禮來公司 (LLY) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2013 earnings conference call.

(Operator Instructions)

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

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

Please go ahead, sir.

Thank you.

Good morning, and thank you for joining us for Eli Lilly and Company's fourth-quarter 2013 earnings conference call.

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

Joining me on today's call are John Lechleiter, our Chairman, President and CEO; Derica Rice, our Chief Financial Officer; Dr. Jan Lundberg, our President of Lilly Research Laboratories; and Ilissa Rassner and Travis Coy of the investor relations team.

I'd like to call out that this is Travis's last earnings call with us before he transitions to a financial leadership role with our oncology business.

We'd like to thank him for his efforts in furthering our work with investors and Wall Street over the last two years.

Thanks, Travis.

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.

Let me begin today's call by highlighting a few events that have occurred since last quarter's call.

In clinical news, at the ASCO GI meeting earlier this month, the detailed data were presented for RAINBOW, the second positive phase III ramucirumab trial to show increased overall survival in patients with advanced gastric cancer.

We were pleased with how these data were received by the medical community, and we look forward to submitting the data to regulators later this year.

We were disappointed that the phase III studies for edivoxetine, which is being studied as an adjunctive therapy for patients with major depressive disorder, did not achieve their primary endpoints.

On the regulatory front, Q4 capped off a busy year, as we completed three more submissions and received a label expansion.

We submitted our new insulin glargine product in collaboration with Boehringer Ingelheim to regulatory authorities in both the United States and Japan.

We also submitted a marketing authorization application for insulin lispro U-200 to the European Medicines Agency.

We received approval to update the US Cialis label to include the use of once daily Cialis 5 milligrams with finasteride to improve urinary symptoms in patients with benign prostatic hyperplasia.

In business development, we entered into collaboration agreement with Pfizer to jointly develop and commercialize tanezumab for the potential treatment of osteoarthritis pain, chronic low-back pain, and cancer pain.

Earlier this month, we announced the acquisition of a CGRP antibody in phase II for migraine prevention from Arteaus Therapeutics.

We're very excited about the clinical data underpinning this decision, and look forward to publishing them in a leading medical journal.

We also entered the final year of what we have called years YZ, with the loss of US exclusivity for Cymbalta in December.

Cymbalta generated more than $5 billion in worldwide sales last year, making it one of the most commercially successful neuroscience brands in our industry's history, and one of only 20 brands, including Zyprexa, to exceed $5 billion in sales in a single year.

While we had not originally intended to pursue an authorized generic for Cymbalta, we did recently enter into an AG agreement with Prasco to provide a limited quantity of duloxetine.

This will have a minimal positive impact on our 2014 revenue.

Finally, during Q4, we executed share repurchases totaling $500 million under our recently authorized $5-billion share repurchase program.

For the full year, we distributed nearly $4 billion to shareholders through dividends and share repurchases.

Now let's discuss our financial performance for the quarter and the full-year 2013.

I'll provide comments about our GAAP results, and then discuss a few non-GAAP measures to provide some additional insight into the underlying trends in our Business.

On slide 6, you can see that revenue in Q4 2013 was nearly $6 billion, or 2% below Q4 2012.

We're pleased with the double-digit growth for Humalog, Cialis, Forteo, Strattera, and Evista, and the Tradjenta revenue more than doubled.

This strong revenue performance nearly offset lower US Cymbalta sales.

Excluding Cymbalta in the US, the rest of our worldwide revenue grew nearly 9%.

Gross margin as a percent of revenue decreased 2.9 percentage points, driven by the loss of Cymbalta's US exclusivity, and by the impact of foreign exchange rates on international inventory sold, partially offset by higher prices.

This quarter, foreign exchange rates on international inventory sold had a negative impact on our gross margin.

However, in Q4 of 2012, foreign exchange rates on international inventory sold provided a benefit to our gross margin.

Excluding this FX effect from both 2012 and 2013, gross margin as a percent of revenue declined from 78.5% to 77.0%, or 1.5 percentage points.

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

Non-GAAP measures are shown on slide 7. Total operating expense, defined as the sum of R&D and SG&A, was flat versus Q4 of 2012.

Marketing, selling and administrative expenses were down 1%, while R&D was up 1%.

The reduction in marketing, selling and administrative expenses was due to the restructuring of our US commercial organization that occurred in mid-2013, lower marketing expenses for Cymbalta in the US, and the favorable impact of foreign exchange rates, partially offset by increased marketing spend on other products.

The growth in R&D expenses was driven by both research and clinical development activity, partially offset by lower milestone payments.

As mentioned on our 2014 guidance call, we expect late-stage clinical trial costs to decline substantially this year.

Other income and expense was a net income of $9 million in Q4 2013 compared to a net expense of $52 million in the fourth-quarter 2012.

This difference is primarily due to milestone payments totaling $40 million received from Boehringer Ingelheim for the submissions of our insulin glargine product in the United States and Japan.

Our tax rate was 20.5%, a decrease of 1.8 percentage points compared to the same quarter last year, primarily due to the lapse of the R&D tax credit in 2012.

At the bottom line, net income declined 16%.

The smaller decrease in earnings per share, at 13%, reflects the benefit of share repurchases.

Ilissa?

Thanks, Phil.

Let me highlight a few full-year results shown on slide 8. Revenue increased 2%, driven by growth of Humalog, Tradjenta, Alimta, Forteo, Cymbalta, Strattera, and Humulin.

Total operating expenses in 2013 decreased 1%, driven by lower selling and marketing expenses, partially offset by a 5% increase in R&D expenses.

Finally, net income increased 19%, and EPS increased 22%.

The dynamics in our full-year results reflect the execution of our strategy for managing one of the industry's most challenging series of patent expirations, driving strong performance in our growth areas and in our marketed brands that retain patent protection, while increasing productivity across our Business to fund the R&D necessary to fuel our future growth.

Our fourth-quarter results remind us that 2014 is the most financially challenging year in this YZ period.

We're prepared for this challenge, and our position to return to growth and expand margins in 2015 and beyond.

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.

Moving to slide 10, you can see the total revenue decline of 2% in Q4 2013, shown in the yellow box on the middle of the page, was driven by a negative volume impact of 5% and a negative foreign exchange impact of 2%, partially offset by a favorable price impact of 4%.

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

This is due to the loss of exclusivity for Cymbalta.

Excluding Cymbalta, US pharma volume increased more than 5%.

In Australia, Canada and Europe, or ACE, you'll see a negative 5% price impact.

This quarter's price decline in ACE was slightly higher than prior quarters, since we are no longer recognizing amortization of the upfront payment by Daiichi Sankyo for Evista rights.

Favorable adjustments in a number of countries in Q4 2012 also led to a negative year-on-year comparison.

Excluding these items, the price decline in ACE was consistent with prior quarters' declines.

In Japan, we had another quarter of very strong volume growth, up 17%, driven primarily by Evista, Forteo, Tradjenta, Strattera, Zyprexa, and Cymbalta.

That strong volume growth was, again, offset by the weakening of the yen.

We expect this robust growth to continue in 2014, as many of these products have several years of exclusivity remaining.

Turning to emerging markets, we are pleased with the revenue growth of 7% in the face of a 4% negative impact from foreign exchange.

Volume growth was a robust 13%, driven by strong performance in many countries in Latin and South America, the Middle East, and Africa.

China volume grew 7%.

Elanco Animal Health delivered revenue growth of 4%.

Excluding FX, Elanco grew 6% in performance terms.

This performance growth was driven by higher prices for both food and companion animal products, as well as by volume growth for food animal products.

This was partially offset by a volume decline for companion animal products.

Overall, we continue to be pleased with Elanco's performance, and are well positioned to continue to outperform the industry.

Slide 11 shows the effect of changes in foreign exchange rates on our 2013 results.

For both Q4 and full-year 2013, FX had a negative effect on revenue growth.

In terms of cost of goods sold, we saw a smaller benefit from the FX effect on international inventory sold in 2013 versus 2012.

As a result, foreign exchange had a substantial negative effect on growth in operating income and earnings per share.

Now let me turn the call over to Derica.

Thanks, Ilissa.

Slide 12 shows our pipeline as of January 23.

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

You'll notice that we have removed liprotamase from the pipeline.

Given our corporate investment priorities, Lilly will not be pursuing further development of this molecule.

We began phase II testing of a tau imaging agent that is being developed by our Avid Radiopharmaceutical subsidiary.

We started phase I testing for five assets, and as Phil mentioned earlier, we added tanezumab to our phase III portfolio through a collaboration with Pfizer.

Finally, we terminated phase III development of edivoxetine, and discontinued development of three phase II assets, and one phase I asset.

With a number of encouraging data readouts in 2013, eight assets in phase III, four assets under regulatory review, and more submissions possible this year, we are confident in our ability to return to growth post-2014.

I would also like to point out that last month we completed enrollment in ACCELERATE, the phase III trial evaluating evacetrapib in patients with established atherosclerosis at high risk for experiencing a cardiovascular event.

We successfully expedited this trial, enrolling 12,000 patients in just over 12 months.

As a result, we have accelerated the last patient visit for the study to January of 2016.

This is a great achievement by our evacetrapib team, and we believe it speaks to the significant unmet patient need.

Based on lowering of LDL alone, we believe it is possible to achieve the primary MACE endpoint with significant statistical power.

We're also encouraged by the pharmacokinetic profile of evacetrapib, as we've observed no clinically meaningful blood levels of the drug at four to six weeks after discontinuation.

We continue to be optimistic about the potential for this molecule to reduce CV events in the patient population being studied.

Also, just last week, results were published in the New England Journal of Medicine from the Expedition and Expedition II studies evaluating solanezumab in patients with mild to moderate Alzheimer's disease.

You may recall that in a pre-specified secondary analysis of patients with mild Alzheimer's disease pooled across both studies, we saw a 34% reduction in cognitive sign as measured by ADAS-cog14, and we saw an 18% reduction in functional decline as measured by ADCS-IADL

We're now conducting a study called Expedition III targeted specifically at patients that we believe are most likely to benefit from treatment with solanezumab: patients with mild Alzheimer's disease who test positive for the presence of amyloid pathology.

In August of last year, the first patient was dosed in this study, and we continue to target study completion by the end of 2016.

Currently, there are no treatments for Alzheimer's that impact the underlying disease, and we remain encouraged by the solanezumab data.

While we understand investor interest will be focused on near-term launches in our diabetes and oncology businesses, with mid-term launch opportunities coming from our autoimmune portfolio, we do not want you to lose sight of these important opportunities for potential first-in-class medicines later this decade.

Next, let me provide a recap of how key events played out in 2013, remind you of our key events for 2014, and quickly review our 2014 financial guidance.

Now, as has become customary when we roll out our full-year financial guidance, we provide you a list of key events for the year, and we update this list quarterly so you can track our progress.

As illustrated by the green check marks on slide 13, you can see that we made significant advances in our pipeline in 2013.

We have positive data readouts for five phase III assets, and completed regulatory submissions for four, while continuing to expect the necitumumab submission to be completed by the end of this year.

We initiated the phase III study for solanezumab in patients with mild Alzheimer's disease.

We defended Alimta's method-of-use patent in a District Court in Indianapolis.

And, as Phil mentioned, we've entered the final year of years YZ with the expiration of Cymbalta's US patent.

2013 was a very productive year, and we expect 2014 to be another busy year, with significant pipeline activity and the potential for multiple product launches.

While I will not go through each item on slide 14, we are excited about the opportunities we have to continue to advance our pipeline, and to share data that will not only help investors better judge our growth potential, but also convey why we view this year as a new beginning in the next phase of Lilly's rich history.

We have the potential to initiate phase III studies for two assets, our CDK4/6 inhibitor for cancer and our anti-sclerostin antibody for osteoporosis.

With respect to phase III data, we expect either internal data readouts leading to top-line press releases, or external detailed data disclosures, for six of the eight phase III assets, and for all four of the assets that are under regulatory review.

We also expect regulatory action for each of those four assets.

With respect to Alimta's method-of-use patent, we anticipate a ruling in the first half of this year.

As a reminder, regardless of the District Court decision, we would expect one or more appeals to be made to the Court of Appeals for the Federal Circuit before this litigation is resolved.

And finally, we will lose patent protection for Evista in the US in March, and data package exclusivity for Cymbalta will expire in Europe in the second half of this year, although we do not expect generic duloxetine to enter the European market until 2015.

Now, moving on to our financial guidance for 2014, we are reconfirming the 2014 guidance that was issued earlier this month.

If you're looking for additional color commentary on our 2014 guidance, please refer to today's press release, as well as the investor section of Lilly.com where you'll find the slides and audio from our January 7 guidance call.

Slide 16 provides a reconciliation between reported and non-GAAP EPS for 2013, and the associated growth rates from these numbers to our 2014 guidance.

In summary, we're pleased with the progress we've made in 2013 implementing our three strategic priorities.

One, replenishing and advancing our pipeline; two, driving strong performance of our marketed brands in key growth areas; and three, increasing productivity and reducing our cost structure.

Our 2013 financial results were strong.

Eight of our products exceeded $1 billion in annual sales.

Japan and China delivered double-digit volume growth, and Elanco continued to exceed overall industry growth.

As Phil stated earlier in the call, excluding Cymbalta in the US, our worldwide revenue grew a robust 9% in Q4.

This strong performance, combined with our discipline in managing costs, generated nearly $6 billion of operating cash flow, covering capital expenditures of $1 billion, our dividend of $2.1 billion, and $1.7 billion of share repurchases.

As we turn to this year, we anticipate a number of clinical trial readouts, data presentations, and regulatory submissions.

Most important, we also expect to launch multiple products, with more to follow in the coming years, allowing Lilly to return to growth and expand margins post-2014.

As I said on our guidance call earlier this month, far from seeing 2014 as the low point in our journey through one of the industry's most challenging patent cliffs, we see this year as an inflection point leading to a bright future.

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

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

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

Operator, first caller, please.

(Operator Instructions)

Steve Scala, Cowen.

Thank you.

I have three questions.

The R&D as a percent of sales in Q4 is the highest it's been in at least a decade and higher than the YZ guidance and 2014 guidance.

What were the particular dynamics around this spend in Q4?

Secondly, assuming that Sanofi does sue Lilly in the next few days over the filing of the insulin glargine biosimilar, do you believe that they will enjoy the full 30 months?

Or does Lilly believe a quicker resolution can be gained?

Lastly, your comment about the blood levels of these evacetrapib four to six weeks after discontinuation, I guess it was meant to contrast it with anacetrapib's very long half-life.

Other than some theoretical concern about long half-lifes, what specifically should we be concerned with, with anacetrapib?

Thank you.

Steve, thanks for the questions.

For the R&D percent, we'll have Derica provide comment there.

I'll go ahead and comment on the Sanofi question.

Maybe we'll have Jan comment for the evacetrapib accumulation comment from the call text.

Derica?

Hi, Steve.

Good morning.

When we look at our Q4 spend, we're very pleased with how we came in.

As it relates to R&D, that spend was driven by additional investments in research as well as some clinical development.

We did have the opportunity to make some incremental investments in the fourth quarter, both in R&D as well as in SG&A, and some of that was also in preparation for the upcoming launches that we anticipate later this year in 2014.

Steve, this is Phil.

For your question on Sanofi and whether, should they sue us, they would enjoy the full benefit of the 30 months, for the 30 month stay.

At this point, it's premature to speculate on how that may play out.

We have, as is required, notified Sanofi of our acceptance of our filing with the FDA.

That's where things stand as of today.

There may be more developments in the future, but it would be premature to comment at this time.

Jan?

Regarding the half-lifes, we see this more as a general comment here that most medicines on the market today of the category of small molecules usually have a short half-life, which is actually what you want should there be any unforeseen side effects.

Always when you do large phase III clinical trials, this is an unknown until you have all the data.

I think you should see this just as a very unusual situation that you have a small molecule agent with this very long half-life that anacetrapib has.

It remains to be seen now that if there are any side effects, what is the consequence?

Thank you.

Next caller.

Mark Schoenebaum, ISI Group.

Hi, it's Mark.

Can you hear me?

Sorry about that.

Yes, we can.

Sorry about that.

I just wanted to ask a quick question on ramucirumab.

The second line lung cancer trial that's ongoing, our understanding is that a lot of patients are Avastin naive in that trial.

Is that something that you could confirm or deny possibly?

Then what is the hypothesis that ram may have a better risk benefit in the squamous population than Avastin?

Then finally, on AWARD-6, is non-inferiority enough to maximize the potential of that product?

Most importantly, congratulations to Phil and Derica on your recognition in the [II] poll.

Thanks, Mark.

We aren't quite to the level of being inducted into the Hall of Fame yet, but thanks for the shout.

For the ramucirumab question, second line lung, Travis, do you want to take a shot at that?

Maybe Travis or Jan, if you want to comment on the hypothesis of why ramucirumab may or may not be better than Avastin in the squamous population?

Then I'll handle the question you had, Mark, on the non-inferiority for dulaglutide.

Mark, for REVEL, which is our second line lung cancer trial with ramucirumab plus docetaxel, I think you asked, I'm going to make sure I get this right, if a lot of the patients are Avastin-naive.

You're getting to the point where we have allowed for some patients to be treated with Avastin.

I'd classify that as a small number of patients that will be treated with Avastin the first line.

Any commentary on the hypothesis of why we may be better in squamous, relative to Avastin?

Jan, any thoughts on those two molecules?

Clearly, we need to see the final data.

I can refer to, as we have said before, that ram and Avastin have different mechanisms of action, and the ram not only it interferes in a way with the receptor activation but it's also internalizes the receptor, whilst Avastin is only blocking one of the angiogenesis mediators, but in the end, we need to see the data.

As we talked about in the past, we've been very pleased that we saw monotherapy efficacy in advanced gastric cancer, and obviously, reinforced with the combination efficacy that we saw in that similar setting.

Again, until we have the data from the other tumor types, it would probably be premature to comment, whether the differences that Jan articulated would lead to either tolerability, safety, or efficacy differences.

We have no direct head-to-head as well, as a reminder.

For the non-inferiority for the AWARD-6 trial, this is a trial that is set up with the intent of showing non-inferiority.

We have received a number of investor questions and analyst questions over the last month or so around whether we're attempting to show non-inferiority or whether what we're really hoping and attempting to show is superiority.

It is to show non-inferiority versus the highest dose in a forced titration trial of Victoza.

There have been two other competitive molecules that have run similar trials and have failed to show non-inferiority.

We would definitely look at showing non-inferiority to the high dose of Victoza as being a win and achieving our goals for that study.

If we do achieve non-inferiority, we certainly will test for superiority, but it would not be our expectation that that would be a high likelihood occurrence, given the profiles of the two molecules as we know them.

This is John Lechleiter.

I think the other thing is just the presentation of the product, the once weekly format, the straightforward nature of the injection, the injection device, which many of our investors were able to see for themselves when we had our meeting here in October.

Having solid non-inferiority data across a whole broad spectrum of comparators coupled with the product itself, I think should give us a leg up.

One of the main reasons for doing the study, Mark, was essentially from a pricing reimbursement and access perspective.

You might do your own research on price levels, but essentially you've got a price level in the marketplace, base price level defined by Bydureon, Byetta, and the 1.2 milligram dose of Victoza, which means that the 1.8 actually carries a 50% premium to that, so showing non-inferiority of that particular dose we believe would place us in a good stead as we have discussions with payers downstream.

Next caller.

Chris Schott, JP Morgan.

Great.

Thanks very much.

Two questions.

The first one's on the CDK4/6 program.

Can you just talk a little bit more on the timelines in breast cancer here?

Specifically, once you start the phase III, how quickly do you think you can enroll and see outcomes from your study?

While we're talking about that, can you also elaborate a little bit more on the impact you think an early Pfizer filing approval, if that happened, would have on the competitive dynamics in this space?

The second question I had was on diabetes.

We've seen some of these national formularies moving to a single covered product in any given category, not just tier two or three, but a single product.

Can you just give us what percent of market in your view is impacted by those national formularies?

And once a provider selects a preferred product, how difficult is it going to be or would it be to displace that product once someone's gone through the effort of moving over in particular account?

I just want to understand competitive dynamics going forward as this trend plays through.

Thanks very much.

Thanks, Chris.

CDK4/6, do you want to do ahead start us off, Travis?

Chris, unfortunately, I can't directly answer your question because we have not yet announced which tumors we would be pursuing for phase III development.

As I mentioned on the guidance call in early January, we do hope to get you further data from both lung and breast from our phase IB/cohort expansions that we performed as part of that trial, in the first half of this year as well as announce which tumors we do intend to take forward in phase III in the first half of this year.

Then, on the diabetes questions that you had, Chris, I don't think we have a percent of covered lives that would be on national formularies, for example with somebody like ESI.

But it is only a portion of their business, for example.

Maybe a better way to answer your question would be to point out that these more highly controlled formularies are a minority of the business in the US.

I think the best evidence for that is you can look in the last two or three years as you've seen some of the larger plans switch to sole source for one of the two insulins, you've seen shares moderate maybe by a couple percentage points in the overall market share for the mealtime insulins.

Again, these are sizable swings, but it's not like you're having the majority of the market moving at any one point in time.

In terms of switching, there certainly are difficulties in switching, so I think payers from our experience don't do this lightly.

I think they'd be unlikely over time to be switching every two or three years from one product to another.

We continue to think that having multiple products available in a class is in the best interest of patients, and actually think long-term in the best interest of payers as well.

They can continue to have a competitive dynamic and not have a significant amount of inconvenience for patients that they're trying to get into their plans as they make these kinds of decisions.

We'll continue to, as we have had in the past, argue for dual access among the various products that we are involved in selling.

Where that's possible, that's great.

If not, then we'll have to make the decisions that we need to make to have our products available to patients here in the US market.

Next caller, please.

Jami Rubin, Goldman Sachs.

Thank you.

John, this is a question for you.

You guys have been quiet on the M&A front whereas we have seen tremendous amounts of M&A across other sectors in health care.

I'm just wondering if you can comment on your appetite for M&A?

Lilly's been rumored recently to be interested in an oncology company.

Just talk about the importance of M&A to achieving your goals, and what specific areas you would be interested in?

At the same time, in your discussion about business development, maybe if you could throw in their your views on Elanco and how you see that business going forward, and if you would consider, as some of your competitors have done, spinning that business out?

Thanks.

Okay.

Thanks, Jami, for the question.

On the pharma side, we continue to have no appetite for large-scale M&A in the pharma business.

If we were to undertake smaller kinds of acquisitions, I think the best way to think about that is they would have to complement or strengthen areas of focus, our current therapeutic areas of focus, or provide us with additional coverage or leverage in key geographies.

With respect to Elanco, we've said that we intend to be buyers and not sellers in the animal health space.

We've done more or less one or two acquisitions, smaller acquisitions, every year for the past five or six years.

We have grown this business nicely over this period through a combination of inorganic moves and organic growth.

We're going to continue to be interested in M&A in the animal health area that helps us increase our coverage in the area of vaccines, and also provide us with a greater presence in some of the key emerging markets.

I will say, obviously, we completed our largest M&A in our history about five years ago, and based on the data we've seen for ramucirumab and necitumumab, that seems to be playing out quite well.

I am also pleased that as we begin to exit this YZ period, we do so with a very strong balance sheet.

Next caller, please.

Gregg Gilbert, Bank of America.

I have a few.

Thanks, John, for that very clear description of M&A.

If we're to think, for John Lechleiter, of 2014 as a year of [declifization] which hopefully sets you up for some nice growth for several years, based on sort of singles and doubles as the Street sees them, do you think there are any other key shareholder value drivers that investors don't fully appreciate, that perhaps are clear in your mind?

My other question is on ram.

I know you're ready to launch ram in gastric quickly after it happens, but do you think the system's ready to provide access for docs to use the product in a broader patient population, as is probably the case in your market research?

Then AWARD-6, what's the most granular timing you can offer?

Phil, I'm sure some folks will ask you that after the call.

Thanks.

John, do you want to start with first question?

Maybe Travis, answer the question on ramucirumab, and I'll take the AWARD-6 timing question?

Gregg, I think first of all, while we intend to get back on a growth trajectory through the launch of new products, I think the fourth quarter with a 9% underlying growth in those products not affected by, essentially, other than Cymbalta US situation, I think augurs is well for solid growth from this basket of currently marketed products that we have.

That's going to be important to underpin our launches in the years ahead.

We continue to do very well in Japan.

I think our volume growth in Japan for the year was 13%.

We're now squarely in the top 20 in Japan.

We continue on an annual basis to more or less lead that market in growth across all of our major competitors (technical difficulty) Pharma and a local Japanese company.

In China, despite a slowdown, we saw 12% revenue growth in China for the year.

I continue to believe that emerging markets represent a good investment for Lilly.

Keep in mind, emerging markets are a relatively smaller piece of Lilly than they are in many other companies.

Typically, our larger competitors have about 20% of revenue in emerging markets.

I think we're closer to about 12%.

I look at that as a key opportunity for growth.

We have a great business in Latin America.

For example, we're expanding our presence in other countries where traditionally we've not had a presence there.

I think that's another area of interest.

We talked about Elanco already.

We're very bullish on Elanco's prospects.

We see good positive synergies between Elanco and Lilly, and we believe Elanco has the operating independence it needs to compete with competitors that are reshaping themselves.

I think in terms of value creation, so we're launching a cancer drug hopefully this year and two drugs in type II diabetes.

Those are launching the infrastructures that are well built out, so we've called that out to investors, but I think that's important to keep in mind.

The other piece is just the work we've done on infrastructure.

This is a different Company today than the Company of the last decade.

We've had to prepare for this very, very difficult period, and we've made some choices.

We haven't wasted the crisis, as the old saying goes.

We're more agile.

We're leaner.

I think we're better operators today.

I believe that will help, that will pay off in terms of success of these launches that lie ahead of us.

Thanks, John.

Travis?

Thanks, Gregg.

With respect to your question around ramucirumab, obviously, we're very pleased that we now have two positive phase III trials for gastric cancer.

Look forward to receiving the regulatory action for the REGARD submission in the US by Q2 of this year, and then look forward to submitting the RAINBOW data to the US in the first half of this year.

Outside of gastric cancer, clearly, we're looking forward to getting the data from the three ongoing trials that we have, second line lung, second line liver, and second line metastatic colorectal cancer.

We'll look to use that data and obviously take that data on board and expand that into potentially further development opportunities for ram.

We're very pleased with the prospects we have for ramucirumab, and look forward to getting those three data points on lung, liver, and colorectal later this year.

I would think, Gregg, the strength of the data will likely also dictate, not only physicians' interest in prescribing, but also what kind of access and the speed of access that we might be able to achieve.

For AWARD-6 timing, we would look to press release the top line results of this study, although this is not a pivotal study for our registration submissions to regulators, we recognize this trial is of high interest to the investment community.

We do intend to have a top line press release, whatever the outcome is, and we would expect from a timing perspective that that would be release we'd be issuing here in the first quarter of the year, and hopefully have a chance if the timing lines up to present that data at a medical meeting in the middle part of the year.

Next caller, please.

David Risinger, Morgan Stanley.

Yes.

Thanks very much.

I have a couple of questions, please.

First, maybe Derica you could just talk about any wholesaler inventory changes of note in the fourth quarter and how you finish the year?

Second, with respect to Alimta in the EU, could you please discuss what we should expect from the appellate court patent decision in terms of timing in 2014?

And maybe you could just frame it for us, and I am forgetting exactly which countries this decision will apply to, but if you could discuss that?

I think that covers it.

Thank you.

Great, Dave.

Thank you very much.

Derica, on the wholesaler inventory?

Hi, Dave.

Good morning.

We did have in the US some wholesaler inventory build.

One other phenomenon we did see is that while there was building at the wholesaler level, we believe that there was a depletion of inventory at the retail level.

Long term, we believe this year it'll work itself out and we're not concerned about that build as we think about our 2014 outlook.

On Alimta in the EU, Dave, real quick, summary of the landscape there.

There's one action, which you didn't ask about specifically, but I do want to comment on, which is the European Patent Office where the patent itself had been challenged.

You may recall that the initial hearing judgment went in Lilly's favor, and that has now been appealed to the Board of Interferences within the European Patent Office.

We still have no date for that hearing.

Separately from the proceedings with the European Patent Office, there are two countries that have the ongoing legal proceedings.

The first is Germany where I believe there's a trial that could come as early as March of this year, and in the UK, which is in April.

In the future, I think there will be a single European Patent Court to hear and decide cases more broadly across the European Union.

That's not the case right now, so the cases that would be heard in Germany and the UK would explicitly apply to those markets.

Other countries based on those rulings would have to make their own determination.

One quick follow-up.

Can you just give us a framework for what percentage of the ex-US Alimta sales come from the EU?

Sure.

I will see if we can grab that here relatively quickly from the --

The secret book.

Yes.

It's actually not too secret, you have this detail.

If you've not been following this, just a little bit quietly, but in the October call, Q3 call, you may have seen that we expanded the disclosures for product sales breaking out international sales by the ACE region, which is Australia, Canada, Europe, Japan, and emerging markets to respond to some requests that we had to provide much more clarity around product sales in particular for Japan and emerging markets.

Hopefully, you'll find that of interest.

I'm looking actually at the public book rather than the secret book.

In the fourth quarter, our international total Alimta sales were about $394 million, about $235 million of that came from the ACE region, the vast majority of which would have been coming from Europe itself.

You had about another $90 million roughly coming from Japan, and almost $70 million from the emerging markets.

Got it.

Thanks so much.

Tim Anderson, Sanford Bernstein.

Thank you.

A couple of questions.

On necitumumab, how confident are you that the drug is approvable in lung, now that you have positive results in hand that you top lined last fall, and what's the development program from here?

It seems that with positive lung results, you'd be pushing into broader development, but I haven't heard you yet articulate what's next.

Are you going to hold off doing anything until you see whether the drug gets approved in lung?

Second question, on your two insulins, novel basal and insulin glargine, wondering if you can characterize what you think the bigger commercial opportunity would be with either those drugs when you look out over the next five years?

Great.

Thanks for the question.

In terms of confidence in necitumumab being approvable and also thoughts on the development plan, maybe we'll start with Travis, and Jan, if you have any thoughts you'd like to add, and then I'll comment on the comment you had on the opportunity with the two basal insulins.

This is Travis.

Obviously, we were pleased with the top line results of improving overall survival in front line squamous non-small-cell lung cancer.

Clearly, squamous non-small lung cancer has been one of those more difficult diseases to treat, vis-a-vis non-squam.

At this time, we are pleased with the risk-benefit profile that we have and look forward to getting those more detailed data in front of you at ASCO.

With respect to next steps, still under evaluation as to what next steps may look like for necitumumab development, so hopefully we'll have more details to share later on that this year.

Tim, in terms of the two insulins, so with the insulin glargine product, we see ourselves very well positioned, one of the few companies that's well-positioned to have success with this kind of opportunity, given the expertise we have in the space, the ongoing commitment to developing devices over time, strong relationships that we have with physicians.

We believe this is a very important opportunity for us to really begin to establish a foothold in the basal insulin segment which we have not been participating in up until this point.

The commercial opportunity for the novel basal insulin could be very substantial, but it will depend on the clinical profile that we see in phase III trials.

There were some very encouraging signs that we saw in phase II as we shared with you at ADA and in subsequent meetings with the profile that we saw for reduction HbA1c, the weight profile, reduction in mealtime insulin usage relative to the current standard of care basal insulin, which if these are confirmed, if multiple of these are confirmed in the phase III trials, it could leave that product have a very substantial opportunity.

We've also been very clear that if this product does not differentiate substantially from Lantus, it's probably more likely than not that it would not be launched, and not be a viable product and therefore efforts we focused will be on the insulin glargine product solely.

Again, until we see the data, it's very difficult to know.

We do have trials for the novel basal insulin that began to wrap up late last year with one of them, a number of them then over Q1, Q2, and Q3 of this year.

We would hope to have enough of those trials in-house probably by the middle part of the year, to be able to issue a top line press release updating all of you on the progress to date with those trials, so encouraged and anxious for those outcomes.

Stay tuned for the top line later this year.

Next caller, please.

John Boris, SunTrust Robinson.

Thanks for taking the questions.

Congratulations on the results.

Just on ramucirumab and your filing in Japan, is it possible to get an update on the timing of any additional work that needs to go on there and the timing for the filing?

Secondly, a question for Jan, on the CDK 4/6.

There's a lot of pre-clinical data out there, but what are the main features or advantages and benefits of your CDK relative to the other compounds, when you evaluate them and consider evaluating taking it to the phase III development?

Thanks.

Thanks, John.

Travis, do you want to start?

We do have a bit of an update versus the guidance call that we provide earlier this month on the Japanese filing for ramucirumab, which is, again, to remind folks, based on the RAINBOW data where we had about a third of the patients from Asian countries, so we look to be able to file that submission by the end of this year.

Okay.

Regarding CDK 4/6, as you know, this is a very exciting area.

But what we have seen on our compound and in the initial clinical trials shows a clear-cut single agent activity which wasn't really I think what Pfizer emphasized for their molecules.

Here we see a potential efficacy benefit.

Furthermore, we could do continuous dosing without interruption based on our safety profile.

There, the Pfizer molecule had issues and has to have intermittent dosing.

We believe that potentially to have a continuous coverage can gain efficacy.

Thanks.

Next caller, please.

Vamil Divan, Credit Suisse.

Thanks for taking the question.

Just two that I have, one on evacetrapib.

I appreciate the update that you gave there on a trial.

I'm just wondering if there's any interim reason you could point to us in the timing of when those might occur now, that might lead to the trial, or gain some data earlier than I guess the 2016 time frame you mentioned?

The other one on the autoimmune side.

It hasn't come up yet today.

In terms of baricitinib, just a status of how the phase IIB study's going there.

If you could also talk about how you are looking to make a decision there move it into phase III.

Is that separate from waiting to see the data on ixe, or are you going to look to see all those play out against each other, given that bari's partnered obviously with Incyte?

Thanks.

Okay.

Great, Vamil.

Jan, would you like to take the evacetrapib?

And Jan or Travis comment on the autoimmune please?

There is room for an interim analysis on evacetrapib which we don't want really to comment on at the exact timing of.

Baricitinib, if you refer to the phase II, ongoing phase II trials, was that the psoriasis indication then where we have data which we are currently evaluating.

I think we will communicate the steps forward in due course.

I would just add on a little bit to what Jan's comment.

We actually do look to disclose that psoriasis data in the first half of this year.

Great.

Next caller, please.

Marc Goodman, UBS.

Good morning.

You talked a little bit about the emerging markets.

Can you talk about some of the countries where you are making investments?

Second, China seemed to slow in the fourth quarter, but it did well throughout the year.

I was just curious, is there a new trend going on, or was there something that happened in the fourth quarter specifically?

If so, has it carried over into January?

Then when you answered the question about the biosimilar for Lantus before, did you confirm that you've actually filed a Paragraph IV and notified the branded company?

Third, just on diabetes, how do you see this market playing out with respect to the SGLT-2s and DPP-4s and are you hearing anything behind-the-scenes on how Invokana is doing, and if the SGLT-2 is moving in front of DPP-4s as far as therapy?

Thanks, Mark.

We'll have Derica answer the first question about emerging markets and where we're investing, and what we're seeing in terms of growth in the fourth quarter, and then I will take your diabetes questions.

Sure.

In terms of the emerging markets, as John indicated earlier, clearly China is a key beachhead, at least for Lilly, but then the grouping of the emerging markets.

But other markets such as Brazil, Mexico, Korea, Russia, Turkey, as well as India are key footprints for us as we think about leveraging some of the key therapeutic areas that are doing well in those markets today which are diabetes and oncology, which obviously are core to what we do.

We continue to see emerging markets as a strong opportunity for us.

In regards to your particular question around China itself, overall, we have seen the China market growth slowing.

That is a factor we are picking up, but it's still very robust when you compare it relative to the rest of the world.

We don't see backing off our investment and our focus in that market.

Another factor we believe is affecting the growth in that market, at least in 2013, was the anti-corruption scandal that was going on there and was really affecting primarily many of the multinational big pharma companies there.

Hopefully, that will begin to subside as we are closing out 2013, and we're not anticipating any significant lingering impact in 2014.

On your question for the insulin glargine product and a Paragraph IV certification, notification to Sanofi, we can't give specific dates.

But in terms of process, our 505(b)(2) filing did then also include a Paragraph IV certification.

Once it was clear to us that FDA has accepted our filing for review, that then triggered our 20-day window to provide notice to Sanofi, and then once we provide notice to them, they have the 45-day period upon which they can initiate a suit.

I think it's safe to assume that by the time we issued our press release on December 20, saying that the FDA had accepted the filing for review, it would have been around that kind of timeframe that we made that communication to Sanofi.

If you're trying to figure out where things are in the process, that may help you to titrate that timeframe down a little bit.

For the SGLT-2, we've actually been quite pleased to see the uptake that Invokana has experienced in the US market place in particular.

There was a lot of discussion prior to the approval and launch of that product.

Many observers were thinking this product class was not going to have a significant adoption by physicians, so I think we're pleased as observers who could be coming relatively soon with one of our own and also potentially the first to have a combination product of a DPP-4 with an SGLT-2, but there seems to be pretty good acceptance for this mechanism and the efficacy tolerability safety profile, that at least this first entrant carries.

We're looking forward to coming into the marketplace ourselves as well.

The DPP-4 market growth has slowed in part due to the uptake of canagliflozin.

We do expect long term that with that underlying demographics and market dynamics that you will continue to see robust growth in both of these areas of the oral diabetes class.

We're looking forward to participating in both of these classes going forward.

Next caller, please.

Alex Afraei, BMO Capital Markets.

Good morning, and thank you for taking my question.

Following up on the SGLT-2s, are there any updates on the EMPA manufacturing issues you discussed in your last call, and when can we expect a resolution?

Also, you don't have the EMPA phase III trial listed as external readouts.

I'm wondering if that's for competitive reasons, or whether it's up to your partner?

Thank you.

Great.

I will take your questions.

This is Phil.

I'll take the second one first.

We actually had many of those trials presented at ADA last year.

That was the big coming out party, if you will, for the data from that phase III program.

Not all of the trials were presented there, so as we go through 2014, I'm sure we will have additional data presentations.

Again, the bulk of that data was in fact presented at ADA last year.

In terms of the timing on the manufacturing issues, the reinspection that BI will be having pursuant to their warning letter, there are no updates at this point in time, as we mentioned on the guidance call.

There is a reinspection scheduled for the first quarter.

We also, coming up in the not-too-distant future, have the potential action date for the submission that we have from empagliflozin.

We'll keep you guys appraised as the situation evolves, but there are no updates from earlier this month.

Next caller, please.

Seamus Fernandez, Leerink.

Thanks very much.

I have a few questions.

First, regarding Peglispro, do you have any new data either from phase III or other ongoing studies in-house, and if so do, these data provide any greater comfort around the liver safety of Peglispro?

Second, on necitumumab did the SQUIRE study include any pre-specified biomarker evaluations, and if so, could you disclose what these pre-specified analyses were?

Third, on CDK 4/6, could you remind us the specific expansion cohorts that we'll see more data on this year?

Maybe remind us the percent of lung cancer patients that have KRAS mutant status?

Then the last question is finally, can you just update us on your plans for your TGF beta in liver cancer, given some of the seemingly promising data that you presented at ASCO GI?

Thanks.

Okay.

We were furiously writing here.

We'll see if we've got all of these.

Maybe I'll start out with the Peglispro question.

As I mentioned earlier, we have begun to have the first trial essentially wrap up in the program.

We won't provide running commentary as each single trial comes out.

As we have done, for example, with the dulaglutide trials, where we have waited until we had awards one, three, and five before issuing the top line press release.

We'll be doing the same thing with the studies for the basal insulin Peglispro.

SQUIRE, this was another pre-specified biomarkers.

Travis, if you able to find anything in our -- We need to get back to you, Seamus, on the pre-specified biomarker question.

I think there were some there, but we don't have the details with us.

We'll follow-up on that one.

CDK 4/6, the expansion cohorts, do you want to comment on what those were, Travis?

We did expansion cohorts for a few tumors coming out of that phase 1B.

Most prominently, we're breast and lung, but I believe there's a couple others, melanoma and potentially one other that I need to follow-up on, Seamus.

There's a question of percent of KRAS mutant, and Seamus were you asking that with regards to colorectal or with regard to lung?

I missed the tumor type you were asking about.

More with regard to lung.

We may need to follow-up on that.

I don't think that data with us.

Jan, do you have anything on that one?

I think I can to say that we included a KRAS mutant as one potential interesting area.

Then the TGF beta data presented as part of the recent medical meeting was definitely very encouraging.

The team is working through sort of what the next steps are for development of that molecule.

I think that later this year that we will hopefully have an update for you on those plans.

Okay, great.

Thank you.

Next caller.

Jeff Holford, Jefferies.

Thanks for taking my call.

Just two questions about diabetes.

A bit more color on the pricing you've put through, any recent pricing increases across the insulin portfolio as well as the cumulative last 12 month price increases you've had across the portfolio?

Also, just another question around the insulin glargine product.

I think I'm correct in saying you don't yet have a device that's sort of public or known to use that is suitable for administrating basal insulin in terms of the number of units that's required.

We aren't able to detect any patent applications for such a device.

Maybe if you could just talk about that, where you think you are, and what's your long-term game plan with devices for the insulin glargine?

Thank you.

For the price increase piece, I don't think we have that with us.

We can follow up with Jeff after the call on a recent price increases.

There were a couple different price increases over the course of 2013 I think the last one in December.

We can follow-up with you with a specific numbers for those.

For the presentations we would use for commercialization of the insulin glargine product, we have not been specific on our plans, other than to state that we are definitely looking at multiple options.

We also believe that we would be in a position to commercialize that product upon expiration of the Lantus compound patent in early 2015.

Thank you.

You're welcome.

Next caller.

There are no further questions in queue.

Great.

Thank you very much for your attention on today's call.

We appreciate your interest in Eli Lilly and Company.

Going forward, we'll continue to do what we did today, and on our guidance call, which is to exhaust the questions in the queue.

Hopefully, you'll find that helpful to get your questions answered in a timely manner.

We look forward to interacting with you at upcoming meetings, conferences, and keeping you appraised of our products, which hopefully will be considerable this year in advancing the pipeline and beginning to launch new products to position ourselves for growth coming out of 2014.

Have a great day.

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