禮來公司 (LLY) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Eli Lilly first-quarter 2014 earnings call.

For the conference, all participants are in a listen-only mode.

There will be an opportunity for your questions.

Instructions will be given at that time.

(Operator Instructions)

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

I will turn the conference now over to your host, Mr. John Lechleiter, Chairman, President, and CEO.

Please go ahead, sir.

Good morning, everyone.

Thank you for joining us for the second time this week, today to discuss Eli Lilly and Company's first-quarter 2014 earnings.

I'm John Lechleiter, Chairman, President, and CEO.

This quarter and going forward, we are taking a slightly different approach to our quarterly calls.

We are bringing more of our senior leaders into the room to participate and to answer your questions, and we hope that this enhances the quality of the information we are able to provide you during these sessions.

So joining me today on the call are Derica Rice, our Chief Financial Officer; Dr. Jan Lundberg, President of Lilly Research Laboratories; Sue Mahony, President of Lilly Oncology; Enrique Conterno, President of Lilly Diabetes; Dave Ricks, President of Lilly Biomedicines; Jeff Simmons, President of Elanco Animal Health; and Phil Johnson and Ilissa Rassner of the Lilly Investor Relations team.

During this conference call, as usual, 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 SEC.

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.

Before covering our first-quarter 2014 results, I'd like to share some high-level observations.

Lilly continues to make good progress in executing the strategy we laid out nearly five years ago to navigate through this period of unprecedented loss of revenue and income, precipitated by patent expirations for several of our largest products.

We have continued to invest in R&D and have successfully replenished our late-stage pipeline.

The first fruits of these efforts are manifest in the approval on Monday evening of Cyramza by the US FDA.

We have three other molecules currently under regulatory review, with more to follow soon, and we have the very real prospect of launching two additional NMEs, empagliflozin and dulaglutide, in major markets later this year.

We have focused our business in core therapeutic areas, including diabetes, oncology, neuroscience, and animal health.

In oncology, our 2008 acquisition of ImClone is paying off.

While in diabetes, our global partnership with Boehringer Ingelheim will enable us to launch two potential best-in-class oral agents in a three-year period.

You know about Elanco Animal Health, soon to be the second largest enterprise of its kind, following our acquisitions of Lohmann Animal Health and Novartis Animal Health.

Finally, we have worked tirelessly and largely behind the scenes to reshape every aspects of our Company to reduce costs, improve quality and productivity, and to regain the customer focus that has been at the heart of Lilly's historic record of success.

Today we are a more capable, more agile, and more focused competitor than ever before.

While we will never declare victory, we are encouraged by our progress through this most difficult period, and with every positive data readout and every regulatory filing, more and more confident that this Company is on a clear trajectory for success.

All of this further buoys our confidence that 2014 is indeed an inflexion point for Lilly, leading to a bright future.

Now with that framing, let me get into the meat of today's call by highlighting key events that have occurred since last quarter's call, and it's certainly been an event-filled last three months, which we believe shows great promise in the execution of our strategy.

On the regulatory front, the first quarter was another eventful period.

In oncology, the FDA approved ramucirumab as a single-agent treatment for patients with advanced or metastatic gastric cancer with disease progression after prior chemotherapy.

With this approval, ramucirumab becomes the first FDA-approved treatment for patients in this setting.

This is an important milestone for patients with this difficult-to-treat disease.

It is the third leading cause of cancer death worldwide.

In coming weeks, we'll make the product commercially available under the trade name Cyramza.

In diabetes, the FDA issued a complete response letter for empagliflozin; the letter cited the need to resolve previously observed deficiencies at the Boehringer Ingelheim facility, where empagliflozin will be manufactured.

The FDA did not ask for any new clinical trials to support the approval of the application.

The FDA has completed its inspection of this facility, and Boehringer Ingelheim has provided its responses to the FDA's observations.

At this time, we cannot comment on exactly when we will resubmit the empagliflozin NDA; however, we continue to expect FDA action in 2014.

In late March, Europe's CHMP issued a positive opinion recommending approval of empagliflozin as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes.

Assuming the European Commission follows the CHMP recommendation and approves empagliflozin, we anticipate launch of the product in European countries beginning in the third quarter.

Meanwhile, earlier this month, Australia became the first market to approve empagliflozin under the trade name Jardiance.

We also announced that the NDA for the fixed-dose combination of empagliflozin and linagliptin has been accepted for review by the FDA.

We are optimistic that this first-in-class fixed-dose combination of a DPP-4 inhibitor with an SGLT2 inhibitor could provide a valuable additional treatment option for patients with type 2 diabetes.

Finally, the FDA issued a complete response letter for the NDA for Humalog [U200] KwikPen, a concentrated version of Humalog.

We expect to resubmit the NDA before the end of the year.

In clinical news, we announced that the Phase III REVEL trial, studying ramucirumab in second-line non-small cell lung cancer, met its primary endpoint, as patients treated with ramucirumab plus docetaxel experienced an improvement in overall survival compared to patients treated with placebo plus docetaxel.

We intend to submit the first application of these data to regulatory authorities in 2014 and will present the detailed data at ASCO later this year.

This marks the third positive Phase III trial with ramucirumab.

We are pleased with this continued progress, which confirms the promise we saw in this molecule when we acquired ImClone.

At the AACR meeting earlier this month, we presented data from the Phase I trial of our CDK4/6 inhibitor, bemaciclib.

These data were from a cohort expansion in patients with advanced breast cancer and supported our decision to begin our Phase III program in breast cancer.

You may have seen that the first Phase III trial has been posted on clinicaltrials.gov and will begin this summer.

We are pleased with the single-agent activity seen in this patient cohort, as well as the product safety profile, and believe we could have a best-in-class molecule.

Moving to diabetes, we announced that the AWARD-6 trial, comparing once-weekly dulaglutide, 1.5 milligrams, to once-daily liraglutide, 1.8 milligrams, met its endpoint of non-inferiority in the reduction of HbA1c from baseline at 26 weeks.

Dulaglutide is the only GLP-1 agonist to show non-inferiority against liraglutide's highest approved dose in a Phase III study.

We look forward to presenting the detailed data at ADA later this year.

In business development news, earlier this week, as I mentioned earlier, we announced an agreement to acquire Novartis Animal Health for approximately $5.4 billion.

We're excited to combine two premier and complementary animal health companies, which will create a new top-tier global animal health player, one that will continue to lead in innovation and customer value.

We expect the acquisition to close by the end of the first quarter of next year.

As you will recall, we also announced in February an agreement to acquire Lohmann Animal Health, a privately held German company that is a global leader in poultry vaccines.

This acquisition, expected to close this quarter, will establish Elanco as a global poultry leader and solidify Elanco's vaccine presence and manufacturing capabilities.

In other news, the US District Court for the Southern District of Indiana ruled in Lilly's favor, upholding the US vitamin dosage regimen patent for Alimta, which expires in May 2022.

The German court also ruled in Lilly's favor, confirming that Alimta's European vitamin dosage regimen patent would be infringed by the contemplated entry of Actavis' generic pemetrexed dipotassium products in Germany prior to June 2021.

We are pleased with these rulings and are confident that these patents are valid and enforceable.

Also in the news, Sanofi filed a lawsuit in the US District Court for the District of Delaware alleging that our new insulin glargine product, for which we are seeking FDA approval, infringes certain of their patents.

We do not believe that the application for approval of our new insulin glargine product infringes any valid claim of the asserted patents.

On March 2, US patent protection for Evista expired.

After a short delay, generic raloxifene is now on the market, and we have entered into an agreement with Prasco to sell an authorized generic raloxifene.

In an Actos product-liability case in Louisiana, a jury found in favor of the plaintiffs, awarding compensatory damages and significant punitive damages.

Lilly disagrees with the verdict and intends to vigorously challenge this outcome.

The agreement between Lilly and Takeda calls for Takeda to defend and indemnify Lilly for losses and expenses with respect to the US litigation.

After the verdict was entered in this case, Takeda notified Lilly that it was reserving its right to challenge its obligations to defend and indemnify Lilly with respect to the Allen case only.

Lilly believes it is entitled to full defense and indemnification of its losses and expenses related to Allen and in all other US cases.

Finally, during the first quarter, we executed share repurchases totaling $55 million under our $5-billion share repurchase program.

We now have $4.4 billion remaining in the program, which we expect to complete over a multi-year period.

Now I'll turn the call over to Phil for a discussion of our financial performance for the quarter.

Great.

Thank you, John.

First, I will review 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 7, you can see that revenue in Q1 2014 was $4.7 billion, 16% below Q1 2013.

This decline reflects a full quarter effect of the Cymbalta US patent expiration, as well as the initial effect of the Evista US patent expiration.

Excluding Cymbalta and Evista in the US, the rest of our worldwide revenue grew 1%.

It is also worth noting that wholesaler purchasing patterns substantially dampened the US revenue growth in the first quarter.

Excluding this effect, the rest of our worldwide revenue would have grown 4%.

Gross margin as a percent of revenue decreased 5.4 percentage points, driven largely by the loss of Cymbalta's US exclusivity, and to a lesser extent, by the loss of Evista's US exclusivity, as well as by the impact of foreign exchange rates on international inventory sold.

This quarter, foreign exchange rates on international inventory sold had a negative effect on gross margin; however, in Q1 2013, foreign exchange rates on international inventory sold provided a benefit to our gross margin.

Excluding this FX effect from both 2013 and 2014, gross margin as a percent of revenue declined from 79.1% in Q1 2013 to 75.8% in Q1 2014.

As in past quarters, we have 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 8. Total operating expense, defined as the sum of R&D and SG&A, decreased more than $400 million, or 14%, versus Q1 of 2013.

Marketing, selling, and administrative expenses were down 10%, while R&D was down 18%.

The reduction in marketing, selling, and administrative expenses was due to our ongoing cost-containment efforts and the reduction in US sales and marketing activities for Cymbalta and Evista.

The decline in R&D expenses was driven by milestone payments and an asset termination charge in Q1 2013 that did not recur this quarter, as well as by lower clinical development costs.

Other income and expense was net income of $56 million in Q1 2014 compared with net income of $34 million in the first quarter of 2013.

This difference was driven both by lower net interest expense and by higher other miscellaneous income.

Our non-GAAP tax rate was 18.7%, an increase of 3.2 percentage points compared to the same quarter last year.

There are a number of pushes and pulls driving this change: recall that our non-GAAP tax rate in Q1 last year was substantially reduced by the recognition of the full-year 2012 R&D tax credit.

In addition, our tax rate in Q1 this year is higher, as no legislative action was taken in the quarter on the R&D tax credit up for extension.

Finally in Q1 this year, we recorded a discrete tax benefit of approximately $30 million, which lowered our non-GAAP tax rate by 3.3 percentage points.

At the bottom line, net income declined 40% and earnings per share declined 39%.

While this is a significant decline, it is consistent with our expectations and places us on track to achieve our full-year guidance.

Slide 9 provides a reconciliation between reported and non-GAAP EPS, and this reconciliation reflects the charge of $31 million pretax, equivalent to $0.02 of EPS, that was incurred in Q1 2014 as a result of restructuring to reduce the Company's costs.

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

Many of you have noted that nearly all our peers exclude amortization of intangibles from their non-GAAP results, while we include this expense.

For your modeling purposes, and as you will see in our 10-Q, we recognized amortization expense of $132 million, representing nearly 3% of revenue this quarter.

Moving to slide 10, you can see the total revenue decline of 16% in Q1 2014, shown in the yellow box in the middle of the page, was driven by negative volume impact of 8%, a negative price impact of 6%, and a negative foreign exchange impact of 2%.

By geography, you will notice that US volume decreased 26%.

This was largely due to the loss of exclusivity for Cymbalta.

US volume did benefit this quarter from shipments of our authorized generic, Evista.

Excluding Cymbalta and Evista, volume on the rest of our US pharma products was down 6% this quarter.

Excluding the effect of wholesaler buying patterns I mentioned earlier, volume on these products increased 2% in Q1.

Revenue in Australia, Canada, and Europe, or ACE, was essentially flat, while in Japan, volume growth was particularly strong, up 37%, driven primarily by Zyprexa, Forteo, Cymbalta, Strattera, [Trazenta], and Alimta.

An increase in the consumption tax that went into effect on April 1 contributed to higher customer purchases; our best estimate is that this added roughly $70 million, or 15 percentage points of growth, to our Q1 revenue in Japan.

You can also see that the weaker yen trimmed revenue growth by 17%.

At current foreign exchange rates, this negative FX effect is expected to be much lower for the remainder of the year.

In emerging markets, we saw strong performance growth of 15%, partially offset by a 6% negative impact from foreign exchange.

Volume growth was a robust 13%, driven by Cialis, Humulin, Humalog, Vancocin, Tradjenta, and Cymbalta.

Volume growth in Brazil benefited from a Humulin [tender], while volume in China grew 15%.

Elanco Animal Health delivered revenue growth of 6%, and excluding FX, Elanco grew 7%.

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

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

Now, let me turn the call over to Derica.

Thank you, Phil.

Slide 11 shows the effect of changes in foreign exchange rates on our 2014 results.

At a high level, FX had a modest negative effect on our underlying foreign-currency-dominated revenue and cost; however, this quarter, the effect of FX on our cost of goods sold also had a negative effect on our results.

In the first rows of numbers, you'll see the FX negatively affected worldwide revenue growth by 2 percentage points, as Phil mentioned earlier.

In the second row, you can see that FX cost caused the sales to increase by 7 percentage points.

Driven by the strengthening of the euro, in Q1, this effect -- this year, the effect of FX on international inventories sold led to a substantial additional cost being booked to cost of goods sold, while last year, it led to a modest reduction in cost of goods sold.

As a result, excluding FX, cost of goods sold actually decreased 1%.

So as you can see in the last two rows, while our operating income and earnings per share declined substantially due to the patent expiration of Cymbalta in the US, foreign exchange further reduced operating income and EPS growth by double digits.

Slide 12 shows our pipeline as of April 21.

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

Now as John mentioned earlier, we received approval of ramucirumab for the treatment of advanced gastric cancer as a single agent after prior chemotherapy.

In addition, we began Phase II testing of a biologic for anemia, and we began Phase I testing on a small molecule for cardiovascular disease.

And we terminated the development of four assets, two in Phase II and two in Phase I.

As John also indicated, with a number of encouraging data readouts in 2013, 8 assets in Phase III, 3 assets under regulatory review, and 1 just recently approved, and more Phase III data readouts, regulatory submissions and product approvals possible this year, we are confident in our ability to return to growth post-2014.

Next, let me remind you of our key events for 2014 and review our updated 2014 financial guidance.

In the first three-and-a-half months of this year, we are pleased with the progress we've made on key events we highlighted on our 2014 guidance call.

While I will not go through each item on slide 13, we're excited about the opportunities 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 expect to begin Phase III studies for two assets: bemaciclib, our CDK4/6 inhibitor for cancer; and our anti-sclerostin antibody for osteoporosis.

As John mentioned, the first Phase III trial of bemaciclib was recently posted to ct.gov and will begin this summer.

With respect to Phase III data, we expect to report top-line results this year, with detailed data presentation next year for four NMEs and one additional indication for ramucirumab.

In January, we disclosed detailed data of the RAINBOW trial for ramucirumab as combination therapy in second-line gastric cancer.

And we anticipate detailed data disclosures yet this year for dulaglutide, our new insulin glargine product; necitumumab; and ramucirumab in non-small cell lung cancer, and possibly in liver cancer.

We've also submitted the fixed-dose combination of empagliflozin and linagliptin for the regulatory review in the US and could have multiple additional regulatory submissions this year across our diabetes and oncology portfolios.

Importantly, we've seen positive regulatory action on Cyramza as monotherapy for second-line gastric cancer.

And we expect to receive European approval for empagliflozin later this quarter, following the CHMP's positive recommendation for approval in late March.

Still this year, we could have regulatory action on empagliflozin here in the US; on dulaglutide; and on our new insulin glargine product, although launch timing will be gated by expiration of Lantus' patent protection; and in the case of the US, by ongoing litigation.

In other key events for 2014, we are pleased with the Alimta patent ruling granted in our favor in both the US and Germany.

And we could receive a ruling this quarter from the recently concluded trials in the UK.

And we lost 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.

Clearly, we have a lot going on in 2014 and we're off to a great start.

Now, turning to our 2014 financial guidance, when we announced the acquisition of Lohmann Animal Health, we lowered our 2014 EPS guidance range to reflect dilution from the deal due to business combination accounting and transaction costs.

That non-GAAP EPS range remains unchanged, and our updates are to specific line items, primarily to reflect the impact of the Lohmann acquisition, as well as movements in FX and the Q1 discrete tax benefit.

On FX, the main change is in the strengthening of the euro, although a number of other smaller currencies have weakened.

In aggregate, these changes modestly benefit revenue, but due to the euro, more substantially add to the cost of goods sold.

Our revenue guidance is now a range of $19.4 billion to $20 billion.

This increase of $200 million reflects estimated revenue from the Lohmann acquisition, as well as the benefit of FX.

Gross margin as a percent of revenue is now anticipated to be approximately 73%, down 1 percentage point from our prior guidance.

Again, this reflects the Lohmann acquisition, including the anticipated inventory step-up and a negative effect of the stronger euro.

We have raised our SG&A guidance by $100 million to a range of $6.3 billion to $6.6 billion, again, to reflect the Lohmann acquisition.

Our R&D guidance remains unchanged at $4.4 billion to $4.7 billion, and other income is still expected to be in the range of $100 million to $200 million.

To reflect the discrete tax benefit booked in Q1, we have lowered our full-year tax rate by 1 percentage point to approximately 19%, which still assumes extension of the R&D tax credit in 2014.

In terms of net income, to reflect from the dilution from the Lohmann acquisition, we now expect net income to be at least $2.9 billion.

At the bottom line, EPS on a reported basis reflects the Q1 charge of $0.02.

Our EPS guidance is now $2.70 to $2.78 on a GAAP basis and remains $2.72 to $2.80 on a non-GAAP basis.

Finally, we continue to expect operating cash flow to be at least $4 billion and capital expenditures to be approximately $1.3 billion.

Slide 15 provides a reconciliation between reported and non-GAAP EPS for 2013 and the associated growth rates from these numbers to our 2014 guidance.

Now, I will turn the call back over to John.

Thank you, Derica.

Before we take your questions, let me briefly sum up.

We have described this moment as a pivotal point for Lilly, and it's literally that.

Even as we feel the maximum impact of our patent expirations, FDA approval of Cyramza, along with the CHMP's positive opinion on empagliflozin, are significant milestones as we move beyond this period to a path of renewed growth.

Our recent announcements to acquire Lohmann Animal Health and Novartis Animal Health position us for continued growth in the attractive animal health business.

For the past five years, we have been candid with you about our challenges and our plans for overcoming them, and we've delivered what we said we would.

We said our first priority was to continue to advance our pipeline, and over the course of 2014, we will continue to generate and disseminate data on a number of Phase III molecules.

We expect to make a number of regulatory submissions of potential new medicines, and we expect to launch multiple products, starting later this quarter with Cyramza.

We said we would offset some of our revenue loss by driving revenue growth across a broad range of products, geographies, and businesses.

Three of our so-called growth engines performed very well again this quarter: Japan grew 16%; China grew 21%; and Elanco Animal Health grew 6%, despite the negative impact on companion animal health of a colder-than-normal winter.

We said we would increase productivity and reduce operating expenses significantly, and operating expenses in the quarter were down 14% versus the first quarter of last year.

Overall, our first-quarter financial results put us on track to meet our 2014 guidance.

Our solid financial performance will enable us to continue to invest in our pipeline, including our new product launches; to pay the dividend at least at its current level; to recapitalize our physical asset base; to reinvest in our business through opportunistic business development; and to return excess cash to shareholders through our share repurchase program.

We remain confident in our strategy and in our ability to execute it.

And now, I will turn the call over to Phil for the Q&A session.

Thank you.

Great, thank you, John.

If I could ask John, the operator, who is helping us with the call today, to provide the instructions for the callers for the Q&A session, and then we'll get started with the first caller.

(Operator Instructions)

Chris Schott with JPMorgan.

Great.

Thank you very much for the questions and appreciate you guys brining the whole management team on the call here.

My first question was for John.

We've seen a trend of increased focus and specialization occurring across the pharma group here.

More recently, we've seen companies actually taking actions to look at strategic alternatives for non-core or sub-scale businesses.

Obviously, you have been able to acquire some assets from these decisions, but more broadly, can you elaborate your thoughts on these trends?

And would Lilly look to further narrow its focus and potentially divest assets?

My second question was on the CDK4/6 program.

If you could elaborate a little bit more on the Phase III program here.

First will you be, will you be looking at adjuvant in addition to the advanced breast cancer market?

Second, and can you elaborate what's the earliest you could get this product to market?

I am just trying to understand how quickly you can roll the study, if there are interims, just realistically when we think about this program being in a position that you could file.

Thank you very much.

Chris, thank you for the questions.

We'll have John take your first one, obviously, and then Sue, if you can comment on the second piece.

I can help if necessary.

John.

Chris, thank you for your question.

I think that judging from events of the last week, if they combine to make a trend, I think you're -- as I think I said in The Wall Street Journal earlier this week, you are seeing companies build on their strengths, add to existing areas of strength, and get rid of assets that where they believe they might be sub-scale.

Animal health, realistically, is one of the few opportunities we have to diversify in a meaningful way in a business that we believe still has very strong synergies back to our pharma business.

When we look at research, we share common footprint for research.

We share a good number of manufacturing capabilities and assets and a global infrastructure that I think enables Elanco to be successful and will continue to enable Elanco to be successful.

I can't comment specifically about whether we would look to shed other assets.

I think from -- we're pretty -- we don't have that many extra assets or businesses, an OTC business, for example, or a vaccines business or what have you.

But I think it's pretty clear that we're going to continue to focus a lot on diabetes and oncology and animal health.

I think our biomedicines portfolio gives us some options.

We're going to know by the end of the year, will we be able to establish an autoimmune portfolio with three Phase III data readouts.

We have a big bet still when you look at Alzheimer's with sola in the EXPEDITION 3 trial ongoing now and enrolling.

And then, as we said last call, we've completed enrollment on evacetrapib, which I think could be a very significant product in the cardiovascular space.

I think we're guided more by where can we build on a solid footprint and an area where we have greater opportunity with the assets we have.

And the idea of divesting assets would only follow from that go-forward thinking, if that makes sense.

Great, thank you, John.

And Sue, on the CDK4/6 inhibitor.

Yes, let me try and address the question on the CDK4/6 inhibitor, bemaciclib.

We presented the breast cancer cohort data at AACR this year, and we have announced that we will be starting Phase III studies this year.

In fact, if you look at CT.gov, we have on that the Phase III study with [provestrin] in metastatic breast cancer.

In addition to that, we have a Phase II single-agent study.

We are excited by our single-agent activity that we saw in our breast cancer cohort, so we are initiating a confirmatory Phase II study there.

With regards to other lifecycle planning and timing of approval, obviously, I can't speculate on those at this point in time other than to say that we're going to continue to progress this molecule, as we (inaudible).

As we are excited by the single-agent activity and dosing and safety protocol that we see so far.

We also will be presenting our lung cohort at ASCO this year and look forward to sharing more data on that.

Thank you, Sue.

John, if we could have the next caller please.

Tim Anderson with Sanford Bernstein.

Thank you.

If I could finish out with a question on the CDK and that lung data coming up.

Can you directionally give us an idea of your level of excitement with that drug in the lung indication, and assuming that the data shows some degree of positivity just a development plan forward?

And then my other question is on your animal health business from Novartis.

Can you give us an idea of what you think the dilution would be to 2015 earnings on an adjusted non-GAAP basis?

And you are talking about remedying the manufacturing problems that that division has had.

The operating margin that Novartis disclosed, I think, was basically breakeven, so it's not profitable.

It would seem to me that the minute you transport those products into some other manufacturing facility, you would have an immediate margin bump up.

Am I thinking about that correctly, and what would be the timeframe for that?

Great, Tim.

Thank you for your questions.

We'll have Sue answer the CDK4/6.

Derica, if you would go ahead and take the question on the impact of 2015 non-GAAP earnings, and then, Jeff, you talk about goals we have for getting profits back up over time, that would be great.

With the [benefactor] data, we presented last year at ASCO the Phase I study, and we found a number of cohort expansions since then.

As I said, we presented the breast cancer expansion data at AACR; we'll be presenting the lung cancer expansion data at ASCO.

Until we present that, clearly, I can't comment on that data.

Again, just to say that we are continuing to look at opportunities to progress this molecule, and we'll be updating you as we get new data.

Thank you, Sue.

Derica?

Tim, this is Derica.

I can't comment or I'm not able to comment as to what the dilutive effect would be in 2015 at this stage.

Obviously, it's going to be predicated on when we actually close the transaction, and right now, we're still projected to close by no later than the end of Q1.

What we have said is that if we assume a January 1, 2015 close, we would expect that this deal would be accretive on a cash basis by 2016 and should begin to return to historical levels of margins that you've seen on Lilly's animal health business no later than 2018 or three years post-closing.

Tim, I'll follow up on that.

First of all, I want to emphasize that the manufacturing problems were, as you know, in Lincoln, Nebraska.

They were human-health-related.

This was a big part of our diligence.

The transfers have already started to take place on the animal health side.

We are very confident as we look at the second half of 2013 and Novartis Animal Health, the trajectory that they're on.

They came in to these problems in a top-tier growth, 6% to 8%, as an animal health business.

We believe when we combine what we have seen in their history and their trajectory in the late part of last year and the transfers that are in place, that we can get to exactly where Derica mentioned.

Two to three years out, we can get back to that mid 20%s EBIT percentage, and we have definitely spent a lot of time in the diligence looking at the transfer and transition in this business.

This is a big part of our assessment of the value.

I am limited on more details than that at this stage.

Thank you.

John, if we could have the next caller please.

Mark Schoenebaum with ISI Group.

Mark, we can't hear you.

I'm sorry guys.

Sorry about that.

Can you hear me now?

Yes, we can.

So I'd like to come back to the CD4K if possible, a couple questions.

Congratulations on the data, it looked really good.

I am just wondering in the Phase III program, you're using IV fulvestrant.

I'm just wondering why the choice to combine with that drug, as opposed to letrozole, which was obviously Pfizer's choice?

And then also wondering on the differentiated neutropenia profile that you have seen for your drug, if you have any explanations for that?

Pfizer has made some comments in the public domain that your compound may buy into different targets than theirs, et cetera.

I'm wondering if you might be willing to offer a mechanistic rationale?

And then, finally on use of capital, given the animal health acquisition recently, earlier this week, should we as investors and analysts view you as, at least over the next year or so, as reasonably balance-sheet constrained, such that we shouldn't have expectations that you could do a deal of similar size on the human health side?

Thank you.

Mark, thank you for your questions.

We'll go ahead and have Sue take the CDK4/6 questions, obviously, and then, Derica on the business development going forward.

Sue?

Sure, the Phase III study that we have currently on Clinicaltrials.gov, as you said is a benefactor of being combination with fulvestrant in metastatic breast cancer, and that includes both first- and second-line patients.

We also, as I said, had the single-agent Phase II.

We're going to continue to look at other areas with regards to this.

Fulvestrant is one of the obvious combinations to go for; we chose that.

With regards to the mechanism of action, we know that our bemaciclib selected to CDK4 and 6. We can't comment on why we are seeing different levels of neutropenia, other than we are seeing a different safety profile, and we are able to do continuous dosing with this agent.

We have single-agent activity with this agent and we have a different safety profile with lower levels of neutropenia.

Other than to say that we have selected for CDK4 and 6, I can't comment on whether there is a specific mechanism of action here.

Derica?

Mark, this is Derica.

As we stated on our animal health investor call earlier this week, the Novartis Animal Health transaction does not change our material effect, our ongoing capital allocation strategy.

We still believe we have the capacity to sustain our dividend, at least at its current level, and we're still in a position going forward to consider future dividend increases.

This does not affect our outlook in terms of our ability to complete our share repurchase program.

We are still committed to the $5 billion.

As it relates to business development, we still have the capacity to pursue the types of deals that you have seen from Lilly historically.

We've never been [adding] the space of mega-mergers, but if you look at our history, the largest deal we've done is ImClone.

Now, the second largest deal is to be the Novartis Animal Health, and after that was Icos for about $2.5 billion.

So within that space, we absolutely have the capacity to pursue those types of opportunities.

Mark, one thing I might add on the CDK4/6, the neutropenia, it certainly could be that Pfizer conditioned the market to believe that this mechanism would be causing neutropenia full stop and those were linked.

There was data we presented at AACR that showed f those patients that received the 30% or greater reduction in tumor size, a significant proportion of those did not have neutropenia.

So I think we may need to rethink a little bit what is actually causing the anti-tumor response and what may be causing the neutropenia.

Stephen Scala with Cowen.

Thank you.

Regarding the 2015 outlook, assuming a January 1, 2015 close of Novartis Animal Health, does Lilly view consensus of 317 as reasonable at this early stage?

And if you are not willing to comment, should we conclude you are not comfortable?

The second question is on your novel basal insulin, based on the data that you now have in-house, are you fully confident that you have a differentiated molecule versus Lantus?

Then the third question is on dulaglutide.

You achieve non-inferiority to Victoza in AWARD-6, but if the numerical trend was worse on some endpoint, how will you overcome that obstacle in the market place?

Thank you.

Steve, thank you for the questions.

Derica, if you will take the first one on the 2015 guidance relative to the street's expectations that they have currently, and then Enrique for the two diabetes questions.

Hi Steve.

I like the phrasing of your initial question, but let me try to clarify.

I am not able to comment on specific 2015 guidance at this time, and it has nothing do with our level of comfort or discomfort.

It just means that we're not in a position to provide guidance and we typically haven't at this stage of the game.

What we have said is that we do expect that in 2015 that we expect to return to growth and margin expansion, and, obviously, that was prior to the impact or the contemplation of the acquisition of Novartis Animal Health.

Great, Enrique?

Steve, we have I think very consistently said that when it comes to our innovative basal insulin, we would only see as launching that if we truly can differentiate against Lantus.

Now all of our trials are basically against Lantus.

We have a number of measures that we are looking at.

We have talked about glycemic control; we have talked about nocturnal hypoglycemia, a better weight profile, and also lower use of the meal-time insulin dose, with a product as some indications that we basically saw in Phase II.

Clearly, we also saw some signals when it comes to some side effects.

At this point in time, I am just going ask for all of us to wait.

We believe that we should be in a position to issue a top-line press release this quarter.

On dulaglutide, I really cannot comment more than what we basically have said as part of the press release.

We are pleased with the results of AWARD-6.

We will have to wait for the detailed disclosure of the data.

At this stage, we believe we have a very competitive product and we are very bullish on it.

Thank you, Enrique.

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

John Boris with Suntrust Robinson Humphrey.

Thank you for taking the questions.

First question, John, you had mentioned about improved customer focus.

Can we maybe hear from your business leaders about that customer focus, especially since it's changed pretty significantly over the last decade to the payers and the pushback from payers on pricing?

But in particular, on oncology, on diabetes, how well prepared you are to secure formulary access for your assets here going forward.

Then quick question on the CDK4/6, have you applied for breakthrough designation on the compound?

If you haven't, what is the hold up for applying for breakthrough designation on the asset?

Thank you.

John, thank you for the questions.

We'll go ahead and hit the commercial [folks] for pharma business.

We're going to start with Dave Ricks, and then, we'll go over to Enrique and then Sue can comment on the oncology part of your first question, and then also CDK4/6 will finish with Sue.

Dave?

Great, John.

Thank you for the question.

As John Lechleiter mentioned in his comments, we have taken the opportunity over the last four years, as we have restructured, our Company to really improve our capabilities to go to market.

This includes significant investments in our payer capabilities.

I will let Enrique, in particular, comment on that as we prepare for the diabetes launches, but we feel good about both the US and non-US investments we have made to represent not only to major payers, but key accounts at all stages in the healthcare system.

We have also substantially restructured our sales force, not just to be stronger and leaner, but I think go to market in a pretty different way.

We're not going go into the details of that, for competitive reasons, here, but I think we overall, feel good about our ability to commercialize the future pipeline.

I'd also comment that Lilly continues to invest in our direct-to-consumer and direct-to-patient capabilities globally, which of course, includes DTC in the US, but also other direct-to-patient contact initiatives and patient support outside the US.

So overall, I think we're in good shape competitively here.

Enrique, do you want to add to that?

Sure.

When it comes to diabetes, I think all of us know the [peer] environment is very complex.

It's challenging, both coming from the decisions the payers are making, as well as the competition that we have.

From our perspective, we believe and we continue to believe the choice continues to be extremely important.

Now we clearly see that sometimes this is not an option that we have, and in those cases, we do compete for preferential access, in particular, when it comes to our insulin portfolio, which is what we are marketing now.

As we make the decisions, we do look at both financial and the strategic considerations in terms of how competitive we are going to be with the different accounts.

I would mention that in the case of Trajenta, the engagement with the payers is done through [BI].

Yes, and with regards to oncology, clearly, from a sales-force perspective, we have a very experienced sales force globally in oncology with payers.

Again, our focus is very much in ensuring that we bring value to those patients in continuing to bring medicines that offer value to patients, payers, and physicians.

We also are really clear that we need to ensure that we continue to get value for continuous innovation, which is the foundation of oncology development.

With regards to CDK4/6 inhibitor, our focus here is to ensure that we get this medicine to patients as quickly as possible, and we will continue to work with the FDA and other regulatory authorities to enable that.

Great.

Thank you.

John, next caller please.

Jami Rubin with Goldman Sachs.

Thank you.

This is really a question for Sue.

In the spirit of the industry specializing and getting more focused, in the area of oncology, Lilly is conspicuously absent in immuno-oncology.

Is that an issue?

Without immuno-oncology agents, can you still be competitive in this arena?

And then secondly, are you planning to develop studies combining your CDK inhibitor with immuno-oncology?

Or rather, ramu or the other VGF-inhibitor, could you combine that?

Is that part of the game plan?

But really, can you be competitive on oncology, given where the paradigm is changing?

Thank you.

Thank you, Jami.

Sue?

Thank you, Jami, it's a great question.

Clearly, there's a lot of interest and excitement about immuno-oncology, and I think it's been very clear that we're seeing some exciting data in some tumors, particularly melanoma and others.

We don't have a PD1 and PDL1 inhibitor.

We do have a number of molecules in our pipeline, though, that do work on the immune system.

The TGF beta pathway is important in immune defects in a number of tumor types, and we have both large molecule and small molecule inhibitors to TGF beta.

We also have other molecules in our pipeline in earlier phase, including our CXCR4 antibody, CSF1 receptor antibody, and our P-38 small molecule inihibitor, as well as our research efforts focused on it.

So no, we don't believe that we're absent in immuno-oncology at all.

Clearly, we are excited at this point in time by the fact that over the last 18 months or so, we've had four positive Phase III studies showing overall survival improvement in lung cancer, in gastric cancer.

And so, we are very much focused on ensuring that we get those medicines to patients as soon as possible.

And yes, we do believe that combinations, both of (inaudible) agents, chemotherapy, and immunotherapy is going to be the future in oncology, and we're very much focused on that.

Thank you, Sue.

Jan, you want to comment as well?

I can also add that we have seen, I think, the emergence of a new area where a lot needs to be done still.

And there are a number of additional targets at the pre-clinical space that is being explored.

But that will come to the clinic in due course.

So I think we are serious about this, and we have also done some key recruitments recently and are strengthening this area where we can actually then apply our core drug-[hunting] skills immediately then to novel targets.

Thank you, Jan.

John, if we could have the next caller please.

David Risinger with Morgan Stanley.

Yes, thank you very much.

I was hoping that you could explain in some detail how you calculate the -- excuse me for one second here.

Sorry, I had an incoming call, my apologies.

If you could explain your calculation of US net price, so obviously, Cymbalta had a significant negative impact on that calculation.

But I just wanted to better understand how you run the calculation, whether it's the step down in US net price in the first quarter, or your full book of business was solely driven by Cymbalta, or whether the diabetes franchise is experiencing price declines?

And how you go about calculating it, maybe you assume, I don't know, the authorized generic price for Cymbalta or something, and that drives that calculation down dramatically?

And then separately, with respect to ASCO, wondering if you're -- what you're planning on in terms of an investor event or specific investor discussions at that event.

Thank you very much.

Great.

Thank you for the questions, Dave.

We'll have Derica respond to your first question and then Sue on your question regarding ASCO.

Derica?

Hi, Dave.

In regards to our US net price calculation, it is really comprised of three elements: one is, obviously, any ongoing rebate that we provide relative to the prior period; secondly, here in the near term, it does include the impact of the authorized generic, which would be at a lower net price; and the third would be any adjustments we make to our gross net accruals, as we reconcile to any receipts that we are receiving from the government.

As it relates to the rebates, the first point I started, we did see in the quarter, obviously, the impact of the ESI contract in the US where we know -- in our diabetes business, where we did see price deflation rather than price growth on a net basis.

Those are the three elements that's driving the price effect that you are seeing in our Q1 results in the US.

Thank you, Derica.

Sue?

With regards to ASCO, we have a number of interesting presentations at ASCO.

We have some follow-up to the RAINBOW gastric cancer study being presented.

We've also got the necitumumab SQUIRE first-line squamous study being presented as an oral, and the ramucirumab/Cyramza second-line lung cancer study being presented as an oral, as well as the CDK4/6 lung cancer cohort.

Clearly, we saw that we've got some interesting information, and we are planning to have a conference call of some sort to be finalized with you all there.

So stay tuned on that one.

Thank you, Sue.

John, next caller please.

Jeff Holford with Jefferies.

Thank you for taking my call.

A bit commentary from you on the insulin pricing environment in the US (inaudible).

Obviously, you've got a bit of a one-time impact here.

Can you give your thoughts about going forward, how you view insulin pricing environment, particularly in the analogue space?

Secondly, do you think there is any other specific areas within animal health that you would look to add or build through bolt-ons in the future?

And then just lastly on your CDK, I know a lot of questions today, but do you think it's possible there could be any different tolerability profile regarding neutropenia when this product is used more chronically in combination with fulvestrant versus as monotherapy?

Thank you.

Jeff, thank you for the questions.

I'll have Enrique take your insulin pricing question for the US, obviously Jeff Simmons for animal health question, then back to Sue again for the topic of the day, the CDK4/6 inhibitor.

Enrique?

First, when it comes to our overall insulin business, let me provide just a bit of broader context.

When we look at our overall insulin franchise, we had very good volume growth worldwide.

Our volume growth was basically 8% to 9% when we look at insulin franchise.

This volume growth was solid across all regions, based on our ability to be competitive when it comes to our presence in different geographies.

When it comes to the US, I think it's important that we do recognize there were two impacts here: there was a net pricing impact of the contract with [DSI] and other contracts as well.

As well as there was a very significant inventory effect when it comes to wholesalers.

That inventory effect was in the high single digits in the US, so that was an important impact for us.

When we look at our overall demand, and all of you have access to this [crib] data, it is very clear that we have seen a very significant impact when it comes to our share performance and our overall volume performance.

Going forward, right, this is something that we monitor very carefully when it comes to pricing, but we have now over [50%] of the market that has gone to preferential formularies when it comes to analogs.

Question is how quickly the rest of the market go there?

I think it's fair to say that we are fighting to make sure that the patients continue to have choice, but at the same time, as I have shared, we need to be competitive whenever a payer basically makes the decision that they're going to narrow the formulary.

At this stage, it is difficult to make more comments when it comes to looking at the future of insulin pricing.

I will just say that we do monitor this very carefully, and we have become increasingly more sophisticated to think about both financially and strategically what's in our best interest.

Yes, Jeff, I think to answer your question, the first thing I would say is Novartis' deal we announced this week was our eighth acquisition since 2007, so I think we've got a good track record here in terms of integration.

Our focus, no question, the rest of this year and going forward is going to be on efficient and timely integration of both Lohmann, which we hope to close here in this quarter, as John mentioned, and Novartis.

That will be our focus.

I think as you look at acquisitions, it'll be back at earlier in the pipeline, heavier focus on innovation, 60% of this growth.

We have out grown industry 3X, and 60% of that growth has been innovation.

So it will be acquisitions more at a product level earlier back in the pipeline.

Thank you.

Sue?

With regard to bemaciclib, clearly, we see lower neutropenia in single agents with single-agent bemaciclib.

We'll have to see the Phase III data with combination fulvestrant to see both the efficacy and safety there.

We do have a Phase 1 safety study that we will -- in combination with fulvestrant at ASCO, so we'll be able to see some more data there on the safety profile of bemaciclib with fulvestrant.

Thank you, Sue.

John, next caller please.

Marc Goodman with UBS.

First, on Alimta, can you give us a little more detail on the usage [transposed] in US and ex-US?

And then Enrique, you were talking about diabetes and insulin.

Maybe you could give us your sense of what you're seeing out there with the orals, DPP-4s, SGLT2s?

And also maybe comment on the [group ones] as well, trends you are seeing in the market, and growth rates, and how much SGLT2 is moving ahead of DPP-4s, and how much is using a combination therapy?

Thank you.

Marc, thank you for the questions.

We'll have Sue, obviously take the first one for Alimta, and then Enrique the second.

Sue?

So, with the Alimta, if we look at our Q1 performance, Alimta sales grew 2%.

That was driven by the US with negative growth, offset by strong performance in ACE and Japan.

In the US, the decrease was really driven by buying patterns, with to a lesser extent, some selling price impact, as we're seeing higher share in (inaudible) accounts.

OUS, in Japan, we saw again, buying patterns which went the other way, it was more positive, with regards to stocking in prior to the tax consumption change.

And also in ACE, we saw very strong volume growth, driven really in the maintenance.

So what we are seeing is we are continuing to see a first-line market share growth and continuation maintenance growth.

And our focus really with Alimta is to continue to drive that to ensure that when patients start on Alimta, they continue on Alimta and we get more continuation maintenance.

Alimta continues to be the market leader in non-squamous non-small cell lung cancer in the first-line setting globally.

We also -- Alimta is the market leader in the maintenance setting; however, we still see that there is a lot of opportunity to grow the maintenance market, so that when patients start on Alimta, they continue on to progression and go in continuation maintenance.

And that's clearly our focus now and going forward.

Enrique?

Very good.

First, in the market dynamic for the orals, I think we are seeing very good growth when it comes to new patient volumes, when we take in combination both the DPP-4s -- the new patient starts of the DPP-4 class, plus the SGLT2 class.

This new patient growth that we are basically seeing is slightly above where we had expected it to be, so we are very pleased with that.

I think the SGLT2 class is off to a very good start.

It seems that it is being adopted very well.

When it comes to the GLP-1s, I think it's slightly different.

We believe that the GLP-1 market could expand in a very significant way, but we have not seen that at this stage.

We are -- I'll be very frank, we are counting on dulaglutide to be an enormous catalyst for that growth.

¶ As I had shared, while we have basically looked at dula against liraglutide's highest dose, our intent of doing that has been to basically ensure that we get the right price and reimbursement for our product.

We are not seeking to just switch patients from liraglutide; the big opportunity that we have in this particular case is to ensure that we can expand the GLP-1 class in a very significant way, and once again, we see dulaglutide as a pretty important catalyst to that.

You were also asking about the payer environment on both of those classes.

Without going into a lot of detail, payers today view, when it comes to GLP-1, more differentiation between the products than maybe when it comes to meal-time insulin.

I think that's also the case for basal insulins.

So the formularies, when it comes to GLP-1s and basal insulins, don't tend to be as narrow as they are in the case of meal-time insulins.

In the case of the orals, formularies today are narrow.

That is clearly a risk going forward, but it is not like the case of the meal-time insulin where you may have just exclusively one product in the formulary.

in most of the formularies when it comes to orals, there tends to be more than one product, maybe two products in that formulary.

Maybe not all but maybe two.

Enrique, thank you.

John, next caller please.

(Inaudible) with Credit Suisse.

Thank you for taking the questions.

(inaudible) just thinking about that one, [mixing] the success you've had in gastric and lung and the second-line, the [COC] data for colorectal, (inaudible) soon, can you give us a sense of what other development steps we might see, other opportunities for moving that product forward now that you've got the first approval here?

And a second one unrelated on the destocking, seems like quite a bit of an impact there this quarter.

Any special dynamics that you can highlight; others have talked about the weather playing a little bit of a role this quarter?

Is there anything else that we should be thinking about and any way to quantify for some of your bigger products, like Alimta, Cialis, Humalog, exactly how much of an impact that had?

Thank you.

Thank you for the questions.

Sue, if you want to take the ramucirumab question, and then we'll actually have Dave Ricks talk a little bit more in detail about the destocking that we saw in the first quarter based on stocking in Q4.

Sue?

Yes, let me talk about Cyramza, because clearly, we are extremely excited this week to announce that we have the first FDA approval for Cyramza.

In fact, it's now the first FDA-approved medicine for advanced gastric cancer following chemotherapy.

This is clearly a huge unmet need, and although it's a very common -- it's the fifth most common cancer globally, it's the third leading cause of death.

It's a rare disease in the US, and we estimate about 22,000 patients will be diagnosed with cancer this year -- with gastric cancer this year, and a proportion of those will go into second-line treatment.

So while I'm talking about ramucirumab, I want to make sure that I mention that.

And also, we are planning that we will have this product available over the next few weeks, because we want to get it to patients.

We also know that we've had a number of questions on price, so I might as well tell this now while you're all there: we had, as I said in -- it is a rare disease in the US.

It is -- ramucirumab, Cyramza has been given orphan-drug status, and we have priced Cyramza similar to other orphan drugs and targeted biologics.

So the price of an infusion, based on the 60-kilogram patient, is -- based on the 70-kilogram patient, sorry, is $6,120.

And given the median numbers of infusions that we used in the REGARD trial, which is the pivotal trial that led to this approval this week, the total price per patient will be $24,480.

So that's in the single-agent, second-line gastric cancer.

With regards to the combination gastric cancer trial, the RAINBOW study, we have submitted that to -- we plan to submit that as a supplemental NDA to the FDA very soon.

Clearly, we also have completed the submission to Europe, based on the REGARD study, and are working to find the most efficient way of getting the RAINBOW study submitted to Europe.

And we plan to submit in Japan as well.

You mentioned as well we've got the other positive Phase study -- Phase III study in lung cancer, which we'll be presenting at ASCO, and the HCC and colorectal studies should be reading out yet this year, so we're very excited.

Yes, we do plan to do other studies of Cyramza as we plan our life-cycle plan.

We're not able to give you specific details there, other than to say that given the positive data that we've seen in both gastric and lung, we clearly are looking to ensure that we have full life-cycle plans for this molecule.

Thank you Sue.

Dave?

In regard to inventories, there is two big effects on Q1, the first, obviously the US.

We have, as Enrique mentioned, a headwind in the high single digits, even low double digits across the marketed product portfolio.

I remind investors that we had a very robust Q4 on exactly these same products and stated at that time that there was a tailwind.

Why this happens I think is a cluster of just how the calendar works in terms of their buying patterns, covering the holiday period in early January, coupled with price speculation.

Obviously, if we look over a longer period of time, these tend to smooth out in the US.

We also in Q1 had a very strong performance in Japan; a portion of that is driven by Japanese stocking from Q2 into Q1, so you need to look through that as well.

Again, in the long term these tend to smooth out, and I think end-market performance for these key brands in diabetes as well as biomedicines, I think are on track and consistent across the two quarters.

Thank you, Dave.

Thank you for the questions.

John, next caller please.

Alex Arfaei with BMO Capital Markets.

Good morning and thank you for taking the questions.

First, a follow-up on the immuno-oncology question, just to clarify, are you looking for external collaborations for ramu in lung-cancer with a PD1 or PDL1?

And could you remind us of the ramu [8 cc] and the other trial that's ongoing, if that's going to be an external readout this year?

Thank you.

The colorectal cancer is the one I meant.

Alex, thank you for the questions.

Sue?

Sure.

Alex, we are continuing to look at multiple combinations, obviously, Cyramza, with its mechanism of action, could be combined with a number of different agents.

So we are looking at multiple combinations, including looking at immuno-oncology combinations with many of our pipeline molecules, not just with Cyramza.

With regards to the HCC and colorectal, we should have the HCC readout in the first half of this year, mid this year, and later this year we should have the colorectal readout.

We're anticipating that we would do top lines on both of those and have external data disclosure on the HCC Phase III trial this year.

Thank you, Sue.

John, if we can go to the next caller please.

Colin Bristow with Bank of America Merrill Lynch.

Thank you for taking the questions.

Regarding business development on the pharma side, are you willing to highlight any mechanisms or therapeutic areas that are of particular interest to you right now?

On evacetrapib, it feels like there's less optimism on this class from a mechanistic, commercial standpoint, since you embarked on the outcome's trial.

What gives you continued comfort that this is a viable mechanism?

Could you give some color on where you see this fitting in, in the evolving landscape in this [NCV] risk reduction?

And then finally, with regards to ramucirumab, can you just confirm the Japanese filing is still anticipated before year end?

Thank you.

Colin, thank you for the questions.

Let's have Dave start out with your evacetrapib question, Sue, if you want to reiterate our plans for ramucirumab in Japan, and then John, do you want to comment maybe on -- or Derica, on the business development areas we are going to be looking at in pharma?

On evacetrapib, certainly, Lilly remains very optimistic about this mechanism, and thus, the basis for our original investment in evacetrapib remains, which is that this drug has a very substantial impact on both LDL and HDL, as well as other important cardiovascular markers.

We believe that that effect will demonstrate a significant reduction in major cardiovascular risk.

We have a large Phase III program which is fully enrolled, we are waiting for events, and we believe we are powered to demonstrate that reduction in major cardiovascular risk, based on all those factors and actually on LDL alone.

So we're optimistic about evacetrapib.

I think some of the noise in the class has died down, post the dalcetrapib readout, reminding investors that the dalcetrapib molecule was quite different from evacetrapib in both its biomarker effect, but also structure, and much more modest effect and only on HDL.

And of course, you have a competitor at Merck in anacetrapib, and they've had some interesting data come out of their own, which I think has dampened enthusiasm for that program.

But we remain both committed and excited about evacetrapib as a potentially very large product in our future.

Thank you, Dave.

Sue, on Japan for ramu?

Sure.

With regard to Cyramza, yes, we are on track to submit in Japan this year.

With respect to business development, we have lots of business development activities, a little bit like the duck floating on the water, the feet are paddling away.

We are looking at business development opportunities across all categories that we compete in.

You know a lot about Elanco and some of the things we have done there, obviously in areas of strength, like oncology and diabetes.

We're looking at opportunities that might complement or strengthen our current portfolio of products, which could be used in combination with those products.

And then bio-medicines, which covers a whole broad range of therapeutic areas.

I think a couple of good examples, recently, tanezumab, the collaboration with Pfizer on the anti-CGRP -- or NGF antibody for pain; and then our acquisition of Arteaus in January, with the anti-CGRP antibody for migraine.

I think we're biased toward areas where we have internal therapeutic expertise, where we understand development pathways, and where we have key customer relationships.

You can expect that we'll continue to remain vigilant and opportunistic when other opportunities come together.

Great.

John, next caller please.

Damien Conover with Morningstar.

Thank you for squeezing me in here.

A question on the strategic level, it looks like we are seeing more movement from Phase 1 right into Phase III.

I am thinking a little bit about the CDK4/6, but we are also seeing that with a lot of your competitors; AstraZeneca making some announcements earlier today.

Wanted to get your thoughts on the risk-reward of this dynamic, and then also any commentary you have on how much of this decision is internally based versus gated by regulatory authorities?

Thank you.

Great, Damien.

Thank you for the questions.

I think we'll Jan respond.

Yes, we have seen this for some time in the oncology area, where Phase 1 data then are used, and then you go directly into Phase III.

Clearly, the [single] has to be strong if you want do this, and you should also have a clear-cut understanding of what is the patient population that you are targeting, and preferably have some biomarker in the way to guide that.

There is clearly a risk in doing this, because in reality, you would like to have more Phase II data to ensure then the highest probable Phase III success rate.

And in our strategy, we are talking about robust Phase II data as a good guarantee, then from improving Phase III success rates, where you actually know the dose, the dosing regiment, the patients you are selecting, and the marker, and the endpoints and so on.

In relation to the Alzheimer area, we and others have limited Phase II data then before you go into Phase III, which is unfortunate.

But in reality, you need so many patients and so long studies, you might as well do the Phase III trial right away.

What you can do there though, however, is begin to select the patients better by only selecting patients that, for instance, for anti-amyloid therapy that really has amyloid in their brain, as detected for instance, done by [amyloid] scanning.

So we actually again, try to target your population in Phase III.

Great.

Thank you.

I understand the queue is filling up again a bit, so we'll continue since we have some time before the bottom of the hour.

John, if we could go to the next caller please.

Seamus Fernandez with Leerink Swann.

Thank you for the questions and thank you for the extra time.

In terms of the and some of the [met mab] and some of the decisions that Lilly makes from competitor data, can you tell us a little bit of what keeps you involved in the c-MET mechanism, whether it be you have two inhibitors in Phase II study?

So what do you need to see in Phase II to warrant a move forward into Phase III, given the subset analyses that were a bit questionable from a competitor moving forward, and then the ultimate failure of that Phase III?

What is it that has you take a harder look at that?

Then can you give us a little bit more color on the oncology side from a scientific perspective, how we should be thinking about CSF1R antibody and your enthusiasm around that approach in oncology.

Then lastly, Derica, I know you have been asked this question a number of times, but can you just give us again -- you said that $2.9 billion of adjusted net income but $4 billion of operating cash flow.

What proportion of that is historical amortization and depreciation?

Is it 100% of that, or is it about $700 million, just to help us think about the comparable valuations, given that most of your competitors actually exclude that from their P&L?

Thank you.

Thank you, Seamus.

We'll have Sue take your first question with regard to the met mab.

We may actually need to get back to you on the CSF1R question.

And then, Derica had to step out for a moment, so I'll go ahead and take your question on the amortization and depreciation.

Sue?

Thanks, Seamus.

With regards to our met program, we remain still excited with our met program.

Our met antibody is different to the genetic antibody.

It's a bi-valent antibody and it blocks both ligand-dependent and ligand-independent c-MET signaling, which we believe could be important.

We have two Phase II trials ongoing in lung cancer with this met antibody, and we're specifically targeting EGFR mutant populations, since there is -- the science shows that there is evidence for the relevance of EGFR and met crosstalk.

So we believe that with the antibody that we've got that's bi-valent, as I say, targeting both the ligand and independent ligand (inaudible) plus our focus on EGFR mutant population, that we've got an interesting molecule in the right development path.

And clearly, we've got a Phase II program that we want to see the outcome of that Phase II program to decide whether we would move forward with the Phase III.

So we remain optimistic.

Great.

Thank you, Sue.

Derica is now back with us, but to not spring the question on him last minute, let me go ahead and I will take the answer and you can add in if you need to, Derica.

Seamus, on your question on the amount of depreciation amortization, on an annual basis, that's about $1.3 billion, with a good chunk of that being amortization of intangibles.

As I mentioned, for this quarter, it is about $132 million that we had of amortization of intangibles that, as you pointed out, many of our competitors now exclude from their non-GAAP or core earnings.

We do not do that and don't have any short-term plans to change.

We certainly have noticed the trend over time for more and more of our peers to exclude this, and we continue to have discussions internally.

We will go ahead and make sure that you guys know where to get to our 10-Q and 10-K language to find these numbers, so that you can make appropriate adjustments for apples-to-apples comparisons.

John, next caller please.

Mark Schoenebaum with ISI Group.

Thank you for taking my follow-up question.

I appreciate it.

I wanted to get a quick update on your PCSK9 antibody program.

It's been a little bit since, I think, we've gotten an update on that.

The specific question is, there has been speculation out there; I was wondering if you could clarify -- if you would be willing to clarify it or not, that your antibody might be able to be dosed less frequently than all the other competitors out there, something like once quarterly?

Thank you very much.

Thank you for the question, Mark.

Dave, if you want to answer.

Jan, feel free to chime in.

Dave?

Mark, as a reminder, we are in the middle of a Phase II study; we expect that data in the second half.

The purpose of that study is really to better elucidate the dosing schedule for the medicine, but I think it's safe to say we believe that PCSK9 can make a significant difference in cardiovascular risk and that the Lilly PCSK9 may have the benefit of an extended dosing schedule.

How long, what we would actually decide to do if we proceeded with the medicine is to be determined.

Thank you, Dave.

John, next caller please.

Tim Anderson with Sanford Bernstein.

Thank you.

One of the [bear] arguments on Lilly relates to Alimta and what the future of that product is, given changing landscape of the PD-1s.

So I know companies maintain five- and ten-year long-range plans.

Directionally, what can you say about how you view Alimta's trajectory given what seems to be a change here?

Is it something that you think is going to continue to grow, or are there going to be some share losses as you see PD-1s start to take some lung business?

Tim, thank you for the question.

Sue, that's right up your alley.

Tim, that's a great question, and clearly the patent decision that we got this year makes us feel much more comfortable with regards to the future of Alimta.

We're going to have to wait and see what happens with regards to the PD-1s and immuno-oncology.

We need to see the data mature.

We need to see which patients would be most eligible for those agents.

Our focus, as I said previously, is really to continue to drive the first line and the maintenance, so the continuation maintenance indications for Alimta.

And even though we are a market leader, we have only got less than 40% share of market in the first-line setting and only approximately 20% of patients go on to receive maintenance after first-line setting.

So we do continue to see that there are opportunities.

There are a lot of different agents being investigated in lung cancer, which is great, because the need is huge.

We have made a lot of improvement over the years, but there is an awful lot of improvement that needs to happen.

I think clearly, we're watching and we're involved in bringing new medicines to patients.

We see that the lung cancer market is continuing to be an area of interest as we are bringing new medicines in because of the size of it and because of the unmet need.

I still see opportunity, clearly, for Alimta to grow.

I'm glad that we won the patent and we are continuing to drive what we believe the opportunity is with three Phase III trials, that have shown an overall survival advantage with Alimta, and showing that if you start with Alimta and stay with Alimta in the front-line setting, that we can continue to help patients and we will continue to [drill] this brand.

Thank you.

Might have time for one last quick question.

John, do we have any callers on the line still?

Actually, no further questions in queue.

Fantastic.

Then I will turn it over to John Lechleiter to close out the call.

Okay, very briefly want to thank everybody for joining us, and we appreciate your interest in Eli Lilly and Company.

We'd appreciate your feedback on this format.

We have been for the past couple of calls extending the time to allow you to ask more questions, and we intend to keep doing that, and to also involve our leadership team, which is represented here today in these calls going forward.

So if you have any feedback on this approach, please get back to Phil.

We'll see many of you at ASCO and at ADA.

We'll be back here again in July with a report from our second quarter.

Thank you again.

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

Thank you for your participation.

You may now disconnect.