 2013 from this trial will be the final progression-free survival data and the interim overall survival data; and finally, presentation of data for the Phase III trial of enzastaurin as maintenance therapy for patients with diffuse large b cell lymphoma.

There are also a number of Phase III trials that may produce data in 2013, although presentation of detailed data at medical meetings would likely occur later.

These include -- the initial Phase III trials of our novel basal insulin analog for both type 1 and type 2 diabetes; the pivotal trials for our new insulin glargine product; the Phase III study of ramucirumab as combination therapy in second-line gastric cancer; the initial trials of edivoxetine as adjunctive therapy for major depressive disorder; also, we will conduct additional analysis of Phase III trials of tabalumab for rheumatoid arthritis.

In total, we will have Phase III data readouts or detailed data presentations on eight of our 13 Phase III assets.

In 2013, we could see up to five regulatory filings.

These include -- three diabetes assets, dulaglutide, empagliflozin, and our new insulin glargine product; and two oncology assets, ramucirumab as monotherapy for second-line gastric cancer, as well as enzastaurin for diffuse large B-cell lymphoma.

As for other key events to watch for in 2013, we plan to initiate another pivotal trial of solanezumab in patients with mild Alzheimer's disease.

In August, we will have the US District Court trial for the ALIMTA method-of-use patent.

And in December, we will lose US exclusivity for Cymbalta.

We are excited about 2013 and the opportunities we have to continue to advance our pipeline and to share data that will help investors better judge our growth potential post 2014.

Slide 16 shows the 2013 financial guidance that we discussed in detail on our call on January 4. We have now incorporated the one-time benefit of the 2012 R&D tax credit that will be recorded as a discrete item in Q1 of 2013.

You can see the estimated full-year GAAP and non-GAAP tax rates have been lowered by 1.5 percentage points.

We have also raised our GAAP and non-GAAP EPS ranges by $0.07.

We now expect full-year 2013 earnings per share to be in the range of $4.10 to $4.25 on a GAAP basis, or $3.82 to $3.97 on a non-GAAP basis.

All other line items of our previously issued guidance remain unchanged.

If you are looking for additional color commentary on our 2013 guidance, please refer to today's press release as well as the Investors Section at www.lilly.com, where you'll find the slides and audio from our January 4 call.

Slide 17 provides a reconciliation between reported and non-GAAP EPS for 2012 and the associated growth rates from these numbers to our 2013 guidance.

To sum up, we made steady progress in 2012 implementing our three strategic priorities -- replenishing and advancing our pipeline, driving strong performance of our marketed brands in key growth areas, and increasing productivity and reducing our cost structure.

Our financial results for Q4 2012 and the full year show our progress with China, Japan, Elanco, and several key brands all producing double-digit volume growth for the quarter and the full year.

This strong performance, combined with our discipline in managing costs, generated $5 billion of operating cash flow, covering capital expenditures of about $900 million, and our dividend of roughly $2.2 billion, and enabling us to complete our prior share repurchase program, and to initiate the new $1.5 billion share repurchase program.

Our continued strong operating performance gives us confidence that we will successfully navigate through YZ with the capacity to drive future growth.

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

Looking at the pipeline, we made significant progress over the past 12 months.

We advanced 12 molecules into Phase I, eight molecules into Phase II, two molecules into Phase III, and launched Amyvid in the US.

We now have 13 assets in Phase III and 23 assets in Phase II, with a good mix of small molecules and biologics across all phases of our portfolio.

We generated a significant amount of data in 2012 and we anticipate data readouts or detailed presentations on eight of our 13 Phase III assets this year.

This is the most robust mid- to late-stage pipeline in our history, and it positions us to drive growth post 2014.

We continue to believe that our innovation strategy is the right one to benefit patients and create value for shareholders.

We look forward to providing more updates as we continue to execute this strategy.

Now, this concludes our prepared remarks, and we'll take your questions.

Julie, first caller, please.

(Operator Instructions)

Catherine Arnold, Credit Suisse.

I had a question for Sue.

I was wondering if you could comment on if there is a scenario in the cancer area where a drug hit PFS and OS and wasn't approved or didn't get priority review?

And, whether she could comment on, now that the data is out, what was most surprising to her as far as the total data set released?

Thanks.

With regards to your first question about whether there's been an agent in the cancer market that has overall survival and PFS data without approval or priority review, I am not aware of any molecule in the cancer market that has had overall survival and PFS data that hasn't been approved or indeed had priority review.

With regards to your question about the data for REGARD for ramucirumab -- obviously, we were very pleased to see the data, and we were pleased by the reaction that we had from investigators and thought leaders in prescribing physicians at ASCO GI last week.

I think specifically this is the first study to show both an overall survival and a progression-free survival advantage in a difficult-to-treat patient population in a high unmet need as a single agent.

And, this was a single-agent study for ramucirumab.

In addition to that, we saw a safety and side-effect profile with -- again, we were pleased to see, with just 10%, 10.5% of patients coming off therapy because of side effects in the RAM arm versus 6% in the placebo arm.

So, I think it is the balance between the efficacy that we saw and the safety that we saw in that trial that we were pleasantly pleased to see.

Tim Anderson, Sanford Bernstein.

Couple of pipeline questions.

Your pipeline chart shows you have a CDK 4/6 inhibitor in Phase II that's similar to the Pfizer compound.

I am wondering when we might see efficacy data from that Phase II trial?

Then on solanezumab, just a regulatory update in ex-US markets.

Do I understand it correctly that you could potentially file the drug for approval in certain ex-US markets without the need for the additional trial that you described on December 12.

And, if that is a possibility, when might we hear more from you on this matter?

Tim, thanks for the questions.

Sue, do you want to answer the question on the CDK 4/6 timing?

Jan, [would you] like to give the update on sol --?

Yes, you're correct.

We do have a CDK 4/6 inhibitor in Phase II study.

It is currently being developed for relapsed and refractory mantle cell lymphoma, and we expect this trial to complete in 2014.

We are also planning on future trials with this molecule.

Jan?

In relation to our plans for solanezumab outside the US, we are in preliminary discussions with a number of regulators, but it is too early to comment if there could be different actions being taken in different geographies, but the systems are somewhat different compared to the FDA.

Andrew Baum, Citi.

One follow up on the CDK 4/6, the safety trial you have had ongoing outside mantle has been running for three, four years or so.

Is this a function of focus of Lilly, or could you just comment on the comparative specificity and potency of the agent compared to Pfizer's compound?

Okay.

Sue?

We, obviously, don't have comparative data versus Pfizer's compound on CDK 4/6.

I can tell you we're very excited by our CDK 4/6 inhibitor.

And as I mentioned, we have ongoing plans to have further studies of this molecule going forward, so you should be seeing more and hearing more about this molecule going forward.

Tony Butler, Barclays Capital.

Also, one for Sue Mahony.

Sue, I understand and am respectful of the comments with ramucirumab in the REGARD trial and filing in the second-line monotherapy indication.

But, I am curious, simply based on the six-week benefit, if that is truly sufficient that you do not need RAINBOW in order to support that filing, and you could add RAINBOW or provide that to the FDA at a subsequent time?

Thanks very much.

Thank you for the question.

With regard to the data from the monotherapy study REGARD, just to reemphasize why we believe that this is a study that we plan to submit to the authorities this year.

Again, there is no approved agent in the second-line study in gastric cancer, and this is the first non-chemotherapy agent that will have shown both an overall survival and a progression-free survival improvement.

Now, you mentioned the 1.4 months.

If you put that into perspective, the patients in the control arm lived a medium of 3.8 months, and that compared to the 5.2 months for the ramucirumab arm, with a hazard ratio that showed a reduced risk of death of 22%, and this corresponds to increase median survival of 37%.

Again, with the safety profile, where 10.5% of patients discontinued therapy due to adverse events in the RAM arm, compared to 6% in the placebo arm, and the most frequent grade-three moderate adverse event being hypertension, 7.6%; grade-three in the RAM arm versus 2.6% grade three in the placebo arm, with no grade-four, or severe hypertension.

We believe, again, with that balance of efficacy and safety in this very high unmet need, where there is no approved therapies, that this is a trial that we believe that we should submit and plan to submit as quickly as possible.

Now obviously, we cannot comment on how the regulatory authorities will view this data, and we will continue to work with the regulatory authorities to ensure we have as robust a data package as possible to ensure approval of this molecule as quickly as possible for patients.

Gregg Gilbert, Bank of America.

Couple more on ramucirumab, Sue.

You guys have had the data for some time, and you have been talking to the regulators for some time.

Can you share with us what piece of info or conversation guided you to actually submit?

Secondly, Sue, how quickly could your Organization be ready to launch?

Can you put some context around that Organization and how nimble it is?

And, what it would be like to launch a new product in the current configuration?

Thanks.

We have initiated conversations with regulatory authorities, but I really can't comment at this point on what those conversations have been, or really anticipate, make any projections about what the regulatory authorities will do with this data.

We made the decision to submit based on what we believe is the robustness of this data in the single-agent activity that we've seen.

With regards to preparation for launch, we have a history of oncology with deep oncology experience at Lilly, and our objectives and plan will be to get this agent approved as quickly as possible, and we will be prepared to launch accordingly.

Seamus Fernandez, Leerink Swann.

Quickly, Sue, can you give us an idea of how we should think about the commercial opportunity in the second-line setting for ramucirumab, particularly, in gastric cancer, first off?

What's the number of patients that we would expect to see, whether it be in the US or internationally, with gastric cancer for this indication?

Then, second question, as it relates to ramucirumab specifically, in the other cancers, what do you think that you're learning about ramucirumab at this point that is new and different from AVASTIN?

Is it differentiating itself more on the efficacy, in your opinion, or on the safety, or both?

Thanks.

With regards to your first question about the opportunity in gastric cancer -- if we look globally, gastric cancer is the fourth most common cancer in the world with nearly one million patients being diagnosed each year with gastric cancer and about 700,000 deaths, each year.

Now, it is more prevalent in Asian countries than it is in the Western world.

In the US, the incidence is about 20,000 Americans will be diagnosed with gastric cancer and about 10,000 deaths.

So, the larger population is in the Asian world; however, again as I mentioned, the unmet need is great and there are no approved medicines in the US, and there is no agreed standard of care in the US.

With regards to the second --

What are you learning with the trial today for RAM in terms of how it may or may not compare with AVASTIN on safety and efficacy?

Ramucirumab is an anti-angiogenic, but it works very differently to AVASTIN.

Ramucirumab is selective to the VEGF R-2 receptor, and we see this as being a different mechanism of action.

So, we will continue to see data going forward.

The hypothesis, when we developed ramucirumab, was that that selectivity would generate both efficacy and -- potentially, both efficacy and safety benefits.

Obviously, we'll continue to see more data over the next 12 to 18 months with our trials, but we are pleased to see the first trial readout in monotherapy, which is different, and with the safety profile that we've seen, again, looks very promising.

Steve Scala, Cowen.

Two questions.

First, on the last call, you stated that you were in the process of reviewing glargine biosimilar data and that it was encouraging relative to comparability.

I am wondering if you have any further thoughts on the data, and how is this data different than the data Derica referred to on page 15?

That's the first question.

The second question is for Dr. Lundberg.

Does Lilly believe 18 months is sufficiently long to test a base inhibitor in Phase III?

And, does Lilly believe monomers are inherently toxic, or are they devoid of biologic activity?

Thank you.

Thanks, Steve, I'll go ahead and answer your question on glargine before turning it over to Jan.

The data that Enrique, I think, mentioned on our last call that Derica also mentioned on this call is essentially the same.

There are a number of studies to support registration that we're in the process of concluding or will conclude here in the first part of 2013 that we expect to support a submission later this year.

Jan?

The duration of Alzheimer's trials is a key topic for our future discussions regarding various agents.

Currently, solanezumab was tested for 18 months and there we were actually able to see reduction in cognitive decline.

So, I think that tells us that 18 months could be enough, providing that we choose a population of mild Alzheimer's disease.

The specifics for phase needs to be determined after we have the full Phase II data and discussions with regulators.

The toxicity on monomers for Abeta1-42 is there.

And, sola data also suggests that if you influence the free monomers, you actually have a beneficial effect on cognition in the Alzheimer's disease patients.

Jami Rubin, Goldman Sachs.

This is Jay Olson on behalf of Jami Rubin.

Couple of questions -- first off, on ALIMTA, could you please update us on the status of your method-of-use patent in Europe and when we should expect to hear more on that?

Secondly, one of your competitors is about to spinoff their Animal Health business; and if that transaction goes well, would you consider a similar approach with your Animal Health business?

Thank you.

Great, thanks, Jay.

Sue, we will go to you for the ALIMTA question and then Derica for the question on Animal Health.

Sure, the ALIMTA question was around the method-of-use patent.

Let me just comment on the fact that -- to remind people that the courts affirmed the ability of the compound patent last year, so we have ALIMTA patent in Europe through to 2017 -- sorry, in US through 2017 and Europe through 2015.

With regards to the method-of-use patent, which is the administration of folic acid and vitamin B12, the court hearing will be held in the US, here in August.

In Europe, the patent -- or similar patent was challenged by the European Patent Office, and a ruling was issued in Lilly's favor in the first instance.

This is being appealed, but we do not have any update on the timing of that appeal.

Great.

Derica?

In regards to our Animal Health business, obviously, we know that there is a lot of interest in Pfizer's spin out of theirs; but in regards to Lilly, we have no intentions of divesting of our Animal Health business.

We have been quite pleased with it.

As you heard earlier, in the fourth quarter, our Animal Health business grew about 18%; and for the year, it grew about 21%.

And, this is a business that we actually anticipate will double over this period we call YZ; and so, we have gotten great returns from that business and great benefit to Lilly.

We also have received significant synergies between our Animal Health business, as well as with our human pharma business, both in terms of innovation.

Most of our human -- before testing the humans, we run our molecules through animal models, and so that's provided a lot of leverage to our Animal Health business.

Then, in addition to that, we also get leverage and synergies through our manufacturing and corporate overhead base.

So, for now, we are pleased with our Animal Health business, and we see this being a long mainstay, in terms of mix -- our portfolio mix.

One thing, Jay, I might add as well is in the Animal Health business, in large part due to the entry into and substantial success that we've had in the companion animal market, but also due to continuing productivity efforts within our Food Animal business, we have seen substantial margin expansion over the last few years out of Elanco Animal Health.

We had been running with margins, on a pre-tax basis, of roughly high teens, and that is now into the mid-20s, with the factors that I just mentioned.

We are very pleased with the performance that unit has generated and is poised to generate going forward.

Julie, next caller, please?

Chris Schott, JPMorgan.

Two questions.

First was on diabetes.

I know it is early, but in this scenario where you have a basal insulin, but it is just biosimilar glargine, how meaningful of an opportunity is that for Lilly?

And, is that a more interesting product in the emerging markets or the developed markets?

The second question was -- has the failure of Merck's Tredaptive changed how you are thinking about CETP and your program there?

Thank you.

I think I will go ahead, Chris, and take your question on diabetes, then maybe have Jan comment on the cardiovascular space.

In a scenario where we would just have the biosimilar, if you will, insulin glargine product, we do view that as an opportunity, not just for emerging markets, but also for developed markets.

We do think we're probably one of a very small number of companies that is well positioned to compete effectively in this space, given the current insulin manufacturing infrastructure that we have, the commercial infrastructure that we'll continue to have, as well as the device presence, as well.

It is hard to predict going forward; but in large numbers, we have said that we could certainly see significant continued use of the glargine molecule through this decade, roughly maybe, one-third of it still being branded Lantus; probably another one-third, roughly, being the other forms of other companies' insulin glargine products, of which we know, we are as far along as anyone, if not the furthest along in that development path.

So, there still will be, I think, a very substantial market opportunity in both developed, as well as developing markets, for this kind of a product.

Jan?

CETP mechanism is different compared to the recently reported Merck data.

With our CETP inhibitor, we can really maximize the elevation of HDL more than 100%.

In addition, we have an LDL lowering.

And, genetic data also support that if you have certain mutations of this CETP, you can actually have protection of cardiovascular risk.

David Risinger, Morgan Stanley.

I have two questions.

First, with respect to your CETP inhibitor, I was hoping that you could explain the trial rationale?

Lilly's outcomes trial is 11,000 patients and is shorter in duration than Merck's, and Merck's is 30,000 patients, so just trying to understand the rationale for a much smaller and shorter trial than Merck's?

Then, second, with respect to the sola publication timing, could you just give us an update on that, when that data will be published?

Thank you.

Thanks, David, for the questions.

We'll have Ilissa comment; and Jan, feel free to chime in you like.

Ilissa?

Thank, David.

For the CETP inhibitor, we believe we have designed an appropriately powered study to test the study hypothesis.

One thing you'll notice, if you look in ct.gov, you will see that the populations of the two trials are different, as are the primary end point.

And, we are currently in the process of evaluating the possibility of publishing a paper to talk more about the specifics of the trial.

In regards to solanezumab and publication strategy, actually, it is the ADCF that will be publishing, so it is really up to their timeline.

I think it is possible that you could potentially see something later this year; but again, it is in their hands, so we'll have to see what they come up with.

Marc Goodman, UBS.

Sue, maybe you could talk about the many oncology drugs in Phase II -- can you pick a couple of them and talk about what you're most excited about and why?

Then, second question, on the insulin franchise, can you give us a sense of any major changes going on in trends and things like that, both in the US and overseas?

And, any managed-care contracting changes we should be aware of for 2013 in the US?

Thanks.

Thanks, Mark.

Sue, and then I'll take the question on the insulin.

Yes, we have a number of products in Phase II in oncology.

In fact, if we look across our pipeline, we have got a pretty robust and diverse pipeline of both small and large molecules.

I never like to pick some of the babies that are preferred in any of these discussions, but CDK 4/6, we already mentioned, and this is one that we intend to be pretty aggressive going forward on as a company and as a business unit.

And, we're also excited by our JAK2 inhibitor and continue to progress that molecule.

C-MET antibody is another one that you should be hearing about, as is TGF-beta, so there are a large number of them.

I've mentioned a few that we should be seeing more data on in the coming months and years and that we continue to look at to aggressively develop those molecules.

Thanks, Sue.

Mark, in terms of trends that are happening in the insulin market, let's go ahead and start with the US.

For 2013, we don't expect significant changes in the payer environment, nothing to the extent we would have seen, either in our favor as we went into 2011, or in the favor for Novo in 2012.

You have seen a stabilization in terms of share of market with mealtime insulin segment.

On the NRx basis, where we basically had the trough in that June-July period of last year and have been creeping back up slightly since then, and on a TRx basis, we have pretty much leveled out around that 39.5% for the last three or four months.

So, I think a relatively stable picture in terms of share of market, which should mean that in a growing market, we could return to have some volume growth here in the US.

Pricing will continue, I think, to be pressured from some of the payer actions that were taken in 2012.

I think you'll continue to see that as we head through, in particular, the first half of 2013, until that begins to annualize, and then with some of the adjustments that were made some of our accruals for rebates and discounts to the detriment of our results in Q4 of '12 -- actually, by the time you get to Q4 of '13, you will have a pretty favorable compare, and you could see a much different dynamic on the year-on-year changes.

OUS, we have seen pretty stable to slightly increasing market shares.

We've continued, as we have talked about in the past, to gain share in China, for example.

So, I think we're very pleased with our performance and holding our own to slightly increasing share, overall, outside the US.

Mark Schoenebaum, ISI Group.

I apologize if I repeat a question, my line dropped a few times.

If I do, just don't answer it.

But maybe -- apologies for that.

Maybe, I can ask some oncology stuff.

For ramucirumab in breast cancer, if you are unable to show an overall survival benefit in breast cancer I think most people understand that you could still file on that.

But, I think the question becomes, what do you think is a clinically significant improvement in PFS if no OS benefit is shown?

Particularly, when you look at the AVASTIN experience, we're all trying to figure out what the FDA might consider to be a clinically significant PFS change without OS benefit.

Then, just quickly on necitumumab, was that a new disclosure that Bristol -- you're no longer working with Bristol on that program?

And, if so, are you able to provide any color?

Thank you.

Thanks, Mark.

Sue, you take the two questions?

With regard to the breast cancer study, we should get data on the breast cancer study later this year, and we are anticipating that we will see both progression-free survival, and hopefully, a trend to overall survival, as well.

We have been looking at both of those.

We will make a decision to submit based on the overall data.

I don't think there is one point, either on PFS or OS or have a ratio that we would be looking for.

We'll be looking at the total efficacy and safety of this molecule to make a decision with regards to submission and the likelihood of approval.

And, we'll know more on that later this year.

With regard to necitumumab, yes, this is a new disclosure.

BMS has exercised their rights to terminate the agreement on necitumumab.

It is a strategic decision that they've made.

We remain very committed to necitumumab; in fact, we see necitumumab as a key part of lung cancer strategy, with ALIMTA being the standard of care in first-line nonsquamous non-small-cell lung cancer, with necitumumab being studied in squamous non-small-cell lung cancer, and ramucirumab being studied in second-line lung cancer.

So, we see this as an important asset for us, strategically.

Thanks.

Michael Tong, Wells Fargo Securities.

Just a follow up on the CETP outcome study.

Do you have any color as to what the baseline HDL of the patients that you've enrolled are in the ranges of less than 30 or in the mid 40s?

Then secondly, Derica, I notice in Europe pricing has improved a little bit in the fourth quarter, is that something of a trend that you can call out, or was there something special in that quarter?

Thank you, Michael.

This is Phil.

On the CETP, I will probably need to follow up because in the room, here, we don't have the specific answer to your question.

Then, Derica and/or Travis, if you want to comment on what's going on with European pricing, that would be great.

Sure.

Michael, in terms of EU, you did see that we had -- showed a 1% price increase in the fourth quarter of 2012.

That is not the typical pricing pattern that we would see.

We did have some adjustments made to prior accruals in the fourth quarter.

If you were to exclude those, you would see the usual 1% to 2% price decline, which is more typical of what we would see in Europe.

Great, thanks, Derica.

Damien Conover, Morningstar.

Just two questions.

One on Boehringer Ingelheim's decision to move away from the novel insulin -- just wanted to see if we should we look at any red flags being raised with that sort of strategic decision and your enthusiasm still behind that product?

Secondly, I know it is still several quarters away, but as we look to the exchanges being set up for 2014 in the US, I was wondering if you could talk at all about your pricing power for those particular markets?

Thanks.

All right, thanks, Damien.

With regard to the BI decision to no longer participate in the novel basal insulin analog, this I don't think you should read any particular red flags, particularly from a clinical perspective on.

We are in the process of running the Phase III trials, and those will produce data beginning later this year.

We continue to be, as we outlined at the ADA meeting, we had our Investor Event last year in 2012, very interested in this molecule.

I think that particular set of data that was discussed at ADA gave people a better feeling for why it is that we were talking about the potential to show not just differences in rates of hypoglycemia, but also to see a potential different weight profile compared to the current alternative, as well as potential tighter control of HbA1c.

I'd also remind you that we saw pretty significant reduction, as well, on the utilization of mealtime insulin as well, that could be another benefit from both the patient, as well as payer perspective, for this molecule.

So, we remain excited about this opportunity and look forward for the data that will come from the Phase III trial starting later this year.

In regards to the US exchanges, given that it is early stages of development, it is very difficult to speculate, at this time, what the pricing environment will be as a result of those.

I think once, if when they come on line and we get more insight, we'll be more than willing to share that.

But at this stage, we're really not in a position to speculate.

Seamus Fernandez, Leerink Swann.

Just a very quick question, maybe this is more for Derica.

We are actually hearing from physicians here and there some concerns about, I would say as a follow up to Damien's questions on exchanges more than anything.

Can you give us your general thoughts on the impact of accountable care organizations as it relates to potential prescribing going forward, particularly of new molecules that would be priced at a premium?

Thanks.

Again, many of those organizations are still under development.

If you were to talk to our managed-care group in our US business, what they would say is that one of the trends we are seeing is that innovation has become more important than ever.

And, our ability to clinically differentiate our molecules is going to be the biggest determinant of us achieving both formulary access, as well as pricing flexibility, especially if you are pursuing or seeking anything similar to what we've experienced previously.

In the absence of that, then you're more likely to experience more commodity-like behavior, and we've seen a little bit of that on the insulin side here, recently.

When we look at our portfolio of late-stage products, those 13 assets that we have in Phase III development, we feel very good about the clinical differentiation that we've seen and that data that we've shared, externally, and what we've seen internally.

And, that's why, when we talked about RAM here today, the fact that there is no agent currently approved in the US or the EU -- no single agent approved for second-line gastric, so if we're able to present data like that, we feel very good about not only getting through the regulatory hurdle, but also achieving formulary access and a reasonable pricing environment.

Great.

Julie, has anyone else joined the queue?

Gregg Gilbert, Bank of America.

One last quick one, Derica, what was that change in Europe that led to the revenue tweak in the fourth quarter?

I just want to make sure it is not something with important read through going forward in Europe.

Thanks.

There was nothing, in particular, other than just us looking at prior-period accruals and having to adjust those along the way, based upon new information.

Gregg, if you want a little more detail on that, they were, as Derica mentioned, just third-party and government rebate accruals.

Thank you.

Very good.

Thank you, very much, for dialing in and listening to the call, today, and the participation in the Q&A session.

Obviously, we had a very strong finish to 2012 that positions us well heading into '13 and '14.

And definitely, a lot on our plate in terms of data readout this year that should provide you quite a bit of information on how we could return to growth in that post '14 period.

We look forward to the future interactions and keeping you up to date on our progress.

Hope you have a great day.

Take care.

Thank you.

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