禮來公司 (LLY) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the third-quarter financial review.

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

Later, we will conduct a question and answer session.

(Operator Instructions)

As a reminder this call is being recorded.

I would now like to turn the conference over to our host, Chairman, President and CEO, John Lechleiter.

Please go ahead, sir.

Thank you, and good morning everyone.

Thanks for joining us today to discuss Eli Lilly and Co's third-quarter 2014 earnings.

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

Joining me on today's call are Derica Rice, our Chief Financial Officer; Doctor Jan Lundberg, our President of Lilly Research Laboratories; Doctor Sue Mahony, President of Lilly Oncology; Enrique Conterno, President of Lilly Diabetes; Dave Ricks, President of our Lilly Bio-Medicines business; Chito Zulueta, President of Emerging Markets; Jeff Simmons, President of Elanco Animal Health; and Ilissa Rassner, Brad Robling and Phil Johnson of our IR team.

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

Our actual results could differ materially due to a number of factors, including those listed on slide 3 and those outlined in our latest forms 10-K and 10-Q filed with the 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 we cover our third-quarter results in detail, I'd like to provide some high level comments about where I see our company at this important juncture.

Losing patent protection in relatively rapid succession for Gemzar, Zyprexa, Cymbalta and Evista, created an unprecedented challenge for Lilly.

Leading up to and through this period of patent expirations, our management team made disciplined choices so that we could invest to drive growth in key brands, geographies and businesses and replenish and advance our pipeline.

We stayed focused on executing our strategy and I'm proud of the results we delivered to date.

In the face of a series of major patent expirations, we drove strong financial results from the rest of our business.

We've delivered on our promise to maintain our dividend, while at the same time returning additional cash to shareholders via share repurchase and the significant progress we've made with our pipeline reflected in the large number of regulatory and clinical milestones achieved this past quarter, validates the decision we made to maintain our investment in R&D.

As we begin to turn the corner with multiple new product launches over the course of this year and next, having withstood the profound economic impact of patent expirations for four of our largest products, we also recognize we operate in an evermore challenging external environment.

We intend to apply the same focused disciplined execution of our strategies that we've displayed in recent years in order to succeed, and I'm confident we will.

We aim to compete effectively and to win in diabetes, oncology and animal health.

This includes investing in successful launches for Jardiance, Trulicity and Cyramza, including important new indications and line extensions and continuing to drive growth in our Elanco business following the acquisition of Novartis Animal Health.

In the near-term and long-term these businesses represent significant growth opportunities for our Company that we must capitalize on.

In our Bio-Medicines business we have opportunities to drive a subsequent wave of substantial growth in areas that include autoimmune disorders with molecules like ixekizumab and baricitinib, cardiovascular disease with evacetrapib, Alzheimer's disease with solanezumab and other molecules to follow and in pain with tanezumab and our CGRP antibody, all dependent on Phase 3 data readouts that will be accomplished for the most part over the next two years.

In R&D we will sustain the flow from our pipeline and bring evermore innovative drugs to patients and do so more quickly and effectively that in the past.

On the commercial side of our business we will continue our quest to find evermore efficient and effective ways to engage physicians, patients and payers.

And we intend to capitalize on compelling growth opportunities in Asia, in particular.

Specifically, Japan and China.

Going forward, we'll remain focused on executing our innovation based strategy.

Focusing in on those areas where we have strong presence and capabilities, or where we determine we can establish a leadership position.

We believe this provides the best opportunity to meaningfully improve patients' lives and create value for shareholders.

With that, let's turn to the key events since last quarter's call.

For the second quarter in a row, we launched a new product.

In the second quarter, we launched Cyramza in the US for second line gastric cancer.

In the third quarter, in collaboration with Boehringer Ingelheim we launched the oral SGLT2 inhibitor, Jardiance in the US and in certain European countries.

We're optimistic about the potential of this brand including the opportunities that could come with being first to market with a fixed dose combination of an SGLT2 and DPP4, as well as being the first SGLT2 to report out results from a large cardiovascular outcome study in the second half of next year.

We've also had a large number of positive developments on the regulatory front.

In fact, I cannot recall another time in my 35 years with Lilly so full of positive regulatory actions.

In our Diabetes business, we achieved regulatory milestones in the US, Europe and Japan for dulaglutide, our once weekly GLP agonists.

Here in the US, the FDA approved dulaglutide, or Trulicity for the treatment of patients with type 2 diabetes.

Trulicity truly was designed with the patient in mind.

It comes in a single dose pen that does not require mixing, measuring or needle attachment and can be administered any time of day independent of meals.

We're excited to enter the GLP-1 market with Trulicity and we believe this product can be a catalyst for growth of the class.

We began shipments of Trulicity here in the US earlier this week.

In Europe, the CHMP recommended approval of Trulicity and we anticipate European Commission approval this quarter with European launches beginning early next year.

In Japan, we submitted dulaglutide for regulatory review and expect regulatory action in the second half of 2015.

The European Commission also approved the Humalog 200 units per milliliter KwikPen for the treatment of diabetes.

This product is bio-equivalent to our current product Humalog 100 and is intended for people with diabetes who take more than 20 units of rapid acting insulin per day.

In the US, we remain on track to resubmit Humalog U-200 by year-end.

In collaboration with Boehringer Ingelheim, we achieved additional regulatory milestones in the last three months.

We received FDA approval of Jardiance or empagliflozin, a once daily oral SGLT2 inhibitor for the treatment of type 2 diabetes.

As I mentioned earlier, we launched the product in both the US and Europe during the third quarter.

Also in the US we submitted the fixed dose combination of empagliflozin and metformin.

In addition, we made progress with our insulin glargine product as the US FDA granted tentative approval of Basaglar.

With this action, the FDA determined that Basaglar meets all regulatory requirements for approval.

However, it is subject to an automatic stay of final approval as a result of patent infringement litigation filed by Sanofi.

The FDA may not give final approval until mid-2016 unless the court determines the patent is not infringed or is invalid or unenforceable prior to that time.

We're confident that we do not infringe any of the patent claims asserted and that we will prevail in this litigation.

In Europe, the European Commission granted full approval of our insulin glargine product.

This product, called Abasria, is the first insulin approved using Europe's bio-similar pathway.

Lilly and Boehringer Ingelheim will launch our insulin glargine product based on dates that do not infringe valid and enforceable patents.

As you can see, over these past three months we made significant progress advancing our diabetes pipeline, moving closer to our goal of offering the widest range of diabetes treatments spanning orals, GLP-1's and insulins, both basal and meal time.

We feel each of our products will be competitive in its class, putting us in a unique position to help people with diabetes as well as the physicians who help them manage their disease.

Diabetes wasn't the only area where we saw significant regulatory progress.

Our Oncology group has been busy as well.

We achieved regulatory milestones for ramucirumab across all three major geographies.

We received a positive opinion in Europe for ramucirumab in second line gastric cancer.

This opinion included use in combination with paclitaxel as well as monotherapy use.

As with Trulicity, we anticipate European Commission approval late in this quarter with European launches beginning early next year.

We submitted ramucirumab to Japanese regulators for the treatment of second line gastric cancers and were granted a priority review.

We expect regulatory action in Japan in the first half of 2015.

And here in the US, we submitted ramucirumab to the FDA as a treatment for second line non-small cell lung cancer.

The FDA assigned a priority review and we anticipate FDA action before the end of this year.

This could lead to a launch in early 2015.

Keep in mind as well, that we have an ongoing FDA review of ramucirumab in combination with paclitaxel in second line gastric cancer.

The action date for this submission is in the first quarter of next year and we expect FDA to act on or before the action date.

Finally, with FDA having granted Fast Track status to necitumumab as a first-line treatment for squamous non-small cell lung cancer, we initiated our rolling submission which we expect to complete before the end of this year.

Turning now to Clinical news, during the quarter we also had Phase 3 trials read out in each of our therapeutic business areas, Diabetes, Oncology and Bio-medicines.

In Diabetes, we announced positive topline results of two Phase 3 clinical trials in patients with type 1 diabetes for basal insulin peglispro, or BIL, which is being studied as a once daily treatment for both type 1 and type 2 diabetes.

In both trials, BIL showed a statistically superior reduction in HbA1c compared with Lantus.

We've now completed the clinical trials for registration and are on track to submit to US and European regulators by the end of the first quarter 2015.

In Oncology, we announced positive topline results for RAISE.

This is a Phase 3 study of Cyramza as second line treatment in combination with chemotherapy in patients with metastatic colorectal cancer.

RAISE showed a statistically significant improvement in overall survival in patients treated with ramucirumab plus chemotherapy compared to chemotherapy alone.

We expect to initiate regulatory submissions based on these data and the first half of 2015.

This marks the fourth positive Phase 3 trial in which Cyramza has improved overall survival: two in second line gastric cancer, one in second line lung cancer and this one in second line metastatic colorectal cancer.

Finally, in our Bio-medicines business we announced positive topline results for three Phase 3 studies of ixekizumab in patients with moderate to severe plaque psoriasis.

All primary and key secondary objectives were met in the three studies.

And ixekizumab was superior to Enbrel on all measures of skin clearance in both of the active comparator trials.

In our Phase 3 trials, up to 41% of patients treated with ixekizumab achieved clear skin at week 12 with just one injection per dose.

These results give us confidence that if approved, ixekizumab could make complete resolution of psoriasis possible for significantly more people.

We plan to submit ixekizumab to regulatory authorities in the first half of next year.

We also announced our decision to discontinue development of tabalumab, our anti-BAFF antibody.

This decision was due to insufficient efficacy in two Phase 3 trials in lupus, us well as in a phase 2 trial in multiple myeloma.

I'd also highlighted the Annual Meeting of the European Society for Medical Oncology.

We presented detailed data from the Phase 3 REACH trial studying ramucirumab in the second line treatment in patients with hepatocellular carcinoma after treatment with sorafenib in the first-line setting.

While the study did not meet its primary endpoint of improved overall survival for the full study population, we saw encouraging results in patients with high baseline levels of alpha-fetoprotein.

These data could form the basis of continued study of ramucirumab in this setting.

During the third quarter, we completed enrollment in our core registration program for baricitinib in rheumatoid arthritis.

Later in the call, Derica will provide you an update of our plans for topline press releases for this program.

We also began Phase 3 testing for our CDK 4/6 inhibitor, abemaciclib, as we dosed our first patients in the first of two breast cancer trials.

Dosing in the second breast cancer trial and in a lung cancer trial is anticipated later this quarter.

In Business Development news, we announced an agreement with AstraZeneca to co-develop and commercialize AZD3293, an oral beta secretase cleaving enzyme or BACE inhibitor, currently in development as a potential treatment for Alzheimer's disease.

We recognize the initial milestone of $50 million pretax or approximately $0.03 per share after tax as a charge to earnings in the third quarter.

We aim to advance this potent base inhibitor quickly into a Phase 2/3 clinical trial in patients with early Alzheimer's disease.

Lilly will lead clinical development while AstraZeneca will be responsible for manufacturing.

The companies will take joint responsibility for commercialization.

In line with our previously announced plans, we completed the sale of Lohmann Animal Health's feed additives business to a management led group.

And earlier this week, we announced an expansion of our existing research agreement with Zymeworks to include development of immuno-modulatory bi-specific antibodies for cancer.

In other news, we announced plans to close and sell one of our three manufacturing plants in Puerto Rico.

As a result of this action we expect to record a charge of approximately $170 million pretax or approximately $0.16 per share after tax in the fourth quarter.

The IRS issued final regulations related to administration of the branded prescription drug free under the Affordable Care Act.

The final regulations modify the timing of when a company must recognize expense for their share of the fee.

As a result, we recognize a $119 million non-tax deductible charge in the third quarter for the fee we expect to pay in 2015.

This accounting change has no impact on the timing of cash payments.

Also, the third-quarter charge is excluded from our non-GAAP results.

Finally, during the third quarter we repurchased shares worth $300 million under our $5 billion share repurchase program.

Since authorizing the program in October of last year, we've now repurchased $1 billion worth of our shares.

Combined with our dividend in the last year, we've distributed $3 billion to shareholders.

And now, I will turn the call over to Phil for a discussion of our financial performance for the quarter.

Phil?

Thanks, John.

First, I will review our GAAP results and then discuss a few non-GAAP measures to provide some additional insights into the underlying trends in our business.

Moving to slide 8, you can see that our Q3 revenue was $4.9 billion which is 16% lower than Q3 2013.

This decrease in revenue reflects a decline of $1 billion in US Cymbalta sales following the loss of exclusivity in December of last year.

In addition, US sales of Evista declined over $150 million following that product's loss of exclusivity in March of this year.

Excluding Cymbalta and Evista in the US, the rest of our worldwide revenue grew 7%, mainly from volume.

Gross margin as a percent of revenue decreased 5.2 percentage points also driven by the loss of US exclusivity for Cymbalta and Evista.

In Q3 both this year and last year, the effect of foreign exchange rates on International inventory sold had a minimal impact on cost of sales.

Excluding this FX effect from both 2013 and 2014, gross margin as a percent of revenue declined 4.8 percentage points from 79% in Q3 2013 to 74.2% in Q3 2014.

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

Non-GAAP measures are shown on slide 9. Total operating expense defined as the sum of R&D and SG&A, decreased 8% or nearly $235 million versus Q3 of 2013.

Marketing, selling and administrative expenses were down 6%, while R&D was down 10%.

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

The decline in R&D expenses was driven primarily by a reduction in late stage development costs, partially offset by a $63 million charge associated with the termination of tabalumab development.

Excluding this charge, R&D expenses declined 14% and total operating expenses declined 10%.

Other income and expense was net income of $93 million in Q3 2014 compared to a net expense of $31 million in the third quarter of 2013 with the change driven primarily by gains on the sale of certain equity holdings and income from miscellaneous milestones earned.

Our non-GAAP tax rate of 22%, an increase of 1.5 percentage points compared to Q3 last year.

The main reason for this increase in the tax rate is the lapse of the R&D tax credit at the end of last year.

At the bottom line, net income and earnings per share declined 41%.

As in the first half of the year, this decline is significant but very much in line with our expectations and places us on track to achieve our full-year non-GAAP EPS guidance.

On slide 10, we provide the same reconciliation of non-GAAP adjusted information for our year-to-date results.

Moving to slide 11, you'll find a reconciliation between reported and non-GAAP EPS and additional details about our reporting earnings are available in today's earnings Press Release.

As you are aware nearly all of our peers exclude amortization of intangibles from their non-GAAP results while we include this expense.

For your modeling purposes, please note that we recognized amortization expense of $134 million representing 2.7% of revenue this quarter.

Many of you on both the buy side and sell side have noted that our inclusion of amortization expense in our non-GAAP results distorts comparisons of our financial ratios with those of our peers.

After careful consideration we've decided that we will exclude amortization expense from our non-GAAP results beginning in 2015.

In particular, we hope that this change will assist portfolio managers in making better buy sell decisions.

Now, let's look at how price, rate and volume affected our revenue growth.

On slide 12 you can see the total revenue decline of 16% in Q3 2014, shown in the yellow box in the middle of the page, and that this decline was almost entirely driven by volume.

Price added about 1% to revenue growth, while the impact of FX was nil.

Excluding US Cymbalta and Evista, the rest of our worldwide revenue grew 7% with about 5.5 percentage points of growth coming from volume and the rest from price.

Touching on some of the geographic highlights, in the US, pharma revenue declined 37% driven by a volume decline of 38%.

Excluding Cymbalta and Evista, the rest of our US pharma revenue increased 6%, about half from volume and about half from price.

Pharma revenue in Japan grew 4% with exchange rate masking stronger underlying growth.

As you can see, volume was up 10% in Japan and revenue growth in constant currency terms was 9%.

In Emerging Markets, we saw strong growth of 18% almost all from volume.

Sales in our largest emerging markets country, China, grew 21%.

I'd also highlight the consistent strong growth we have seen from our Emerging Markets business this year with 14% revenue growth in constant currency terms through the first nine months of the year.

Finally, Elanco Animal Health posted revenue growth of 10%.

The Lohmann acquisition drove 6 percentage points of growth with our base business driving the remaining 4 percentage points.

This lower base business growth is due primarily to competitive pressures and to a lesser extent to slower market growth in the US.

Now let me turn the call over to Derica.

Thanks, Phil.

On slide 13, you'll see the effect of changes in foreign exchange rate on the growth rates for select items of our income statement.

FX had almost no impact on our revenue or operating expenses this quarter.

As Phil mentioned, FX only had very little effect on cost of sales.

As a result, the decline in our EPS is very similar with and without FX.

Slide 14 shows our pipeline as of October 16.

As John discussed earlier, Lilly and Boehringer Ingelheim received European approval and tentative US approval for our new insulin glargine project and the FDA approved Trulicity.

These approvals leave our regulatory review column empty.

However, this shouldn't last long, as we expect to complete regulatory submission for necitumumab, basal insulin peglispro and ixekizumab over the next three quarters.

As mentioned earlier, we began Phase 3 testing for abemaciclib in breast cancer.

We began Phase 1 testing of two monoclonal antibodies, one for cancer and the other for rheumatoid arthritis and we added the base inhibitor through our collaboration agreement with AstraZeneca.

Finally, we terminated the development of tabalumab and of a Phase 1 oncology asset.

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

We're very pleased with the progress we've made on the key event we laid out for you at the beginning of the year.

As you can see from the green check marks on slide 15, all the possible regulatory actions resulted in timely approvals and we achieved nearly all of the other pipeline milestones.

It's certainly been a very productive year and a pivotal one as we emerge from our widely patent expiry period and look to return to growth.

Before the end of the year, we expect to begin our second Phase 3 breast cancer study, as well as our Phase 3 lung cancer study with abemaciclib.

We expect to complete the rolling FDA submission of necitumumab for first-line squamous non-small cell lung cancer.

We expect to receive FDA action of ramucirumab for second line non-small cell lung cancer, and we expect to lose European data package exclusivity for Cymbalta in depression following the loss of data package exclusivity for stress urinary incontinence in the third quarter.

We continue to expect generic duloxetine to enter the European markets in 2015.

Also, after discussions with InSight, we've agreed upon our disclosure plan for the Phase 3 trial of baricitinib in rheumatoid arthritis.

This includes issuing the topline Press Release for the first trial late this year or early next year.

In addition, the topline Press Release for the final two trials is likely to be issued late next year after completion of the full 52 weeks of treatment.

Clearly, we've achieved a great deal in 2014 and we're looking forward to maintaining this momentum both as we close out the year and during 2015.

Now let's turn to our 2014 financial guidance.

Our performance through September places us on track to achieve our full-year non-GAAP EPS guidance, which remains unchanged at $2.72 to $2.80.

We are updating our GAAP EPS guidance, which is now $2.34 to $2.42, to reflect the charges taken in the third quarter as well as those announced for Q4.

In addition, we are updating a number of the individual line items.

We've narrowed our revenue range to $19.4 billion to $19.8 billion due to the weakening of the euro, yen and pound that occurred late in the third quarter, as well as the recent competitive pressures and market dynamics in the US we're seeing in Animal Health.

Both of these factors prevent future headwinds for revenue.

We've raised our estimate of the gross margin percent to roughly 74.5%.

A major driver of this change is the weakening of the euro.

While that brings our revenue headwind it does provide a near-term benefit on the cost of sales.

In addition, a shutdown to implement production changes at one of our bulk insulin plants will now occur solely in 2015 rather than span 2014 and 2015.

As a result, idle plant, a period manufacturing expense, will ship out of 2014 into 2015, benefiting this year.

In total, our operating expense guidance is essentially unchanged, although we have modified the range for the individual components.

We've narrowed and lowered the non-GAAP range for marketing, selling and administrative expenses to $6.3 billion to $6.5 billion and we've added a line to reflect GAAP guidance for the same line item, which includes the $119 million additional pharma manufacturer's fee.

We've narrowed and raised the range for Research and Development expenses to $4.6 billion to $4.8 billion to reflect the third quarter charge for tabalumab, the base deal with AstraZeneca and trends in our research spending.

Based on the amount of year-to-date other income, we've raised the non-GAAP range for other income and expense to a range of $200 million to $250 million of income.

While our non-GAAP tax rate guidance continues to be approximately 19% we're now providing GAAP tax rate guidance of approximately 20%.

These tax rates assume a full-year 2014 benefit of the R&D tax credit and other tax provisions up for extension.

If these items are not extended both 2014 tax rates would be approximately two percentage points higher.

Similarly, our expectation for non-GAAP minimum net income remains unchanged at $2.9 billion.

And we're now providing our expectation of GAAP minimum net income of $2.6 billion.

Finally, our guidance for minimum operating cash flow as well as capital expenditures is unchanged.

Keep in mind that our 2014 financial guidance assumes the acquisition of Novartis Animal Health closes in 2015.

Should the acquisition close during 2014 we'll revise our 2014 financial guidance, if necessary.

On slide 17, we provided a reconciliation between reported and non-GAAP EPS for 2013 and the associated growth rates from these numbers to our 2014 guidance.

Now, before the Q&A session, let me briefly sum up.

From a financial perspective, the first nine months of the year have played out much as we had expected.

We've seen our revenues and earnings decline due to the US patent expirations of Cymbalta and Evista.

We've prudently managed expenses, driving a double-digit reduction in our operating expense base.

From a pipeline perspective, we've met or exceeded our expectations.

The flow of positive regulatory and pipeline news has been substantial and we've launched three new products: Cyramza, Jardiance and Trulicity.

The steady advance of the pipeline strengthens our confidence in our innovation-based strategy and our commitment to accelerate discoveries to the people who need them.

In addition, it positions us well for a return to growth and expand margins in 2015 and beyond.

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

Thanks, Derica.

Marla, if you could go ahead and provide instructions to the callers for the Q&A sessions, please?

(Operator Instructions)

Tony Butler, Guggenheim Partners.

Thanks, very much.

Two questions, if I may?

One, perhaps to Derica or maybe even to Dave Ricks and the second, to you John.

The first is really around the sales footprint.

You've done a very nice job at keeping cost down, but the question is with new launches, obviously, there is the need for additional marketing expense and maybe additional sales persons.

So I'd love for you, if you could, provide some idea or thoughts around both US and non-US footprint with respect to sales individuals?

And then the second, John, you made a good comment about keeping the dividend at the same rate, especially as you enter this particular year.

But as you move forward with these new launches, have you given some thought to, when it's prudent, for the overall business to actually raise that rate?

Thanks for the time.

Great, Tony, good to hear your voice.

Thank you for the questions.

For the sales footprint, Dave, if you don't mind maybe talking about some of the things that have been going on in the US and Europe in terms of some of the restructuring since you've been very involved in that?

And then maybe Enrique and Sue, if you if you could talk about some of the preparations for launches since that's hitting you first in terms of the progression of the pipeline?

And then Derica, if you want to take the question on the plans we have for the dividend, thoughts around the dividend?

Great, Tony.

Thanks for the question.

As it relates to the loss of exclusivity products, as we've been discussing here over the last two years, we've been taking down our sales footprint market by market.

Typically those are anticipating, they happen in advance of the LOE event.

So in the US, you're seeing the full-year effective of sales reductions in 2014, which mostly occurred in 2013 related to Evista and Cymbalta.

As it relates to Europe, our patents are expiring.

This last quarter we're reporting on now, some of those actions have been taken, some have not.

We do anticipate over the next year rationalizing the footprint to the products we have in bio-med, not including Cymbalta, of course, being the major contributor.

Going forward, we're quite confident we have the personnel and coverage to launch our new product portfolio effectively in those major markets.

Of course, we're shifting much more to a specialty type business, so that absolute numbers are lower than what we've had in the past in bio-medicines.

Enrique?

Sure so, when it comes to diabetes, Tony, we've had a very significant footprint on a worldwide basis.

I think what we have before is that we basically expect to leverage this footprint.

We do see some increases, but they are limited, when it comes to our overall sales force.

We've seen some increases in the US but more marginal when it comes to Europe.

Yes, Tony, with regard to oncology, we're going to be using the footprint that we have in oncology.

We've got an experienced oncology sales team globally, very experienced in thoracic oncology and as well historically in GI, and we'll be using the expertise and the people that we've got globally on the commercial perspective to launch our products.

And Tony, this is Derica.

From a dividend perspective, just historically before we entered this YZ period, our dividend payout ratio was in the 40% range.

The mid-40%s, and that's kind of been on par with where our peers were, as well.

We knew as we went through this period that we would see a spike in our payout ratio as we went through this income decline, so the law, the ratio itself.

As it pertains to when we would consider to -- increasing the dividend going forward, I don't believe we'll wait until we have to get back to that 40% to 45% range.

It's going to be more predicated on our confidence, as we see how some of the pipeline and regulatory and launch news play out over these next couple of years.

Thanks, Derica.

Marla, next caller please.

Mark Schoenebaum, ISI Group.

Thanks very much for taking my question.

It's Mark.

If I may, just two quick ones?

Number one, just a clarification.

Can you guys clarify what, if any, interim analyses might be available to you for solanezumab as well as evacetrapib in 2015?

Again, if any?

And number two, I was wondering if you could speak about the Tradjenta outcomes trial?

I'm just wondering if there is a prospectively evaluated endpoint of hospitalizations for heart failure?

This has obviously become an endpoint of interest to the physician in the Wall Street community.

Thank you very much.

Mark, if you're able to still hear me.

Are you referring to the Tradjenta outcome study or studies or are you referring to the Empagliflozin flows and outcome study that we talked about having data for in the second half of next year?

Actually, both would be nice.

I knew when I asked the question that it would probably be that.

All right, well we can accommodate that.

So Dave, if you could start us off please with the interims for solanezumab.

Enrique, if you want to handle the question on the measures for the outcomes today, that would be great.

Thanks, Mark.

On evaceptrapib, we have said we will be conducting an interim analysis.

We expect that to be happening sometime in the first half of 2015.

This is a -- of course a safety review, but also includes some efficacy features.

I think as we've said before, it's a reasonably low bar, given that in lipid management studies quite a bit of the benefit is often seen in the back half of the trial.

So, we'll of course await that event and communicate quickly afterward if there's any change to the program.

Otherwise, we continue to expect a final readout on that data in 2016.

As it relates to a solanezumab, we did build into the protocol a possibility of an interim review.

We have not decided to conduct that or not.

One of the key reasons for that is this review needs to be conducted late enough, where we have enough patient exposures.

You may remember in expedition one and two, a lot of the benefits started to accumulate after 40 weeks of exposure.

And there's a relationship between the rate at which we've recruited this study and whether there'd be value in conducting such an assessment or just waiting a short time further for the final result.

The study continues to enroll, and so we'll be making that determination sometime in the next 12 months.

Enrique?

Very good.

So just to clarify, we are expecting for our empa c.v.

trial to report out next year, and when it comes to Tradjenta in 2018.

So, a big difference in terms of when we expect the results.

Both of these trials have similar measures.

We look, of course, at CB tests, we look at MI and we look at stroke.

In addition to that, the Tradjenta trial has hospitalization for unstable angina.

So those are the prospective measures that we look at.

We do have the ability to look at hospitalization due to heart failure.

This is, of course, an important measure.

We will know more about the DPP4 class when the type of study basically reports out from Merck [appendome].

We should give some clarity in terms of this particular measure.

Great, thank you, Enrique.

Marla, next caller please.

Tim Anderson, Sanford Bernstein.

Thank you.

As you near the launch of your Lantus look-alike, the insulin glargine product, I'm hoping you can give us your latest commercial assessment of the opportunity both here in the US and then in Europe, where you'll launch first.

At one point in the past, you talked about what you thought could be the market share potential of your product, which was quite a bit higher than how Sanofi has described it, and they continue to minimize the threat to their product from your program.

When are we going to learn more from Lilly on some of the EU specifics like pricing and exact launch timing?

And then my second question is on, as we near the end of 2014 and move into 2015, I'm hoping you can qualitatively describe the pushes and pulls in R&D spending?

It seems that you've crossed a lot of milestones with your pipeline, and maybe there could be some easing up on R&D spending.

And that's already a trend it seems like that we've started to see in 2014.

So directionally, as you think about R&D in 2015, what should we be considering?

Thanks, Tim.

So Enrique, if you'll handle the first question, and then maybe Jan and I will tag team the second question for you.

Enrique?

On glargine, I don't think that we've discussed before what we believe is going to be our share uptick.

I think what we have shared is that we expect that glargine will continue to be a very important product going forward.

Clearly, there is a very significant opportunity.

How bio-similars in Europe or in the US this glargine follow-on basically compete, and what those dynamics, will be critical to see what it is going to be the share of the overall bio-similar market.

We clearly are not the only ones that are coming.

We are maybe the first that will be entering the marketplace.

But clearly, for us, we like our chances because we do have the commercial footprint, the expertise in diabetes, and the very extensive manufacturing capacity and devices, to make sure that we can provide an excellent customer experience and go toe-to-toe with Sanofi.

We do have expectations for these products.

We have to recognize that this is very significant opportunity overall, and even any type of level of market share can be basically meaningful from a revenue perspective.

Tim, this is Phil.

On your second question, just as a preamble, we will issue official financial guidance including R&D spend on January 7, 2015, for 2015.

And in that same meeting, as we have in the past, we'll talk about some of the specific, particularly late stage, developments that we would expect over the course of the year, including Phase 3 starts.

So I'll limit my remarks today to some of the things that are already out there and known in the public.

For pushes and pulls on R&D spend, clearly we've had a lot of trials read out this year that will not be continuing into 2015, that does provide some relief in terms of year-on-year compares.

We do have trials that are ramping up for things like abemaciclib, as we'll have all three of those trials enrolling quickly we expect over the course of 2014, what remains in 2015.

We also, pending the full removal of the partial clinical hold by FDA, could be restarting Phase 3 trials, and a significant number of them potentially for tanezumab that would also add spend in 2015 we did not have in 2014.

And then also the collaboration with AstraZeneca for the base inhibitor, which we're excited about, we'd expect more spend in 2015 compared to 2014.

In the past, Derica on many occasions has said that going forward, roughly we're looking at the sort of $5 billion number, plus or minus a few hundred million dollars, likely is the place that we will be.

Obviously, dependent upon pipeline outcomes and good investment opportunities in the pipeline.

Jan, do you want to comment maybe on some of the things that are in earlier stage development that you're following and are very interested in?

I think we should remember that positive Phase 3 readouts also triggers additional opportunities.

And we have a number of line extension opportunities and also the new combinations, and so on, that we could pursue, which we are currently discussing.

And this, you know is oncology, diabetes and the autoimmune space, for instance.

We also are very keen of -- to have sustainability of the pipeline and looking at additional Phase 2 investments.

And here, oncology have a number of readouts next year, including the galunisertib TGF-beta compound, the [methmab] and several others.

Diabetes, we have the glucagon receptor antagonist, our oral first-in-class agent.

In the Alzheimer's area, as Phil said, we have our new base program.

In addition, we also have our plaque-specific antibody N3pG, which will generate new data.

And just to remind you, we have also some very intriguing pre-clinical data with combinations of base and N3pG, which actually caused more or less a total clearance of plaque in Alzheimer models.

In the pain area, Phil mentioned tanezumab or NGF antibody, which we are very excited about based on the previous data in various pain situations.

And we need to clear then the situation with the regulators with some additional pre-clinical safety data.

We have our CGRP antibody, which we are not only testing in migraine prevention but also more recently in osteoarthritis, since we believe that this could be a pain mechanism that can be applied more generally.

We also are looking upon data from our PCSK9 antibody, and evaluating then the efficacy and so on, to see if this could be the potential best-in-class molecule in that area.

And blosozumab, as you know, we delayed Phase 3 start, but we're working very much on the new formulation so we could come back.

And finally, we are getting data from myostatin on muscle building, and we have recently reported that this not only builds muscle mass but also strength.

So we have a lot of opportunities coming both on existing NME's but also on some of the new ones.

Great.

Thank you, Jan.

Marla, next caller, please.

Chris Schott, JPMorgan.

Great, thanks for answering the questions.

Just had two here.

First, can you just elaborate a little bit more on Animal Health commentary from your Press Release and the prepared remarks on increased competitive dynamics?

Just trying to understand that a little bit better?

And the second question was on the near-term diabetes launches.

Can you just help set some expectations on how your seeing the shape of those launch curves?

It seems like we've seen some non-first in class primary care launches that seem fairly slow initial uptake in first year ramps, and then perhaps go on to be very successful.

But I'm trying to think of -- with these opportunities, is that a reasonable way to think about how these products will launch?

Or is there anything you think about with these profiles or that you can do from a pair perspective that may result in a different uptake curve for these products?

Thanks very much.

Thanks, Chris.

We'll have Jeff Simmons take your first question and Enrique will take the second.

Great, Chris.

Thank you for the question.

I'll start kind of at a high level, Chris.

As you know, Lilly's been very intentional and strategic about its Animal Health business.

We've outpaced the industry in growth the last six years.

We intend this year to be at or above industry growth rates, as you saw, our growth driven by both Lohmann as well as organic growth that we've seen in our existing business.

But, as Derica mentioned, there's two competitive pressures that were anticipated, and they are both, first, in the companion animal space, seeing a couple new competitive entrants, as well as we've seen the market actually not grow as anticipated.

That was driven by one, cooler weather, and then second is, a little bit more movement into the OTC channels.

On the food animal side, we've seen market growth not be quite as aggressive as it was last year.

Some of that, as you know, the swine virus has dropped pig population around the world anywhere from 7% to 10%.

And then just some of the natural dynamics in the market.

I would say the other thing that materially impacted us was, Zilmax last year went off the market and we saw 1.5% growth or so growth in our food animal business by filling this gap in the marketplace.

So year-to-year that had impacted our growth rate, as well.

But, overall, we feel very good.

Acquisition growth, international growth and innovation growth will allow us to see in the medium and long-term at or above industry growth rates.

Great.

Thanks, Jeff.

Enrique?

Maybe some comments on the structure of the market, which I think in a certain way impacts how we basically view the upticks of new products.

And this is regardless of whether the product is first in class or second or third in the class.

First, I think when we look at access, about 50% of the market in the commercial space, 50% of the market basically is available for access when it comes to new products.

First in class, second in class, third in class, you're likely going to be on a lower tier when it comes to the co-pay, but it is not [off] formulary.

About 25% of the market in the commercial space is going to have some sort of restrictions.

So, step edits or some sort of restriction that goes beyond just the co-pay.

And about a quarter of the market, the rest of the market basically is off formulary.

So we need to take that into account as we look at the uptick of new products in today's world.

In part D, the situation is different, because it basically takes a lot longer to be able to get into the part D formulary, and is not as simple to be able to get into a part D formulary in the middle of the year.

Now, as we look at upticks for our products, we look at our performance within the plans where we have access.

Of course, we also look at our overall performance.

But as I look at the empagliflozin at this, I look at the issue of these SGLT-2 class, I have to say that I'm very encouraged by the uptick of this class.

Not just the overall volume of prescriptions that we basically see, but we basically have seen an acceleration of the uptick with the additional players coming into the markets.

So that to me is very encouraging.

But not only the quantity of prescriptions is interesting, but I think the dynamics of those prescriptions because they are coming at the expense of sulfonylurea.

Primarily, the substitution that is happening is for, when it comes to new patients, are patients, instead of going to an SU, they're going to SGLT2.

That to me I think is extremely interesting, because there is the -- as used today, after metformin continued to be very widely used.

So I'm very encouraged by the uptick of the class.

It is early for me to make many comments about Jardiance, but I will say based on six, seven weeks that we're in the market, that we're off to a strong start.

Great.

Thanks, Enrique.

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

David Risinger, Morgan Stanley.

Yes, thanks very much.

I have three questions.

First, with respect to the SG&A outlook, should investors [in the] SG&A expect a decline or say (technical difficulty) in 2000 --

David, you are cutting out.

We can barely hear you.

Sorry about that.

Is this better?

Yes, it is.

Okay, great.

So the first question is, with respect to the SG&A outlook, should investors expect SG&A to decline in 2015 or stay flat?

Second, with respect to the earnings impact from the Novartis Animal Health acquisition in 2015, could you just review what you've stated previously and also comment on the amount of amortization that Lilly will exclude?

And then third, could you just provide some perspective on the variables that will impact your decision over the next year regarding whether or not to take an interim look at the solanezumab data?

Thank you.

Thanks for the questions.

We'll have Derica handle the first two and then Dave, you want to do the third please or -- okay, Derica?

Hi, David.

In regards to the SG&A outlook, I'm not in a position to provide you 2015 guidance at this point.

As Phil said, we'll have a more extensive dialogue around that on January 7. So if you'll just kind of live with this until then.

And then likewise, also in terms of the earnings impact anticipated from Novartis Animal Health, until we actually close the deal, which we anticipate being sometime in 2015, we're really not in a position to talk about that at this stage.

What we did say, at the time we announced the deal, is that by 2017 we would expect to have achieved at least $200 million of benefit, or synergistic benefit, that would result in cost savings, as well as we should be able to get back to our historical levels of profitability in that 2017 and 2018 timeframe, which for our Animal Health business has been at that 25%, roughly, level of profitability.

As it relates to amortization, what we can talk about at this stage is the amortization that we're seeing in our base business today.

Obviously, it will be eventually impacted once we close the Novartis Animal Health deal.

But in this quarter alone, we had $134 million of amortization expense in Lilly's result, and on an annual basis it's about $500 million to $540 million.

And then obviously, if we're able to close the Novartis Animal Health deal, that number will grow or get bigger as a result of that acquisition.

Dave?

I think there was an earlier question on this related to the sola interim review.

We do have a feature to potentially conduct such a thing.

But the primary -- there's many reasons why we would pull the trigger or not, but the primary one relates to patient exposure versus the amount of time left in the study.

So you may recall, in expedition one and two, most of the drug impact appeared to occur after week 40.

And so what you'd want is enough patients with at least that exposure to conduct the appropriate statistical analysis.

On the other hand, if the study enrolled very quickly, it wouldn't be so wise to use Alpha to take that look.

I think our current situation, so investors know, is that the study is enrolling quite well.

And so we're not in a position to make a statement about whether we would conduct an interim review or not.

But those are the considerations we would weigh, and sometime next year we'll have something to say about that.

Great.

Thanks, Dave.

Before we go to the next caller, I'm sure that our Chief Accounting Officer, Don Zakrowski, is listening.

So I do want to go ahead and just set expectations.

When we provide guidance on January 7, we will still have to make high-level assumptions about how we'll allocate purchase price and what the financial impact will be to both reported and non-GAAP results for 2015.

It will be later in the year that we'll actually be able to finalize those numbers.

So you should expect that there could be some variance, hopefully it's not very large, but some variance on specific line items or the amount of purchase price allocated to intangibles that are being amortized.

So again, we'll do great job I'm sure with our accounting group to get as close as we possibly can for our guidance, but you may see some variability as we go through the year and finalize the accounting for the transaction.

Marla, if we could have the next caller, please?

Gregg Gilbert, Deutsche Bank.

Thanks.

Good morning.

I have a few.

First, emerging markets growth was quite strong.

Is that based on early benefits of your new commercial model, or are there other factors we should be aware of that might be shorter term in nature?

On the pipeline, how is the BACE inhibitor from AstraZeneca different from your prior experience and perhaps from Merck's approach?

And lastly, on your PCSK9, Jan, you indicated you would assess to see whether it could be best in class.

Are you setting the bar that high because of the expense?

Or could you shed some more light on what you think about your PCSK9 inhibitor based on what you've seen to date and what sort of the go, no go decisions will be based upon?

Thanks.

Great, Gregg.

Thanks for the questions.

Chito, we'll have you take the first on the emerging markets growth and then, Jan, if you'll take the base and PCSK9?

And Dave, if you have any comments to add to the PCSK9, feel free to do that as well.

Chito?

Good to have the first question for the Emerging Markets for the year.

So delighted to have the question.

We're obviously thrilled to see the strong growth for the quarter and year-to-date.

Let me make sure everybody understands though that part of that strong growth is driven by a tender that we won for Humalin in Brazil, and a few one-time items with regards to China in our anti-infectives business.

The underlying business is growing at around 8% to 9%, solid growth.

The key drivers, again, would be China, really our diabetes business, strong growth in Latin America, and pockets within the Middle East.

Our fastest growing product, if you exclude Humulin because of the tender, is actually Forteo, which is growing at 24% to 25% year-to-date.

We think there's a lot more opportunity there but so is Humalog.

So with the diabetes opportunity in China and emerging markets, Humalog is growing over 20%.

I think it's early to say that the actual new commercial model is having an impact.

Clearly, I'm seeing across all our affiliates that the move to nontraditional non-salesforce alternative channels is taking shape, where we're seeing a significant growth in our interactions with customers using the digital channels, which I think are, from our perspective, more effective and in fact, more efficient.

Okay.

The BACE inhibitor from AstraZeneca is also an oral compound and its non-selective BACE1/BACE2 agent, which is similar then to our previous agents, and also the Merck inhibitor now in Phase 3. This agent has Phase 1 data showing a dramatic AD to lowering in cerebrospinal fluid, which is a good indication then of target engagement in the CNS.

What we need now is longer exposure data in patients in Phase 2 before starting Phase 3, to exclude that we see similar effects as we had on the liver or potentially other side effects, remembering that this class needs a strong safety component.

We are very encouraged by the data we have seen so far.

But again, we need longer safety exposures before we can start Phase 3.

In relation to PCSK9, I think we are all very enthusiastic about this class based on initial Phase 3 data from several competitors, including some preliminary data on the positive MACE outcomes.

Therefore, for us I think being behind, we will have a very high hurdle on this agent, looking at what is the LDL lowering efficacy, how long is the duration of effect and what about injection convenience, the volume and the regiment, and so on.

We have not yet made those evaluations.

Thank you, Jan.

Marla, next caller, please?

John Boris, SunTrust.

Yes.

Thanks for taking the questions.

First question just has to do with your gross margin going forward, on your insulin lines in particular.

There's some ongoing manufacturing changes that you're making to improve the efficiency of your production of your insulins when you benchmark yourself against your competitors.

How much of an improvement do you think we might be able to see on the gross margin line from that, and the timing of that as it filters through?

Second question in autoimmune, it would appear that you have a couple of assets there that could be ideally positioned to compete in somewhat highly competitive markets.

How should we be thinking about an autoimmune buildout and the implications of that for 2015?

And then, just the last question on ALIMTA, any update in Europe on either the German or the UK appeals?

Thanks.

Great, John, thanks for the questions.

So we'll cycle among the three business unit Presidents.

Enrique, if you'd take the first question on gross margin for insulins.

Dave, for the commercial support for autoimmune platform going forward.

And then, Sue, if you'd like to handle the European situation for the ALIMTA challenges.

Enrique?

Improving our gross margin for an insulin portfolio I think is critical to us.

We are in the process of executing our insulin technical agenda to be able to do that.

What we have shared in terms of the benefits and improvement is that we should start seeing some benefit, but it's limited in 2015 and more fully in 2016.

Over time, because of learning curves and so forth, we do expect this to be very significant that we have shared that our gross margin for insulin should improve by several percentage points over time.

So, a very important initiative for us, and also is one that gives us flexibility when we look at our facilities being able to produce different types of insulin.

So an important initiative and we are very much on track to deliver what we've been expecting.

Great.

Dave?

John, thanks for the question.

We're obviously very excited about our possibilities in autoimmune.

I would point out that each of the products have their own marketplace, and so although they may fit in to a therapeutic area that's quite broad, we'll be competing against different products in each case.

We've announced in the last quarter Ixekizumab data and we're very pleased with the fact that it met all of its endpoints in a very strong way.

We are working extremely hard right now to get that submission to the FDA in the first half of 2015, and we're encouraged by the possibilities for the IL-17 class, but also about the possibility for us to have a differentiated product within that class.

And really successfully be able to move patients to the possibility of complete clearance of plaque psoriasis, which is -- or a significant portion of them, which is what we understand patients want.

The buildout for that business is, as I mentioned on a previous question, not as significant in terms of people and organizations, but is significant in terms of capability.

So the company is hiring from the outside, we're building medical infrastructure, patient support infrastructure, as well as selling resource to do that.

We plan to be completely prepared to compete with the strongest players in the psoriasis sector at the time of launch.

Baricitinib, we anticipate data soon.

I think as Derica mentioned, we will likely have a topline release on the first study over the next few months.

And this also will be in a very competitive space in RA.

We see baricitinib as a potentially disruptive technology in that space, and one in which we could really change expectations for the treatment of RA for many patients.

We'll wait for the data, of course, which will further inform our strategy, but we will also compete effectively in areas of medical, sales and patient support across that product, and plan to play to win in RA, assuming the data supports submission for baricitinib.

Thanks, Dave.

Sue?

With regards to the ALIMTA patent situation in Europe, as a reminder the European Patent Office ruled in our favor on -- in terms of validity.

That is being appealed.

We still do not have a date for hearing with regards to that.

On the infringement, the German case that was ruled for us is being appealed, and a date has been set for March of next year.

And in the UK, where the English High Court ruled against us, and that covers France, Italy and Spain, that is also being appealed, with a date set for March of next year.

Thank you, Sue.

Marla, next caller please.

Steve Scala, Cowen.

Thank you so much.

Two questions.

Lilly's 2014 guidance range implies Q4 EPS from down 8 to up 3. Why are you still guiding to such a large range with only nine weeks left in the year?

And why didn't you choose to tighten the range today?

And the second question is, on the BACE inhibitor, there would seem to be three possible reasons why you did this deal with Astra.

The first is that you fear that Merck is too far ahead of your own pre-clinical candidate.

The second is that you see some weakness in the Merck agent.

Or the third is that you need a base to combine with your other agents internally.

Any thoughts on which of those is most likely?

Thank you.

Great, Steve.

Thanks for the questions.

We'll have Derica take your first question, and then Dave, if you want to take lead maybe on the BACE inhibitor question.

Jan, feel free to chime in as well.

Derica?

Hi, Steve.

We left the guidance range unchanged, essentially to say that our business, in totality and aggregate, we see as being unchanged at this stage.

We did modify some of the line items, as you saw.

We raised the bottom end of our R&D.

We lowered the top end of SG&A.

But in total, we believe that our total OpEx will stay about in line with what we expected for the year.

And then likewise, we're dealing with some of the topline headwinds as it relates to rate, when you think about our outlook for the remainder of the year.

So, overall, we felt comfortable with the guidance range that we had.

There was nothing behind anything beyond that, to read into the no change to our EPS guidance range.

Thanks, Derica.

Dave?

Yes, Steve.

Thanks for the question.

On the BACE deal, we're very excited about the collaboration with Astra.

Not only because we like the asset, we like the space, but also, we get very complementary type of alliance with AstraZeneca on this.

You mentioned three reasons why we might be interested.

I think those are all good reasons.

There may be a few others.

This product is clearly ahead of our own internal efforts, given the setback we had in 2013 on our own clinical stage program.

It is different, in terms of the approach to BACE inhibition from a chemistry perspective, so that's a good thing.

With Merck's program we, of course, watch that carefully.

We do think there's opportunity for differentiation and a best in class approach even if it's not first in class.

And as Jan mentioned previously, we are excited by -- I would say, we anticipate a combination therapy, particularly antibody small molecule combinations in the treatment of Alzheimer's, will become the norm.

And so having all of these -- as many of these mechanisms as possible is probably a good thing for combination studies and offering more value to our customers.

So amongst these three, it's really all of the above, Steve.

They're all good reasons to do this deal and we're excited by it.

We have an aggressive plan for development and we'll give you further updates into next year on that.

And just a final comment on the mechanics which, as you probably know, have genetic validation, where people in Iceland and who has the mutation in this BACE cleavage site of APP, actually are protected against dementia and live very long.

So, I think that seems to be a very attractive option to mimic.

Thank you very much, Jan.

Marla, next caller please?

Seamus Fernandez, Leerink.

Great, thanks for the questions.

So first, Derica, can you be a little bit more specific on the percent of the gross margin benefit from FX versus the plant shutdown delay?

I presume that the plant shutdown delay would then recur or be delayed into the 2015.

Just trying to get a sense of what the magnitude of that difference would be?

And if that would be a repeat delay or if it's something that you would expect then to kind of shift into 2015 and then it shifted again to 2016?

So really, there's just a benefit this year but we need to anticipate a differential but not a double hit in 2015?

Second question, in terms of your expectations for US coverage and access relative to Trulicity, I was just hoping that you could give us a little bit of color on your hopes for overall access, unrestricted access and Medicare coverage.

For Dave, the key differentiating features of Xeljanz -- versus Xeljanz with baricitinib that are hoped for in the product profile.

And then lastly, for Susan, maybe ramu approval, it's possible that we could see second line long approval in the fourth quarter of this year.

How should we think about the pace of uptake, the percentage of second line lung patients likely eligible for therapy, and the duration of real world therapy in that context?

Thanks a lot.

I think I've got that down, Seamus.

So we've got the percent gross margin benefit coming from FX versus the shutdown.

We'll have Derica, obviously, handle that one.

So then the US access outlook for Trulicity, Enrique.

Xeljanz versus baricitinib profiles, Dave.

And then, Sue, the ramucirumab approval, some of your thoughts on the pace of uptake and the percent of the eligible and second line.

Derica?

Hi, Seamus.

In regards to our gross margin revised guidance for the remainder of the year, the primary driver is the benefit or the FX benefit.

So we get a topline headwind, but we get a tailwind in terms of the cost of sales impact when you include the FX impact on the inventories expected to be sold during that period.

As it relates to the shutdown, it is a benefit in this year.

We do expect to be more on a normal cycle next year.

So this is, we would view, as a kind of a one-time movement.

We wouldn't expect to see 2015 shutdowns being scheduled -- shutdowns been pushed out.

Great, thanks Derica.

Enrique?

Seamus, I won't be able to give you what our access goals are for Trulicity but I will share, once again, that as we look at the diabetes space, regardless of class and regardless of order, what we basically see is that in about 50% of the commercial space we're able to get access.

Maybe with a higher co-pay but it is access, and we believe that we can very much compete in that space and most companies can.

In about 25% of that space you have step edits in some cases.

In the GLP-1 class, this is going to be a step edit over a GLP-1.

So you have to be in GLP-1 before you could maybe go on the new GLP-1 that is launching in this particular case, Trulicity.

And in about 25% of the commercial market there's really no coverage until basically the P&T makes a formal decision to be able to do that.

On Medicare part D, I think the situation is different because of the schedules.

While we are working to try to get coverage sometime in 2015, I think the discussions are typically around 2016 coverage for part D and whether we can maybe accelerate that into 2015.

I have to say that we have been having discussions with payers around Trulicity, and I do believe that we have very strong valuable position, and that's basically what our payers are sharing with us.

Thank you, Enrique.

Dave?

Thanks, for the question.

Obviously, the big caveat on all this is we need to see the Phase 3 data from our program, and we're looking forward to that first study toplining here in the next several months.

Which, as a reminder, is the TNFIR study, these will be refractory patients to TNF therapy.

There's a complete program which also spans pre-biologic patients as well as head-to-head against Humira, which is our structure study and is fully powered for non-inferiority.

So one feature that could be different from tofacitinib is the clinical program.

We built this program looking at our own Phase 2 data but what also they had conducted, and we are optimistic that it will yield the kind of label, should these studies demonstrate the effect we saw in Phase 2. They'll be very competitive in the RA market for us.

Of course, also, we have a difference.

Although they're both JAK inhibitors, we have different receptor activity.

We are selective of the JAK 1-2 pathway, where as tofacitinib is not.

It's a pan-JAK inhibitor.

This may manifest in different side effects or effects.

And again, the clinical program will have to bear that out.

Recall as well, that we are very happy with our dose -- our ability to select a dose that yielded a very significant efficacy result as published in our Phase 2 studies, really with the side effect profile that we think is quite appropriate for the RA patients and competitive with biologics, yielding the possibility of an oral medicine with biologic-like efficacy.

And so, head-to-head comparisons haven't been conducted but for instance, if we look at our competition, which was unable to gain EMA approval really based on lack of effect at the 5 milligram dose, we think that could also be different.

Ultimately in this class, for early uptake as well, the overall safety profile emerging from the Phase 3 program will be essential to look at.

We don't have that data in front of us, but have been conducting regular data monitoring committee meetings, and have been pleased that there haven't been any changes made to the program.

So we'll wait for our data to come out.

The way we designed this was to have a differentiated profile and really be able to present to the market something that could change expectations for patients who suffer from RA.

Thanks, Dave.

Sue?

Yes, Seamus, with regards to Cyramza, clearly, we're very happy to not only have a positive Phase 3 study with Cyramza in second line lung cancer, but also to get priority review.

So we are hoping that we'll get an action by the end of this year and be ready to launch next year.

Regarding uptake, clearly, I can't give you full details of that, but I will say a few things.

Firstly, this is the first agent to show a benefit in a broad patient subset, both in the squamous and non-squamous in second line setting.

And we have a lot of good experience with thoracic oncology with ALIMTA in first line and this would now be in broad-based second line.

So we're excited by the opportunity that we've got with this agent in a second line setting, and clearly our plan is to ensure that we have a successful launch.

Marla, can we have the next caller, please?

Jami Rubin, Goldman Sachs.

Wow, thank you.

I appreciate it.

John, you've been quiet on this call.

I have a question for you.

On the last earnings call, a lot of us asked you whether or not you're interested in a tax inversion deal.

In hindsight, very smartly you said you weren't, and congratulations, it's been a mess out there.

But I'm just curious what your Washington folks are telling you about prospects for corporate tax reform?

With the midterm election in a couple of weeks, it looks like prospects for Republicans to gain control of the Senate look pretty promising.

Who knows?

It's pretty close.

But what -- how should we think about potential changes to tax reform, which will even the playing field for US companies relative to foreign enterprises?

Thanks.

Jami, thanks for your question.

Up to this point, I've been delegating effectively here.

But, you got me.

I think on tax reform, obviously, a lot depends on what happens in November and some of the subsequent dynamics, and of course, what else is happening in this crazy world we live in.

I think I can say, and our guys in Washington would say, we're cautiously optimistic that the next two years will bring about some sort of meaningful tax reform.

I've never seen an issue where I go around and talk to people in both parties, and everybody's in agreement.

We've got a lousy system now that makes American companies less competitive.

People seem to agree on the fact that we need a lower rate, and that a territorial system of some kind would make sense.

There's not unanimity on that, but I think there's you get fair degree of alignment.

And then we get into the details and that's where the devil is.

Some companies are capital intensive, some are R&D intensive, some have the bulk of their operations here, some like Lilly are sort of equally divided between the US and OUS.

So I don't think there's necessarily an easy answer, even if we all agree that the status quo really isn't -- doesn't represent sound policy, and doesn't really put the US on the best possible footing to be competitive.

So, we're going to keep pushing for it.

We're going to keep talking about it.

And as I say, I think -- I believe there is a window in the next two years, and I think you're going to see a lot of companies, not just Lilly, really beating on this drum as well, Jami.

Thanks, John.

Thanks, Jami.

Marla, next caller please.

Vamil Divan, please go ahead.

Thanks for taking the question.

So just a couple more on the BACE inhibitor, which I know we've discussed quite a bit already.

One is just a very simple question.

I didn't understand why you guys listed it on Phase 1 on your slideshow?

In fact, I think it's slide 14, when there's already a Phase 2/3 study that's ongoing you guys talked about?

At least the Phase 2 part is already started.

So just a simple question there.

And then my other question just related to that study.

I couldn't tell from reading the description if you guys are actually using your amyloid imaging agent to screen patients?

At least those that might have mild AD for entry in that study.

And if you could just clarify if you are or are not, and if not, why not?

And one other quick one, if I could, on the diabetes side with the basal insulin peglispro.

It's obviously the topline release you guys put out earlier.

If you could just give us a sense at this point now that you've seen some of the Phase 3 data internally, what group of patients do you think would be the best candidates for that drug?

Especially given some of the side effects we're seeing there on the triglycerides and some of the changes in HDL and LDL?

Thanks.

Great, Vamil, thanks for the questions.

I'll go ahead and take your first one on the phase of development for the BACE inhibitor.

Dave, if you'd like to take the second question on the trial itself and then Enrique for the basal insulin peglispro.

So I believe both AstraZeneca and Lilly follow a similar process for calling something a Phase 2 asset, and that's when the first efficacy dose, the first dose of the drug, is actually administered to a patient.

We do expect that will happen in the near-term.

Just recently, that trial has started to screen patients.

Should they pass those screens, then after a certain period they will receive their first dose.

So it should not be too long into the future that you will see that formally change, I think, for both Astra and Lilly, to show as a Phase 2 asset.

Dave?

There are many design features in the Phase 2/3 program.

We've incorporated learnings from our past failures and observations in disease modification and Alzheimer's.

Among those include screening patients for the presence of amyloid plaque.

There are many other things, and this is why I think the collaboration makes sense for AstraZeneca and us to harvest those learnings, and build that into a base program, and ultimately, try to maximize the probability of success.

Yes, we're conducting screens on these patients.

When it comes to our basal insulin peglispro, we have conducted our studies across type 1 and type 2 NICE patients.

Switching from glargine, and also in combination with meal time-insulin and so forth, and so we have a wide spectrum of studies.

I think consistently, what we have seen is superiority when it comes to hemoglobin A1c and as -- you mentioned triglycerides.

We are encouraged, I think, when we look at some of the CV data in terms of -- what we have shared so far is that we have already excluded -- when we look at our trials, we have already excluded the 1.3 hazard ratio, and that our observed hazard ratio when it comes to CV events is basically below 1.

We are pretty excited in terms of what this product could offer patients.

Now, specifically, to your question how did the benefit risk vary across different patient types, I think this is a discussion we can have when we basically disclose the detailed data to ADA.

Great.

Thank you, Enrique.

As we're reaching the bottom of the hour, if there are callers still in the queue, the IR team will get back to you shortly.

For those of you who have additional questions, do feel free to call us during the day.

We're happy to help with your questions.

John, would you close the call, please?

Sure.

Thanks, Phil.

To all those on the call, we thank you for your continued interest in our Company and for your support.

As we near the end of our journey through years YZ, I am extremely proud that we have executed on our strategy and delivered on the commitments we shared with you nearly five years ago.

We remain convinced that our strategy is the right one for Lilly in order to create value for patients, physicians, payers and our shareholders.

And our ability to execute so far, gives us increasing confidence in our future prospects.

As always, we will keep you apprised of our progress.

Thanks again, everyone.

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