禮來公司 (LLY) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Q3 2015 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I'd now like to turn the conference over to John Lechleiter.

Please go ahead.

Thank you, good morning, everyone.

Thanks for joining us for Eli Lilly and Company's third-quarter 2015 earnings call.

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

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

During this call, we anticipate making projections 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 it's not sufficient for prescribing decisions.

So let me begin by providing an overview of Lilly's third quarter.

Again this quarter, we posted strong non-GAAP financial performance.

With our continued focus on expanding margins, we leveraged constant currency revenue growth of 5%, into operating income growth of 27%.

Year to date, we've leveraged 3% constant currency revenue growth into 16% operating income growth.

Along with this strong financial performance, our focus on innovation continues to pay off.

Just since our last call, in diabetes along with Boehringer Ingelheim, we presented results from the EMPA-REG OUTCOME study with Jardiance.

This is the first time a diabetes medication showed a significant reduction in both cardiovascular risk and cardiovascular death in a dedicated outcome study.

We anticipate that our colleagues at BI will submit these data to US and European regulators before the end of this year.

In biomedicines, we announced results from two Phase III rheumatoid arthritis studies evaluating baricitinib head to head against two of the most widely used RA treatments.

In one study, baricitinib showed superior efficacy to methotrexate in treatment-naive patients.

And in the second study, it showed superior efficacy to adalimumab, the market-leading biologic, in patients with inadequate response to conventional DMARDs.

These are outstanding results.

Our team is now squarely focused on global regulatory submission.

And in oncology, the US FDA granted breakthrough therapy designation to our CDK4 and 6 inhibitor abemaciclib for the treatment of patients with refractory, hormone receptor positive, advanced or metastatic breast cancer.

This is our second oncology molecule to receive breakthrough therapy designation following olaratumab for soft tissue sarcoma.

As you know, the FDA may grant this designation in certain circumstances where there is preliminary clinical evidence that a drug may demonstrate substantial improvement over available therapy on a clinically significant end point.

These are all excellent examples of the progress we're making in delivering innovation that is valued by patients, physicians and payers.

Also since our last call, we were reminded of just how vexing the pursuit of pharmaceutical innovation can be.

Despite demonstrating HDL and LDL changes consistent with our Phase II study, our CETP inhibitor evacetrapib did not demonstrate a reduction in major adverse cardiovascular events in the Phase III ACCELERATE trial.

Lilly and its academic collaborators decided to terminate development of evacetrapib based on this new information.

This was an unexpected and disappointing development for patients with high-risk vascular disease and for Lilly.

Despite this setback, our pipeline is strong, and our future growth prospects are bright.

We continue to look forward to revenue growth and margin expansion throughout the balance of this decade, and we believe we've built a sustainable R&D engine for the long term.

Let me highlight additional key events that have occurred since our second-quarter earnings call in late July.

On the commercial front in diabetes, we launched a number of products in major markets.

We launched our weekly GLP-1 agonist Trulicity in Japan.

Along with Boehringer Ingelheim, we launched our insulin glargine product in Japan as well as the UK, Germany, and a number of other European markets.

And here in the US, we received approval for and launched Synjardy, a twice-daily combination pill containing the SGLT2 inhibitor empagliflozin and metformin.

Also in the US, we launched Humalog U200 KwikPen, the first concentrated mealtime analog insulin in the US market.

On the regulatory front, our colleagues at Boehringer Ingelheim completed the FDA submission of Jentadueto XR, a once-daily combination pill containing linagliptin and metformin.

In Japan, we submitted ramucirumab for second-line non-small cell lung cancer, and ixekizumab for both moderate to severe plaque psoriasis and for psoriatic arthritis.

In the US, we submitted Humulin Regular U-500 in the KwikPen delivery device to the FDA.

The product is already marketed in the US in a vial and syringe format.

As I mentioned earlier, the FDA granted breakthrough therapy designation to abemaciclib based on data from our Phase Ib cohort expansion in breast cancer.

On the clinical front, we had a number of noteworthy disclosures.

As Enrique discussed on our investor call a few weeks ago, along with our colleagues at Boehringer Ingelheim, we at Lilly are thrilled that Jardiance is the only diabetes medication to show a significant reduction in both cardiovascular risk and cardiovascular death in a dedicated outcomes trial -- in this case, in patients with type 2 diabetes at high risk of CV events.

Roughly one in two deaths in people with type 2 diabetes is due to cardiovascular disease despite the use of statins, blood pressure medicines, and anti platelet therapy.

Clearly a significant unmet need remains for further reducing cardiovascular risk in people with type 2 diabetes to help them live longer and healthier lives.

Highlights from the EMPA-REG OUTCOME study included a 14% reduction in the primary outcome measure of the three-point MACE end point, comprised of cardiovascular death, nonfatal heart attack or nonfatal stroke, a 35% reduction in hospitalization due to heart failure, a 38% reduction in death from cardiovascular causes, and a 32% reduction in death from all causes.

This is great news for patients with type 2 diabetes at high risk for cardiovascular events.

As I mentioned earlier, the positive clinical data read-outs didn't stop there.

Along with Incyte, we were extremely pleased that baricitinib demonstrated superior efficacy to methotrexate in treatment-naive patients with RA and to adalimumab in RA patients with inadequate response to conventional DMARDs.

We will present detailed data from these trials at the American College of Rheumatology meeting in San Francisco in November, and we will host an investor call on November 11 to review the results with you.

Finally in clinical news, we terminated the development of evacetrapib for the treatment of high-risk cardiovascular disease as I stated in my opening comments.

We expect to disclose detailed findings from this study at a medical conference next year.

On the business development front, earlier this month as planned, we took back North American rights to Erbitux from Bristol-Myers Squibb.

We announced the acquisition of worldwide rights to a Phase III intranasal glucagon from Locemia.

This product could be the first needle-free rescue treatment for severe hypoglycemia.

We expanded our collaboration with InnoVen, based in [Shoozo] China, to include the development and potential commercialization of up to three anti-PDi1 based bispecific antibodies.

We entered into a pre-clinical research collaboration with ImaginAb centered on T-cell based immuno-oncology therapies, and we announced an expansion of our immuno-oncology collaboration with AstraZeneca to include a range of additional combinations across both companies' complementary portfolios.

In other news, we entered into a settlement agreement with Sanofi to resolve insulin glargine patent litigation.

Under this agreement, Sanofi granted Lilly a royalty-bearing license so that Lilly can manufacture and sell Basaglar in the KwikPen device globally.

Also, Lilly and Boehringer Ingelheim will be able to launch Basaglar in the US in December 2016.

The Japan Patent Office issued a notice of closure in the trial regarding the validity of Lilly's vitamin regimen patent for Alimta.

We expect a written decision upholding the validity of the patent in the coming weeks.

This is the first of two decisions pending.

If the patents are ultimately upheld through all challenges and appeals, they would provide intellectual property protection for Alimta in Japan until June 2021.

The US District Court for the Southern District of Indiana ruled that our Alimta vitamin regimen patent would be infringed by generic challengers' proposed products.

The court had previously upheld the validity of this patent, which provides intellectual property protection for Alimta until May 2022.

The generics have appealed these rulings, but a date for the appeal has not yet been set.

We announced plans to expand our New York City research and development site.

This investment will enhance our immuno-oncology capabilities, as well as facilitate academic collaborations.

And finally in the third quarter, we repurchased $61 million of stock, leaving $3.2 billion remaining on our $5 billion plan.

In addition, during the third quarter, we distributed over $500 million to shareholders via our dividend.

We remain committed to providing a robust dividend and to returning excess cash to shareholders via share repurchase.

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

Phil?

Thank you, John.

Before I discuss our Q3 results, it may be helpful to review key features of our presentation of GAAP results and non-GAAP measures.

When interpreting our GAAP results and the growth rates versus 2014, keep in mind that 2014 does not include Novartis Animal Health while 2015 includes the operating results of this business as well as all the costs associated with the acquisition.

For our non-GAAP measures, we now exclude amortization of intangibles.

And, to provide you a better idea of the underlying trends in our business, we've adjusted our non-GAAP measures for 2014 to exclude the expense associated with amortization of intangibles and to include Novartis Animal Health as if we'd closed the transaction on January 1, 2014.

This should place 2014 on the exact same basis upon which we are reporting our financials this year.

Now let's look at our results for the quarter.

Slide 9 provides a summary of our GAAP results.

I will focus my comments on our underlying non-GAAP measures to provide insights into the trends in our business.

Please refer to today's earnings press release for a detailed description on the year-on-year changes in our third-quarter reported or GAAP results.

Moving to slide 10, you can see that Q3 revenue was just under $5 billion.

The decrease of 4% compared to Q3 2014 reflects significant FX headwinds.

Excluding FX, our Q2 revenue increased 5% on a non-GAAP basis.

As we discussed on prior calls, this year, we're still feeling a negative effect from the loss of US exclusivity for Cymbalta and Evista.

As we move through 2015, however, this effect is diminishing.

This quarter, US Cymbalta and Evista trimmed about 150 basis points off of our worldwide revenue growth rate.

Gross margin as a percent of revenue increased 3 percentage points, going from 74.8% to 77.8%.

The increase was driven by the favorable impact of foreign exchange rates on international inventories sold, which increased costs of sales in Q3 last year, but decreased cost of sales in Q3 this year.

Excluding this FX effect, our gross margin percent increased by 30 basis points, going from 74.9% in last year's quarter to 75.2% this quarter.

As on prior calls, you will find a supplementary slide providing our gross margin percent for the last 10 quarters with and without this FX effect.

We continue to drive productivity improvements across our business.

Total operating expense defined as the sum of R&D and SG&A declined by 7% over $200 million, compared to Q3 of 2014.

Breaking this into its component parts, market, selling, and administrative expenses declined 5% while R&D declined 10%.

The reduction in marketing, selling and administrative expenses was due to the favorable impact of foreign exchange rates and continued expense control, partially offset by expenses to support recent product launches.

The reduction in R&D expense was driven primarily by the 2014 charge associated with the termination of tabalumab development and to a lesser extent by the favorable impact of foreign exchange rates.

Other income and expense was income of $87 million this quarter, and included a gain on liquidation of our Receptos holdings that was partially offset by other investment losses and writedowns.

Our tax rate was 24.9%, an increase of 1.6 percentage points compared to the same quarter last year.

This increase is due to a catch-up for the first nine months of this year to reflect an increased percentage of forecasted earnings in higher tax jurisdictions.

Also, our tax rate in both periods did not include the benefit of certain US tax provisions including R&D tax credit, as those provisions had lapsed.

At the bottom line, net income and earnings per share both increased 22%.

Slide 11 contains non-GAAP adjusted information for the first nine months of the year.

I would point out that year to date, our non-GAAP operating expenses, again the sum of SG&A and R&D, is 54.7% of revenue.

This is more than 140 basis points lower than the same period last year and reflects clear progress towards our goal of 50% or lower in 2018.

Slide 12 provides a reconciliation between reported and non-GAAP EPS, and you will find additional details on theses adjustments on slide 22.

Now let's take a look at the effective price rate and volume on revenue.

On slide 13 in the yellow box at the bottom of the page, you will see the total revenue decline of 4% on a non-GAAP basis that I mentioned earlier.

The significant strengthening of the US dollar against many foreign currencies drove this decline as you see the 8% negative effect from FX this quarter.

On a performance basis, our worldwide revenue grew 5% with volume driving 7 percentage points of growth, partially offset by a negative price effect of 2%.

By geography, you will notice that US pharma revenue increased 13% driven by volume, partially offset by price.

Late lifecycle revenue for Evista and Cymbalta did influence the individual components of US growth, but not the overall increase.

In fact, excluding Evista and Cymbalta, the rest of our US revenue grew 17% with 9% from price, and 8% from volume with new products like Trulicity and Cyramza making significant contributions.

Moving to our international operations, we're now reporting Australia and New Zealand along with our emerging markets.

So Australia, Canada, and Europe, or ACE in the past, is now EUCAN, which stands for Europe and Canada.

The decline in EUCAN revenue of 17% was almost entirely driven by the negative effect of FX while on a constant currency or performance basis, EUCAN revenue decreased 3%.

This decrease was driven by a substantial reduction in European Cymbalta sales resulting from a loss of data package exclusivity.

Excluding Cymbalta, EUCAN sales increased 3% in constant currency terms.

In Japan, pharma revenue decreased 4% in total, driven by adverse currency movements, while on a constant currency or performance basis, Japan revenue increased 14%.

This performance growth was attributable to many products, chief among them Cymbalta and Cyramza.

Turning to emerging markets, we saw revenue decline of 18%, driven primarily by a negative FX effect of 14%.

On a performance basis, emerging market sales declined 4%.

This 4% performance decline was driven almost entirely by the negative effect of the Brazil Humulin tender that we had last year but not this year.

Also this quarter, our pharma revenue in China declined 2% with 1% driven by FX, and the other percent driven by lower volume.

On a non-GAAP basis, which adjusts 2014 as if we completed the Novartis Animal Health acquisition on January 1 of last year, Elanco Animal Health revenue declined 9%.

Excluding the negative effects of FX, Elanco revenue decreased 2%.

This performance decrease was primarily driven by OUS companion animal products and to a less extent by US companion animal products, partially offset by growth in US food animal products.

Moving to slide 15, you will see the effect of changes in foreign exchange rates on our Q3 2015 results.

This quarter, FX was a significant top line headwind, reducing revenue in US dollars by 8 percentage points.

In terms of cost of goods sold, however, FX provided a substantial benefit as non-GAAP cost of goods sold decreased 15% including FX, but increased 5% excluding FX.

With both revenue and cost of sales increasing 5% in performance terms, we saw similar growth in gross margins.

Our continued expense discipline is evident in our operating expense results as even when backing out, the favorable effect of FX on our expenses, OpEx still declined 3%.

This allowed us to leverage mid-single-digit growth in revenue and gross margin into 27% performance growth in operating income and 25% performance growth in net income and EPS.

These are outstanding results.

Moving to our pipeline update on slide 16, you will see the pipeline as of October 16.

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

In terms of advancement, you will see that we began Phase III testing of olaratumab in soft-tissue sarcoma as well as of our Tau Imaging Agent for Alzheimer's disease, and through our recent agreement with Locemia Solutions, we added the intranasal glucagon molecule.

You will see that we began Phase II testing for an ultra rapid-acting insulin in collaboration with Adocia, and we began Phase I testing of two molecules, one for cancer and the other for diabetes.

Since our last update, we've also terminated development of a number of molecules, including evacetrapib in Phase III, two molecules in Phase II, as well as five in Phase I. The early-phase terminations you've seen in recent quarters reflect a concerted effort to raise the bar for taking molecules forward and to focus our efforts on the highest priority opportunities.

Now let me turn the call over to Derica.

Thanks, Phil.

As on prior calls, I will recap the progress we've made on the key events we projected for 2015, and then review our 2015 financial guidance.

Turning to slide 17, we're pleased with the positive progress we've made on the key events we laid out for the year.

This progress is represented by the large number of green check marks that you see.

We've highlighted in yellow the key events that have occurred since our last earnings call.

They include initiation of Phase II trials for olaratumab in soft-tissue sarcoma, ramucirumab in second-line liver cancer, and along with Pfizer, for tanezumab in both osteoarthritis pain and chronic lower back pain.

As mentioned earlier, we issued a top line press release and presented detailed data at EASD for the Jardiance EMPA-REG OUTCOME trial.

We also issued top line press releases for two positive Phase III studies of baricitinib in rheumatoid arthritis, RA BEGIN in September and RA BEAM earlier this month.

And we terminated the Phase III ACCELERATE trial with evacetrapib.

You will also see that we've updated the regulatory submissions category to reflect Japanese submission of ixekizumab for both psoriasis and psoriatic arthritis.

Separately, you will now see on www.ClinTrials.gov that we are running a new psoriasis trial comparing ixekizumab head-to-head with Stelara.

In the other section, you will see green check marks for the positive Alimta ruling from the US District Court on the issue of infringement, and for the similar ruling received in Japan.

Key events remaining this year include regulatory submission of baricitinib for RA, initiation of a rolling submission for olaratumab for soft-tissue sarcoma with the completion of the submission expected during the first half of next year, FDA action on necitumumab for first-line squamous non-small cell lung cancer, and legal rulings on Alimta litigation in Europe.

The process we've made in the past few years, and again this year in executing our innovation-based strategy solidifies our near to medium-term growth prospects, and gives us confidence that our strategy is the right one for Lilly to create value for our various stakeholders including our shareholders.

Turning to our 2015 financial guidance, let me start with the punch line.

We raised and narrowed our non-GAAP EPS guidance to reflect solid underlying performance for the first nine months of the year as well as higher other income.

Looking by line item, you will see that our revenue and gross margin percent guidance is unchanged.

We've reduced our guidance for both marketing, selling, and administrative expense and R&D and development expense.

This is driven by our continued focus on expense management.

I would note that this lower R&D range includes an anticipated Q4 charge of up to $90 million related to stopping the evacetrapib clinical trials.

We've increased the expected range for other income, largely due to the gain on the sale of our Receptos stock holdings.

To reflect an increased percentage of earnings in higher tax jurisdictions, we've increased our non-GAAP tax rate to 21.5% and our GAAP tax rate to 16.5%.

Please note that both tax rates assume the R&D tax credit and other international tax provisions will be extended before year end, retroactive for the full year.

At the bottom line, you will see we've raised and narrowed our non-GAAP EPS range and now forecast full-year non-GAAP EPS to be in the range of $3.40 to $3.45 per share.

Our new GAAP EPS range of $2.40 to $2.45 per share reflects this same upward adjustment.

Finally, we've lowered our estimates for full-year capital expenditures to $1.1 billion.

In summary, we again posted solid underlying business performance in the third quarter and for the first nine months of the year.

Excluding the negative effect of FX, we drove mid-single digit revenue growth, with strong contributions coming from recently launched products.

Our continued focus on productivity and cost controls drove strong leverage at the bottom line, and the current pace of market expansion puts us on track to meet our midterm margin expansion goals.

While we did experience a setback with evacetrapib, news from our pipelines has on balance been exceedingly positive.

The string of positive results we have had over the last couple of years represents tangible results from our innovation-based strategy.

And we still have an exciting period ahead of us.

We expect FDA action on two molecules presently under regulatory review, necitumumab before the end of this year and ixekizumab in the first half of next year.

And over the next 18 months, we could submit six additional new molecular entities for regulatory review: baricitinib, olaratumab, abemaciclib, intranasal glucagon, our CGRP monoclonal antibody and solanezumab.

The success of our pipeline positions us to drive revenue growth and expand margins throughout the balance of this decade.

As it has been our stated intent, we have returned to revenue growth on a performance basis.

We are reducing OpEx as a percent of revenue, helping to expand our operating margins.

We are advancing our pipeline with positive results, and we have built a sustainable R&D engine that can produce additional exciting new medicines to help people have longer, healthier lives.

This concludes our prepared remarks.

Now I will turn the call over to Phil to moderate the Q&A session.

Thanks, Derica.

Linda, if you can please provide the instructions for the Q&A session and then go to the first caller on the line please.

Mark Schoenebaum, Evercore ISI.

Thanks so much for letting me have the first question.

I really appreciate it.

John, I have two questions for you, please, if I may.

And I hope you're well.

Last quarter, you said in the 2Q call that you thought SMID-Cap Biotech stocks in general were in a bit of a valuation bubble (laughter).

You have proven to be a better stock analyst than me and my competitors.

Now that we're 25% lower than your comment, I'd just love to hear what you think, and from a Lilly perspective, are you asking your BD folks to speed up the pace of their calls, or do you want to let this settle out for a while, or do you want to see it go lower?

Number two, I know you're very involved in Washington and what goes on there with the bio and the Pharma in the allotting groups and industry.

I'd loving to hear your thoughts on drug pricing, but more specifically -- obviously given the Hillary Clinton tweet, the Marco Rubio comments, but more specifically I'd love to know when do you think the industry is just going to begin defending itself to the public more aggressively?

Which is going to cost some money.

There were only 10% of overall healthcare spending, and the other 90%, et cetera.

When is the industry going to begin to spend the money to try to change the image and teach Americans that it's probably worth it?

And I will leave my questions at that.

Thanks, Phil, for calling on me.

You're welcome, Mark.

John?

Okay, Mark.

Thanks a lot.

Well, I did make the comment about the bubble, I guess, at the last call.

Although I think the hit that the industry has taken may have come from another direction with the noise around pricing.

I think there's no question that valuations are lower.

Does that change our fundamental posture with respect to business development?

It doesn't.

I think we've said all along that we're not really interested in large-scale M&A, but we're going to continue to look at particular opportunities particularly earlier in development even at the pre-clinical stage to acquire assets or acquire companies as the case may be.

We're very excited about the opportunity we have with Locemia, this intranasal glucagon that we announced just a few days ago.

I don't know how good of a -- I don't think I want to change jobs with you right now though, Mark.

I think you do what you do well.

And I will continue to try to do --

I'd take that trade.

Okay, good (laughter).

On drug pricing, I think if you go back through successive presidential campaigns, with some bit of variability, drug pricing tends to rear its head because I think it's something the politicians have found resonates with voters.

Having said that, I think the facts tell a different story.

Someone showed me some information the other day.

In the second quarter of this year, the net effective price increase for the market basket of medicines in this country rose 0.7%.

That reflects not necessarily these things that get called out in the media, these individual huge drug price increases.

It reflects the fact that many of our medicines are going generic still.

I'm talking about the industry here, really been through its own situation with that.

It reflects the deep discounts that were mandated by the government to provide, but increasingly must provide to commercial insurers and payers, in order to get onto formularies and be able to compete for the business.

With respect of telling the story, I think you can expect to see more coming from the industry.

I think we've got to be careful and thoughtful here.

I don't think there's a way you can spend enough money to all of a sudden change people's minds because so much of the criticism comes in the form of our media.

No one is out there spending money per se.

They're just picking up quotes and amplifying those.

We've got a great story to tell.

We've got medicines, and if you look at the hepatitis space, if you look at cancer, if you look at diabetes, huge advances in recent years.

Obviously lots of risks.

Our evacetrapib trial called that out.

At the same time, I've never been as optimistic as I am about the chances we have as an industry to really make a difference for patients.

We've got to keep telling the story, reminding people that the medicines as a percentage of total healthcare spend have remained remarkably constant for a long period of time, which suggests that our medicines are helping to hold the line or even reduce other costs in the system that none of us want to incur.

Hospital stays, being off work, disability, et cetera.

So we're not tone deaf, Mark, in terms of the criticism that's being levelled at us.

At the same time, I think that we've got more work to do here, and I think can you expect to see more.

Thank you, John.

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

Chris Schott, JPMorgan.

Thanks very much for the question.

First one is on expense management, and you guys are obviously doing a great job on that front.

Just a qualitative question as I look out to 2016.

You've had a lot of incremental product flows as we think about next year into 2017 between Jardiance expanded label, the IL-17, baricitinib, et cetera, should we think about 2016 as an investment year for the Company where we could see SG&A growth resume here?

Or do you still have enough flexibility with some of your initiatives to absorb some of these launches in the existing infrastructure?

The second question was on baricitinib Just wanted to get some of your perspective on how you see the superiority data versus Humira playing out in the commercial RA market, Is this an area that you think you could take share quickly, or this is going to be a much more gradual story just given how entrenched some of these TNFs are with the long-term safety, et cetera?

Thank you for the question.

Derica, we will go to you for the first question on expenses and particularly the pushes and pulls as we head into 2016, and then Dave for your comments on baricitinib.

Good morning, Chris.

It's too early to give specific guidance on 2016 as it relates to our expense management.

We will provide that on our January call the first week of 2016.

But what I can say is we expect to be consistent with what we stated all along, which is that we believe we can expand margins throughout the balance of this decade, and that's also including revenue growth.

And clearly to expand margins, that means we either were growing our top line faster than we're growing our expense base.

And what ultimately happens to our expense base we will share the specifics around that in that first week in 2016.

Dave?

Yes, thanks for the question, Chris, on bari.

We're very excited now that we have the full set of data in hand.

Recall we have four separate Phase III programs which really span the whole spectrum of rheumatoid arthritis from refractory patients to biologics.

Recall that was the first study we read out, and our study has a unique feature in that it's a very real-world assessment.

Many patients had failed on two or three or more biologics, before entering that study, and still baricitinib still showed very strong, robust efficacy.

We then read out a study in conventional DMARD, refractory patients.

Again, baricitinib really helped patients who had been refractory to methotrexate and other conventional DMARDs.

We then demonstrated superiority to the established standard of care for disease modification, which is methotrexate, in the RA BEGIN study, and most recently a superiority to adalimumab in DMARD refractory patients service first line biologic space.

So I think we've gotten what we wanted when we started the program, and to your question on safety so far through clinical trial observations, we're very reassured by the safety profile we see.

So we're now onto submission.

In terms of what to expect in the market, I think the RA market has some features where one would say this will not be an overnight phenomena of share gain.

You mentioned one which is a natural caution on safety in any new drug where you're suppressing the immune system.

We're very confident in the data we've produced on that dimension through our clinical trials, but understandably physicians would like to see that play out over time.

And I think that's been the normal pattern in this market.

As more reassuring safety data from a real-world setting is produced, doctors become more comfortable.

It's also a very competitive space.

We understand that.

And we're prepared to compete in that.

On the other hand, baricitinib offers a new choice, which is when I'm failing on the inexpensive generic conventional DMARDs, rather than step 2, a TNF, I have another alternative now, and that alternative appears to be superior to the standard of care in that setting.

And there are a number of patients in that situation who have not made that step 2 into TNFs for all kinds of reasons, and we will be competing aggressively in that space.

So we like our hand.

We obviously will have baricitinib for a while to come.

We're stepping into a new market for Lilly and want to do it right, and my view is I think we will see good uptake.

It won't be some overnight phenomenon, but on the other hand we do expect to make incremental gains as we enter the market.

Thank you, Dave.

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

Tim Anderson, Bernstein.

Please go ahead.

Thank you, I have three questions.

On EMPA-REG OUTCOME, is it possible those results will actually trigger price competition as J&J tries to hold onto its market-leading formulary positioning within Invokana?

And Lilly like most other sellers of SGLT2s also sells a DPP-4.

What's your messaging to physicians on how they should think about those two different classes of drugs?

On Alimta, US performance was down year on year, you mentioned competitive pressures, I'm assuming that is the PD-1s.

Is that the trajectory we should think about going forward?

And the last, on evacetrapib, knowing what you do about the data at this point, do you think your drug failed because of the way you ran your particular clinical trial, or do you think it failed because CETP inhibition is just not a viable mechanism?

I realize full results have not yet been presented.

Thank you for the questions.

Enrique, if we could go to you for the first couple questions on EMPA-REG OUTCOME and messaging around DPP-4 Trajenta.

Sue, to you for the Alimta US Dynamics that we're seeing.

And then Dave on evacetrapib.

Jan, also feel free to chime in if you would like as well.

Enrique?

Tim, thank you for your question.

It's difficult to speculate when it comes to price competition.

If anything, the EMPA-REG OUTCOME results create differentiation in the marketplace.

So from that perspective, we feel very confident in the value proposition that Jardiance offers today, which is very significant.

I would point out that the access that we already have with Jardiance for 2016 is indeed very strong.

We will have over 85% commercial access and over 55% Part D access.

Could those numbers improve a bit with some of these results?

It is likely.

But as you know, that takes time, and there's a process when it comes to formularies.

We -- at this point in time, it's -- there's no promotion of this data.

We are clearly seeing an uptick when it comes to new to brand prescriptions.

Just to frame, we were before the top line, when we look at EMPA, including both Jardiance and Glyxambi, our new to brand share was 15%.

That's creeped up to 17% by the time of EASD.

And now we are at 21%.

Probably most relevant is the share shift that we've seen post EASD with endocrinologies going from 21% to 31% new to brand share, despite the fact that there is no promotion.

As John shared in his prepared remarks, we are planning to have the submission before the end of the year.

Now in terms of our positioning, in terms of promotion, that's something that we do not discuss prior to basically launching our promotion campaign, and our messages in this particular case for EMPA.

And any thoughts at all on Trajenta moving forward now that we have SGL2 data and how we will be competing with that drug?

Yes, nothing really changes when it comes to Trajenta.

We have I think a unique product that is uniquely differentiated in the DPP-4 class.

Trajenta think it is important to note is the fastest grower in that class.

So growth is very, very strong.

We are planning no changes at this stage.

Sue?

Yes, sure.

Tim, with regards to Alimta, we saw a couple of things this quarter.

Firstly, we saw a buying pattern where we had a buying this time last year that we didn't see this year.

And secondly, we have seen some softening on Alimta in later lines of therapy, in second line and beyond, which we had anticipated.

We've just launched Cyramza in the second line setting, and clearly the IO agents are also in the second line.

So we're seeing some softening there and in areas that we're not promoting.

Where we are promoting, i.e.

the first line setting and continuation maintenance, we continue to see good usage and continue to believe that we will continue to see good usage in those areas.

As you know, we're also doing combination studies with IO agents.

We anticipate getting some data next year on that.

So I wouldn't read too much into this quarter's trend.

Dave?

Yes, as it relates to evacetrapib, Tim, obviously we're disappointed in the outcome, but I guess your question is did we run the right experiment, and our answer is yes.

We sought to test a hypothesis whether robust CETP inhibition, which dramatically raised HDL and reduced LDL, would lead to a reduction in major cardiovascular events.

We ran that experiment I think exceedingly well in a population of interest, which was high-risk vascular disease.

And after three years of observation, the answer is robust CETP inhibition does not change major cardiovascular events with evacetrapib.

We can't say whether that would apply to other CETP inhibitors, but I think we're pretty confident that the experiment we ran was a good one.

And we have a definitive answer, thus the discontinuation of development.

This is Phil real quick, because we have a number of questions as you would imagine after the announcement that we're stopping the development of evacetrapib, just to clarify the kinds of robust increases we saw in HDL and decreases in LDL.

If you look at the Phase II study, you will notice we essentially had two main doses, a 100 milligram dose and a 500 milligram dose.

It's very clear that the 500 milligram dose produced both greater increases in HDL and greater decreases in LDL than the 100 milligram dose.

The 130 milligram dose we took into Phase III had been reformulated to be more bioavailable and give effects that would be more potent than the prior formulation.

And the effect that we saw from the initial data we've seen in our Phase III study would have been as we had expected and talked about in the past.

Additional HDL raising of roughly 120% plus, 130% numbers and greater than a 30% reduction on top of statins on LDL.

So very robust changes that for whatever reason unfortunately did not translate into a reduction in MACE events in this particular trial.

So more to come on that likely next year as Dave mentioned.

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

Vamil Divan, Credit Suisse.

Please go ahead.

Thanks so much for taking the questions.

I just had two questions if I could.

One, just around the pricing discussion from before, I just found interesting, slide 13 when you break down the push and pulls on the revenues.

I think this is the first quarter in a few that we've seen an impact on the price in the US neighborhood.

I wonder if you could just provide a little more color, if I'm correct, on what exactly drove that result relative to the last several quarters.

And the second one is just around -- we've received a few questions around -- obviously a lot of news, positive and negative, from the pipeline.

And you've generally endorsed the margin expansion story you talked about before.

You gave us pretty specific comments in the past around the ranges you expect for SG&A and R&D in that 2018, 2109 time frame in terms of percentage of sales.

Can you just talk to -- do you still feel comfortable with those numbers you gave before?

And maybe more broadly, how much are you factoring in from drugs that are still in the pipeline in terms of delivering actual revenue in that 2018, 2019 time frame as you think about hitting the margin target that you've outlined before?

Thanks.

Great.

Thank you for the questions.

On your first question, this is the first quarter in a while that we had a negative price effect for our US Pharma business.

If you do go back to some prior years, I think there's been some similar effects as we have gone through loss of exclusivity for products, particularly when we've engaged in helping to supply the market with generic forms of our product.

And that's what happened essentially this quarter, in particular with Avista where we had higher volumes, and in last year's quarter, four shipments of generic Avista or raloxifene, and that influenced the price calculation.

This is something that is particular to late life cycle as John mentioned in the very beginning.

This is one of the benefits essentially that the industry provided our innovation is that eventually you do lose patent protection, and patients and payers benefit from significantly reduced prices on those innovations.

Derica, on the forward-looking ranges for SG&A and R&D?

Sure, what we said is we will get our operating expenses, and that's defined as the sum of R&D and SG&A combined, to a level of 50% of revenue or less in 2018.

And we feel that given the results that we've seen here in the quarter, and really thus far through the first nine months of this year, we're very much on track to achieve that goal.

And we've also stated that we believe we can achieve that goal regardless of the pipeline output scenario that we're in.

So we've never known exactly which molecules would succeed and which would fail, but whatever the mix was, we were confident we could still achieve that margin expansion goal.

And we believe that with the payout we've seen thus far over the last couple years, we're even more confident that we will achieve that, and also that we will be able to expand margins throughout the remainder of this decade.

Great, thanks Derica.

Linda, if we can go to the next caller please?

Gregg Gilbert, Deutsche Bank.

Thanks.

Enrique, going back to diabetes, I'm not asking you to show your future strategic cards here, but what is Lilly doing to help shape the diabetes treatment guidelines post the EMPA results?

Perhaps you could share what you think a realistic, responsible goal would be for Lilly as a company in terms of how to frame the importance of that outcomes benefit for treating physicians.

And then my second question is on the Alzheimer's front.

Is Lilly exploring compounds that treat the symptoms of the disease, or are you focused only on disease modification as a goal?

A policy question as you approach R&D in that area beyond the later-stage assets.

Thank you for the question.

So Enrique on the first question, and Dave, if you'd like to take the second one.

Jan, obviously feel free to chime in as well if you like.

Well, we have the great fortune that we count within our ranks a number of people that have either participated in developing and writing some of these guidelines in the past, both in Europe and in the US, or people that have actually called for some of those committees.

We have to understand that those committees act in an independent manner.

For us, I think our role is to ensure that these bodies, whether it's the ADA or others, basically have full access to all of our data.

And we believe that the data speaks by itself.

I think it's very compelling, and when it comes to the overall benefit.

We do expect that the data is such that it would trigger some of these reviews.

I'm not going to speak to the outcome of that.

Thanks, Enrique.

Dave?

Yes, we're going to -- I will just give a quick commercial on December 8. Have a chance to talk a lot about our Alzheimer's strategy, Gregg, so you're welcome to join us then.

But in brief, we believe Lilly is very well positioned to capitalize on the emerging science in Alzheimer's that is primarily focused right now on disease modifying agents, but not exclusively.

And as you know, we have disease-modifying agents at every stage of development, but we also have important pre-clinical efforts on symptomatic agents because people even with the best-case scenario on disease modification will live with this disease for a long time.

They will suffer from the symptoms of Alzheimer's.

And we believe there is a space there.

We have some expertise there and we will exploit it.

Our main focus is disease modification, but we're interested in agents that could also help patients just live more comfortably or more safely with the disease.

Thank you.

And you know, I can add that we have a compound in Phase I, which has said Parkinson's as the heading, but that's also a potential symptomatic treatment for Alzheimer's disease.

And in the pre clinical space, we also have some efforts that actually build on Lilly's very long experience in the field of psychiatry.

So I think we are well positioned realizing though that it is an uphill battle to understand exactly what mechanisms could work for novel symptomatic treatments in Alzheimer.

But we are also very much involved in new ideas and to learn how the brain is functioning in psychiatry.

Seamus Fernandez, Leerink.

Please go ahead.

Thank you very much for taking the questions.

Just a couple of quick questions.

First off for Enrique, can you talk to us a little bit about the importance of Basaglar, and the decision to settle on this?

Was the settlement specifically applied only to the device, or does it apply more broadly such that other competitors seeking to enter the market would have to go through the same legal process that Lilly would?

And then in terms of more of a guidelines follow-up question, as we think about maybe just the guidelines and timing of guidelines around EMPA-REG, can you just update us on which guidelines are the most important?

As we've talked to payers and surveyed payers, the feedback that they have provided is that guidelines could be what really changes the -- their willingness to place Jardiance in a preferred position onto formularies.

And just as a final question, the performance of the insulin business, particularly looks really challenged internationally.

Can you talk in a little bit more detail about that trend and how you see that going forward?

Thanks a lot.

Thanks Seamus.

Enrique, it's all yours.

Very good, let me start with the last question on insulin overall.

There is a trend that has not been discussed much, but one of the impacts that we saw broadly when we look at the macro diabetes market is that insulin growth has basically slowed down.

We see that of course for mealtime insulins.

We believe that both SGLT2 growth and GOP-1 growth is partly the cause of that.

Now, having said that, when we look at our own performance, we grew Humalog 6%, 6% in the US and also 6% outside of the US, different regions with different growth.

Emerging markets of course much higher than that.

When we look at our human insulin Humulin, we were basically flat, we were at minus 1%.

The US did have positive growth driven by Humulin U-500, but we did have a decline in the emerging markets as a result of no longer participating in the Brazil tender.

So all in all, not big changes when it comes to our overall performance.

But we do see a slowdown when it comes to the overall insulin market.

You asked about Basaglar, clearly this is a very important product for us.

I'm pleased to report that so far our launches are going well.

We are -- uptake is very good, maybe slightly ahead of our expectations, whether it's Japan or Slovakia or the Czech Republic, which are the first three markets where we launch the product.

When we look at our performance, we look at the entire basal market.

We don't only look at Lantus.

In Japan, when we look at the entire basal analog market, we are now at 5.5% two months post launch.

So very pleased in particular with that performance in very important markets.

Now, clearly the settlement we have with Sanofi gives us certainty, which we value very highly.

What the settlement calls for is for us to -- we won't be able to sell products until December 15, 2016.

That means basically placing our products with a third party from a commercial perspective.

In the meantime, we can indeed contract, and we're of course submitting to -- in order to be able to get final approval for this.

You asked specifically about the settlement, and the settlement allows us to basically market and commercialize the Basaglar in the KwikPen on a global basis.

Just to remind you, that KwikPen is the product we utilize for Humalog as well, and there is a royalty bearing license specific to the US when it comes to Basaglar sales in this particular device.

At this point in time, we've settled, so that's water under the bridge.

And we are now -- have a certainty when it comes to the launch date, and we're preparing for that.

You asked about the guidelines and how important this would be and which bodies could issue guidelines.

Of course the American Diabetes Association is a key organization and is one that has issued this type of guidelines.

AACE, which is comprised of endocrinologists, also issues guidelines.

I'm not going to comment on the most important guidelines other than just to say that we expect a number of different bodies will be conducting some of these reviews.

There is no question that changing the guidelines will have a huge impact on the overall performance of Jardiance.

Thank you, Enrique.

If we can go to the next caller, please.

Colin Bristow, Bank of America.

Please go ahead.

Thanks for taking the question questions and nice work in the quarter.

In light of breakthrough designation received for abemaciclib, could you talk about the key points of differentiation in the clinical profile of this asset versus palbociclib?

And the anticipated timing to the data readouts would be helpful.

And another question on Basaglar, could you just comment on the pricing relative to Lantus in the launch territories?

And acknowledging that it is early, are you seeing any switching from Lantus patients or this is purely new patient acquisition?

And lastly, on your PCSK9, can you talk about potential points of differentiation versus the competition, and when we should expect any updates on Phase III progression?

Thank you for the questions.

We will go to Sue for the brief designation, the question on abemaciclib, differentiation versus the other marketed drug in the class and also timing for data readouts.

Enrique, what we're seeing in terms of relative price in Lantus.

And Dave and Jan, if will provide the answer on the PCSK9, that would be great.

Clearly we're very excited to have our second breakthrough therapy designation now.

For abemaciclib, this designation was based on the Phase Ib cohort expansion that we presented at San Antonio Breast last year.

And this shows single agent activity, a robust response rate, acceptable safety profile, durability.

We have a Phase II study that's ongoing.

We hope to replicate that data in that study.

We should hear next year and see data on that and hope to present that data at a scientific meeting next year.

We also have, as you are aware, two Phase III studies in breast cancer ongoing.

Again, we hope to have data readout on those in 2017 although we do have some interims.

And we have a lung cancer study specifically in KRAS.

With regard to our CDK4/6 inhibitor, we do believe we have a potential to have a best in class inhibitor.

As I said, we have single agent activity.

We're also able to continuously dose this agent, which we believe is important given that the whole point of it is to inhibit the cell cycle, so you'd want to continue to do that.

So we believe that that could be an important differentiator for us.

So we look forward to seeing the data and seeing the single agent data next year, and the Phase III data readouts after that.

Thank you, Sue.

Enrique?

So on Basaglar, in the three countries where we've launched, and I will briefly just highlight what our share is, when we look at the entire market, in Japan, as I mentioned, we are at 5.5%.

In the Czech Republic at3%, in Slovakia, it's a small market but I bring it up because we're at 11%.

We also launched in Germany, the UK, Sweden, Poland.

So we are really in full launch mode.

I think it's fair to say that the dynamics when it comes to pricing, they vary from country to country.

In some cases, there is a very formulaic path in terms of what's going to be the pricing that we would receive as a result of launching a biosimilar.

And that determines the price.

And some cases we have discretion in terms of where we price.

It is too early to basically say that the -- where these patients are coming from.

It is likely that in Slovakia, some of these patients are switches because the reimbursement level in Slovakia was lower when we launched.

And in this particular case, patients that are on Lantus, my understanding is that they have to pay the out of pocket on some of the difference relative to the Lantus price.

We have to see this story evolve.

But I think it's fair to say that so far we are pleased with our launch.

Great, thank you, Enrique.

And Dave, on the PCSK9?

I think we talked about this on prior calls, so I will be brief.

We have our Phase II program complete.

We believe there are key elements of differentiation of the molecule.

But as we evaluated our options as a company, we said we're looking at our strategic options for further development of the product.

We haven't completed that review.

So there's no real updates on progression or other alternatives at this point.

Great.

Thank you, Dave.

Yes, and the addition I can make, this antibody has a longer durability of the LDL lowering effect than compared to competitors.

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

Stephen Scala, Cowen.

Please go ahead.

Thank you, three questions.

When in 2016 are the interim looks for abemaciclib's Phase III trials?

Maybe you can narrow it down to the half -- first half, second half.

Secondly, what is going on with peglispro and potential further studies?

It seems as though we're on a path toward Lilly dropping the drug.

But maybe you can tell us why that is not the case.

And thirdly, on evacetrapib's ACCELERATE trial, what is the explanation for in July the study being deemed not futile, and in October the study stated to have no chance of success?

Were the analyses done using different criteria, or did something bad happen in those three months?

Thanks for the question, Steve.

So we will start off with you, Sue, for the abemaciclib interim timing question.

To you, Enrique, on the peglispro question and over to Dave on the evacetrapib question from Steve.

Yes, Steve, obviously, these are all event driven, so things can change.

But as we look at the Phase II data, we anticipate that we'd get the interim data the first half of the year.

And for the Phase III, probably the second half of the year.

Thank you, Sue.

Enrique?

Sure.

So just to remind everyone, we had of course in percentage efficacy when it comes to basic insulin.

Peglispro we had some risks that we felt needed to be discharged with the addition of clinical trials prior to us being able to make a submission.

What we have shared is that we were engaged in discussions with regulatory authorities as well as our advisors.

Those discussions are ongoing.

We have had some of those discussions.

And we both, the FDA and EMEA are still having some of the discussions with our advisors.

So it is something that I cannot make a comment on right now.

Thanks, Enrique.

Dave?

Yes, as it relates to evacetrapib, and the ACCELERATE study and how we were monitoring that and the interim futility, as we've said before, the study called for a single interim futility analysis.

That was the instructions we gave the independent data monitoring committee.

They conducted that analysis in July, and for their charter, instructed us to continue to study as planned.

We don't know what their analysis or conclusions were in July other than what they instructed us to do.

A few weeks prior to October, first week in October, they informed us they planned to meet again, and shortly thereafter, they communicated a new recommendation, which was to stop the study for lack of drug effect.

We then looked at their analysis, and we agreed with that collusion.

If you're wondering if there was some big surprise between those dates, the data doesn't seem to indicate that.

The independent data monitoring committee's job is to monitor the study on behalf of the patients for safety and making sure we're not subjecting people to study burden when it's unnecessary.

It was their judgment to continue during those two periods, and we respect their judgment.

And they need to keep the Company blinded to their analysis, which they did very well in July.

So that's really all we know.

And as we look at the data now, we agree with their recommendation.

So I think the positive thing is we did call for the interim look.

And we got that answer albeit a few months after we originally specified it.

Thank you, Dave.

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

Tony Butler, Guggenheim Partners.

Two brief questions, one again to Sue.

It's on ramucirumab.

And the question really is around much like Alimta, what has been the primary focus of sales today?

Where are you getting traction?

Does it continue to be in gastric?

What's occurring in colorectal cancer?

And the second question is silently Lilly's put together a number of assets outside of TGF beta in the immuno-oncology space, be it bispecifics, et cetera.

I'd be interested if you perhaps could frame the overall strategy for what you think you're going to be doing in this space.

Thanks very much.

Thank you Tony for the questions.

Sue, we will start off with you for the first question for sure.

If you want to comment on the second as well, then we will go over to Jan for additional commentary.

With regards to the Cyramza launches, we've now launched in gastric, lung and colorectal in the US, and in gastric in Europe and in Japan.

In the US, we're seeing a use actually in all areas with gastric use in about 40% of patients actually are getting treated now with Cyramza in second line and beyond.

Opportunity we believe is going to continue to grow that in the success line, but also we're getting third line usage, and we want to move that up to the success line.

We're seeing about 40% now of the patients that are treated in the US with Cyramza being in lung cancer in both squamous and in non-squamous.

Clearly lung cancer is getting much more competitive in the second line setting.

We're continuing to see use and believe and hear that there is a good place for Cyramza in lung cancer going forward.

And we are seeing some usage in colorectal cancer, although that isn't our focus.

Our focus is on lung and gastric.

We are seeing some uptake in the US in colorectal cancer.

In Europe, we have launched in the -- what we call the Wave 1 countries, the ones that you get access to.

And again in gastric cancer, we're getting good feedback and good uptake there.

We continue to work through a succession of launches in gastric cancer in Europe.

And in Japan, we launched the end of June, and feel very good about the uptake in our first quarter in this market.

It is a big opportunity and an unmet need in Japan, two to three times the incidents of gastric cancer there versus the US.

And the feedback so far is very good.

Clearly we have a succession of other hopeful approvals and launches in both lung and colorectal around the world to look forward to too.

Thank you, Sue.

With regard to IO, Jan, do you want to -- ?

Yes, it's a very exciting area.

And I think the situation today is that it can still be improved.

I think we are at the beginning here with the response rates up to 20% or somewhat higher, but many patients don't really respond very well.

So what we're doing in this space is to combine our expertise in cell singling and micro environments together with other companies' PD-1 axis agent.

And there are numerous clinical trials ongoing, which actually you don't see on our pipeline chart but I know Sue and others have communicated from the oncology business unit.

So I think it's very important to see also then other novel agents, how can they interact then with the checkpoint access?

In relation to checkpoints, we are also very interested in our bispecific antibodies since there are several other checkpoints that haven't been tested yet.

And having the PD-1 as one anchor and seeing the recent communication around that.

We also want to change the micro environment with oral agents, and TGF beta is one of them which is very interesting both potentially as a monotherapy but also then in combination with PD-1s.

We also want to test other micro environment oral agents which we have in the pre-clinical space.

And finally, it's not only important to activate T cells in the tumor, but you need to direct the T cells to the tumor because if you don't have them there, checkpoint inhibitors are unlikely to respond.

So we are new activities as we also have communicated with key partners such as IMMUNOCORP to actively direct T cells to tumor-specific antigens, which I think represents also a new avenue in immuno-oncology treatments.

David Risinger, Morgan Stanley.

Thanks very much.

I have a number of questions.

I guess first is on sola please.

So with respect to the DSMV looks at sola, do they assess futility, or is it impossible for the study to be halted early on futility?

The second question is with respect to the US price slide, slide 13, I was just hoping that you could explain a few points in a little more detail.

First, how it's calculated, and then second, since the negative impact of generics started at the beginning of the year, it wasn't quite clear why the year-to-date pricing is up 3% yet the third-quarter pricing is down 4% for the US business.

I just didn't understand what the inflection was in the third quarter when the negative impact from generics started to be felt quarters ago.

And third, with respect to the base Phase III decision, it seems like you will rolling that into Phase III.

But if we could just discuss the variables and timing of that decision, that would be helpful.

Thank you.

Thank you for the questions.

And Dave Ricks, since you've got evacetrapib base and also the product that had the dynamic with the shipping to authorize generics, if you want to take the lead on answering all three of them then we could complement, that would be great.

Let me start with the sola question.

And make sure I hit all these, Phil as we go through, or Dave.

So on sola, we have a more standard data safety and monitoring board like we do with many large studies.

Their mission is really one of monitoring safety.

We have communicated on prior calls we have not chosen to go for an option to have an interim look specified by the company.

And we would not instruct them to conduct such a review.

I will say that data safety and monitoring boards, as we set them up, they're independent, their mission is to look at study data on behalf of the patients, and it's not unprecedented that they may call us and say we think you should stop the study.

But we have not asked them to do that, and we're under no obligation to follow their recommendation.

Based on our observations from EXPEDITION I and II, you would note it took till about 40 weeks to see a drug effect.

And based on the enrollment curve we have for this, we don't see a lot of value in looking at an interim because we enrolled the study very rapidly.

And most of the benefit will come in the final months if the study behaves like EXPEDITION I and II.

So unfortunately, we will be waiting until late next year, the latest part of next year before we have the answer, and I would expect the study to run until that time.

On US pricing, you're correct to point out our year to date is 3%.

I think that's more indicative of the underlying trend we see, which is list price gains net of gross to net reductions for all the various mandated and commercial reasons.

The one-time event in Q3 which Phil tried to answer earlier was a shipment to our authorized generics partner.

It's a large shipment.

The way that deal's set up is we book revenue under the terms of that deal for the bulk product that they then distribute, creating another option for patients, a low-cost option for generic raloxifene.

There's clearly demand for that in the market.

And we're help to supply Lilly-made raloxifene for our authorized generic partner.

The way that deal's set up, those shipments happen periodically.

' It just happened one occurred in Q3, and it was subsequent enough to shift down the Q3 reported price below our ongoing trend.

But I think the year-to-date numbers are more indicative of our trend.

I think your next question was on the base inhibitor, and what would trigger that into Phase III.

We've previously communicated that as well with our partner AstraZeneca.

We designed this as a Phase II-III program.

We are actively enrolling into the Phase II components.

The primary objective of the first interim analysis, which we expect to happen in Q1 of 2016 will be a look at safety.

Base inhibitors, while very promising in terms of genetic validation, and their pharmacokinetics and dynamics, many have gone down on off-target safety.

So this is a first look at sustained dosing in a reasonably large cohort of people with Alzheimer's.

And that will then trigger expansion of that study and perhaps triggering another study and movement into the Phase III component of Lilly's pipeline and advancing to patients.

Was there another question?

Thank you.

Okay great.

Thanks, Dave.

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

Andrew Baum, Citi.

Please go ahead.

Two questions --

Andrew, we're having a hard time hearing you.

I'm not sure if you can do anything on your end to improve audio quality.

Sorry about that.

Is it any better?

Yes, it is.

Terrific.

So number one, what was the base line for the LDL within ACCELERATE since you already disclosed?

Second, I noted that you recently lost your fairly recently appointed head of immuno-oncology.

In terms of replacement and how you are thinking about that, I will be interested.

And finally, do you view your CSF1R monoclonal as competitive with others?

In particular, does it actually block dimerization, and how relevant is that in terms of potential efficacy?

Thank you for the questions.

At this point in time, we have not disclosed -- well, actually maybe we have, Dave, in the paper that was recently published.

Did we have the base line?

I do not believe we did.

I think we have commented that the study designed for ACCELERATE was to have people come in on a variety of statins that they may have already been on on the maximum tolerated dose.

I will just qualitatively say the patients who entered the study had LDLs in line with guidelines.

And it was really already on best standard of care statin.

We further reduced LDL as Phil mentioned in the mid-30s on top of that, thus the quite surprising to us, and I'm sure the field lack of MACE effect.

We will be disclosing more data about ACCELERATE, everything we've learned and probably more data exposures after that sometime in 2016 in a major cardiovascular meeting.

Thanks, Dave.

And Sue, on the question on IO staffing and the CSF1R molecule.

Yes, you will have to remind me on the CSF1R question.

With regards to IO staff, we actually have a really, really good team of people in New York and in New Jersey who are focused on IO.

And Michael Kalos heads our research group there, he came from U Penn.

We also recently brought in some IO experience in the medical and the development area.

And we have in our IO hub that we announced in New York and New Jersey recently moved one of our very experienced drug developers from Lilly.

So we feel very good about the expertise we've got there, and we're going to continue to built that internal expertise as well as through the partnerships.

I think we announced over the last year, nine different partnerships related to IO.

So our view is that we will use the external expertise and the internal expertise to continue to drive our IO experience.

And then Andrew, on your question for CSF1R, you ask if we are competitive with other agents, and if we down regulate something I did not catch when you said it.

My question was whether your monoclonal prevents dimerization to receptors, and to what extent is that an important competitive element versus other CSF1Rs in development.

Jan, I don't know if you can comment on that.

I can't comment on that.

From a timing perspective, we have completed our Phase I dose study and now have a dose of one arm.

We just announced actually a collaboration with AstraZeneca to do a combination of the PDL-1 with our CSF1R.

So we think from a timing and from a development perspective, we're as competitive if not more competitive than other companies.

The specifics around the dimerization, we're going to have to get back to you on, okay?

That's okay.

I think we have time for at least one more question.

Marc Goodman, UBS.

Please go ahead.

Morning.

I was wondering if you could give us an update on the CGRP program, and I was curious your thoughts about the oral therapy given that there was a trade there and a company actually acquired one and is considering moving forward with that.

And if you could just give us a little more detail on the diabetes product that moved in the pipeline there, the URI.

Dave, if you can comment on the CGRP update, and Dave and/or Jan on the oral approaches for modifying CGRP as well, and Enrique on the diabetes compound.

We're excited about our CGRP antibodies for two different conditions.

We're studying first for cluster headache, we announced earlier in the year.

We proceeded into Phase III, and those studies are enrolling as we speak for both chronic and episodic cluster.

And then on migraine, we finished our Phase IIb study in the first half of the year and actually read out the results in June.

We need some robust reduction in headache days, et cetera, and we will be proceeding into Phase III imminently.

We're excited about this program.

We think it's a very competitive molecule in a largely underserved space.

In terms of the oral products, there's been a long history of researching and attempting to create an oral CGRP inhibitor.

That's proved to be difficult I think for many of our competitors.

We are in the list of people who also have our own program in this area.

We don't have anything to say about that today.

We observed the trade that happened and wish them all the luck in the world.

But right now, all the data in terms of what looks like drugable CGRP inhibition are antibodies, those are the late-stage projects, and of course we have one of those.

Thanks, Dave.

Enrique?

The -- you are right that it's a little on the pipeline.

It's the [biochaperone] that we licensed from Adocia.

I think so far the program is progressing extremely well.

We're very pleased with the results, and as we continue to get results, we will be sharing them.

Thank you, Enrique.

Linda, let's try to squeeze in one more question if we can before John closes the call for us.

There was only one more question, perfect.

Jeff Holford, Jefferies.

Thanks very much for squeezing me in.

I know we're ahead of guidance in January, but previously you have talked about this gross margin line and how there can be some reversals of the benefit this year if we see FX going forwards.

I wonder Derica if you could just give us a little bit of a hint there.

If we saw FX rates, the major rates staying flat going forward into next year, how we might think of that gross margin into next year, just so we don't get any big surprise early next year.

Yes.

If you notice every -- each of our quarterly calls, we provide the absolute gross margin.

But then we also provide a slide in the packet where we illustrate what our gross margin would be without the effect of FX.

And if you're trying to get a sense of what the underlying run rate is, our gross margins are really running in that mid-70%s range.

So once all the FX noise is cleared out, which we expect to exhaust that once we move into 2016, you should expect we're going to be somewhere around that natural run rate of mid-70%s.

That's great.

Thanks very much.

And I also like the fact the IR team doesn't have any homework assignments out of the call.

So great we got through the queue this time.

John, if you'd like to close the call for us please.

Thank, Phil.

We appreciate everyone's participation in today's call and your continuing interest in our company.

We hope you will take part on our call on November 11 to discuss the baricitinib data that will be presented at ACR as well as our investor event in Boston on Tuesday, December 8, where we will discuss in detail our Animal Health business and provide a comprehensive overview of our efforts in Alzheimer's disease.

We hope these updates allow you to more fully appreciate the myriad opportunities before us, and why we're bullish on our future.

Finally, if you have questions we didn't discuss during today's call, please contact our IR team.

They will be standing by.

Thank you and have a great day.

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That does conclude our conference for today.

Thank you for your participation.

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