禮來公司 (LLY) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Q1 2016 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Please go ahead.

Good morning, everyone, and thanks for joining us for Eli Lilly and Company's first-quarter 2016 earnings call.

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

Joining me on today's call, and some from remote locations, are Derica Rice, our CFO; Dr. Jan Lundberg, President of Lilly Research Labs; Dr. Sue Mahony, President of Lilly Oncology; Enrique Conterno, President of Lilly Diabetes; Dave Ricks, who's President of Lilly Biomedicines; Chito Zulueta, President of Emerging Markets; Jeff Simmons, President of Elanco Animal Health; and Ilissa Rassner, Brad Robling and Phil Johnson of the Investor Relations 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.

Successful execution of our innovation-based strategy has put Lilly on a positive trajectory that became most evident in 2014 and 2015, particularly with regard to sustaining the flow of innovation.

Building on that positive momentum, 2016 is off to a good start.

Let me begin our call today by recapping progress we've made on our strategic objectives since our last earnings call in January.

Slide 4 should be familiar to you, depicting the four strategic objectives for our post-patent expiration period that we first laid out in January of 2015.

On our first strategic objective, grow revenue.

In the first quarter we grew revenue 8% on a constant-currency or performance basis.

Nearly all of this performance growth was driven by volume.

And in total, our new products, Trulicity, Cyramza, Jardiance, Basaglar and Portrazza drove 5 percentage points of this volume growth.

Starting with today's call, we'll include in our earnings calls an update on the performance of new products for their first three years on the market.

In addition you'll see that we've included additional product information in our supplementary slides.

Of course we welcome your feedback on this approach.

Turning to our next strategic objective, expand margins.

Our non-GAAP OpEx as a percent of revenue was up slightly compared to the first quarter 2015, due to the baricitinib milestone payments paid to Incyte, which totaled $55 million in the quarter.

Excluding these payments, our OpEx percent was flat.

We are on track to achieve our full-year guidance which, at the midpoint of our ranges, implies an improvement of 200 to 250 basis points in OpEx as a percent of revenue, even including the baricitinib milestones.

Under the heading of sustaining the flow of innovation, I've highlighted a few examples of the continued success we are experiencing.

Along with AstraZeneca, we announced that our BACE inhibitor advanced into the Phase 3 portion of the AMARANTH study in early Alzheimer's disease.

Taltz, discovered here at Lilly, was approved in the US for moderate to severe plaque psoriasis and initial shipments left our warehouse earlier this month.

And just yesterday, we received European approval.

Also olaratumab, a monoclonal antibody from our ImClone acquisition, has now been submitted to US and European regulatory authorities for soft tissue sarcoma.

During this call will provide a more complete list of the pipeline progress we've achieved over the last three months.

Finally, on our strategic objective deploy capital to create value.

During the quarter we returned over $800 million to shareholders through our quarterly dividend and ongoing share repurchase plan.

On the business development front, we completed a number of smaller deals, including the Aratana deal to bolster our companion animal business.

And we continue to actively pursue external opportunities to enhance our future growth prospects.

In summary, I'm confident that we are on track to achieve each of our strategic objectives and assure you that their achievement remains a top priority of our entire management team.

Now let's move on to review the key events that occurred since our last earnings call.

On the commercial front, in Europe following European commission approval in late January, we launched Cyramza for second-line non-small cell lung cancer and for second-line metastatic colorectal cancer.

We also received European commission approval for, and earlier this month launched, Portrazza for first-line EGFR expressing squamous non-small cell lung cancer.

As I just mentioned, earlier this month we launched Taltz in the US for the treatment of moderate to severe plaque psoriasis, following FDA approval in the first quarter.

And also here in the US we launched the Humulin Regular U-500 KwikPen.

It was a busy three months on the regulatory front as well.

In addition to the US and European approvals of Taltz and the European approval of Portrazza, in Japan we submitted baricitinib for the treatment of moderately- to severely-active rheumatoid arthritis.

This represents an outstanding achievement as regulatory submissions in the US, Europe and Japan occurred within a span of less than 40 working days.

This also demonstrates that our focus on development execution is paying off.

As an update to the submission announcement we made with Incyte, here in the US the FDA has now accepted our submission for baricitinib and we look forward to regulatory action in early 2017.

As I mentioned earlier, in both the US and Europe, we submitted olaratumab for the treatment of soft tissue sarcoma.

In collaboration with Boehringer Ingelheim we submitted the once daily combination tablet of empagliflozin and metformin XR to the FDA.

And on the animal health front, we received US approval for Imrestor, a non-antibiotic animal health product for reduction of the incidence of clinical mastitis in dairy cows.

Imrestor is a protein and a first-of-its-kind therapy that helps support the natural function of a dairy cow's immune system during the critical time around calving when the risk for mastitis is heightened.

On the clinical front, we announced a change to the EXPEDITION3 trial solanezumab in patients with mild Alzheimer's Disease, making the ADAS-Cog 14 cognitive scale the sole primary endpoint.

Functional outcomes will be evaluated as key secondary endpoints.

Along with AstraZeneca, we announced that AMARANTH, a Phase 2/3 study of AZD3293, an oral beta secratase cleaving enzyme, or BACE, inhibitor currently in development as a potential treatment for early Alzheimer's disease, will move into the Phase 3 portion of this Phase 2/3 seamless trial.

This movement into Phase 3 triggers a milestone payment from Lilly to AstraZeneca which will result in a second-quarter pretax charge of $100 million to Lilly's GAAP and non-GAAP research and development expense.

As mentioned at our December 8 investment community meeting, the transition of AMARANTH into Phase 3 will also trigger the start of a second Phase 3 study with AZD3293.

That study, called DAYBREAK, will focus on patients with mild Alzheimer's disease and is scheduled to begin enrolling patients in the third quarter this year.

Similar to the EXPEDITION3 trial of solanezumab also in patients with mild Alzheimer's disease, DAYBREAK will use a single cognitive primary endpoint, in this case ADAS-Cog 13.

Further the AMARANTH trial, in patients with early Alzheimer's disease, will also be changed to use ADAS-Cog 13 as a single primary endpoint.

So we are consistently moving to a single cognitive primary endpoint across our trials in the early stages of Alzheimer's Disease.

In following the successful results of the EMPA-REG outcome trial, along with Boehringer Ingelheim, we announced plans to conduct two outcome trials investigating Jardiance for the treatment of people with chronic heart failure.

The trials are expected to begin within the next 12 months and are planned to enroll people with chronic heart failure both with and without type II diabetes.

On the business development front, we modified our existing baricitinib agreement to provide Incyte with the right to develop ruxolitinib, or Jakafi, for graft-versus-host disease.

We retain rights to develop baricitinib for this indication.

As part of this deal, Lilly will receive a $35 million upfront payment that will be recognized as other income in the second quarter, both in our GAAP and non-GAAP results.

On the animal health side of the business, yesterday we announced that we licensed rights to Aratana's Galliprant, an FDA-approved therapeutic for the control of pain and inflammation associated with osteoarthritis in dogs.

This deal includes an upfront payment of $45 million plus additional milestone and royalty payments upon meeting certain development, regulatory and sales milestones.

Galliprant will support the growth of our companion animal therapeutics segment, one of the key growth engines for our animal health business.

In other news, the UK High Court decided the Alimta vitamin regimen patent would not presently be infringed by Actavis marketing pemetrexed trometamol in the UK, France, Italy and Spain, with instructions to dilute the product only with dextrose solution.

We plan to appeal this decision to the UK Court of Appeal.

Finally in the first quarter, we repurchased $300 million of stock, leaving $2.65 billion remaining on our $5 billion plan.

During the quarter we also distributed over $500 million to shareholders by our dividend.

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

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

Thanks, John.

Slide 7 summarizes our presentation of GAAP results and non-GAAP measures while slide 8 provides a summary of our GAAP results.

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

So please refer to today's earnings press release for a detailed description of the year-on-year changes and our first-quarter GAAP results.

Of note, you will see in our GAAP other income and expense, we have recognized a pretax charge of $204 million, equivalent to $0.19 per share related to the significant deterioration of the Venezuelan economy and its impact on the bolivar.

This charge represents the effect of evaluate our bolivar-denominated assets and liabilities at a rate of 275.

Moving to non-GAAP measures on slide 9, you can see that Q1 2016 revenue increased 5% compared to Q1 2015, reaching $4.865 billion.

Foreign-exchange rates continue to provide a top-line headwind.

Excluding FX, our Q1 revenue increased 8%, driven by higher volume from Trulicity, Cyramza, Humalog, Jardiance and Trajenta, among others, as well as got a take-back of North American rights for Erbitux.

The effect of price was 1%.

Gross margin as a percent of revenue decreased 1.9 percentage points to 76.3%.

This decrease was primarily driven by that the fact of foreign exchange rates on international inventories sold.

This effect resulted in a benefit, both this quarter and last year's quarter.

But the benefit this quarter was substantially smaller than the benefit realized last year.

Excluding this FX effect, our gross margin percent decreased by 40 basis points, going from 75.3% in last year's quarter to 74.9% this quarter, driven primarily by product mix and the timing of production.

Total operating expense, defined as the sum of R&D and SG&A, increased by 7% compared to Q1 of 2015.

Breaking this into its component parts, marketing, selling and administrative expenses declined 1% while R&D increased 17%.

The reduction in marketing, selling and administrative expenses was due to the favorable impact of foreign exchange rates and lower litigation expenses, partially offset by expenses to support new products.

The increase in R&D expense was driven primarily by higher late-stage clinical development costs, including $55 million in milestone payments to Incyte, triggered by regulatory submissions for baricitinib in the US and Europe.

These milestone payments added over 5 percentage points to R&D expense growth and over 2 percentage points to total operating expense growth.

Excluding these milestone payments, total operating expenses increased about 4.5% which was slightly slower than revenue growth.

Other income and expense was income $55 million this quarter and this represents a reduction of $38 million compared to Q1 2015, primarily due to lower net gains on investments.

Our tax rate was 17.9%, a decrease of 5 percentage points compared to the same quarter last year.

This decrease is due to a net discrete tax benefit of roughly $50 million this quarter and the benefit of certain US tax provisions, including the R&D tax credit, that were in force during this year's quarter but had lapsed during last year's quarter.

This was partially offset by a higher percentage of earnings in higher tax jurisdictions this year compared to last year.

At the bottom line, net income decreased 4% and earnings per share decreased 5%.

While I'll cover the FX effect on our income statement in a subsequent slide, I would highlight that when excluding the effect of FX, non-GAAP net income and EPS actually increased 5% this quarter.

Slide 10 provides a reconciliation between reported and non-GAAP EPS and you'll find additional details on these adjustments on slide 23.

Now let's take a look at the effect of price rate and volume on Q1 revenue growth.

On slide 11 in the yellow highlighted row at the bottom of the table, you'll see the 5% revenue growth I mentioned earlier.

When compared to Q1 last year, the strengthening of the US dollar against many foreign currencies was a headwind to revenue growth, as shown by the 3% negative effect from FX this quarter.

On a performance basis, our worldwide revenue grew 8% driven by volume growth of 7 percentage points with price growth of 1 percentage point.

By geography you'll notice that US pharma revenue increased 17% driven by volume, and to a much lesser extent, price.

Trulicity, Humalog, Jardiance and Humulin all made substantial contributions to US pharma volume growth.

Having completed the take-back of North American rights for Erbitux on October 1, we also benefited from booking a full quarter's end sales of Erbitux.

The decline in EuCan revenue of 5% was entirely driven by the negative effect of FX, while on a constant-currency or performance basis, EuCan revenue increased 1%.

This increase was driven by volume gains on many products, most notably Trulicity and Cyramza, up but also including Basaglar, Forteo, Jardiance, Humulin, Trajenta and Strattera that more than offset a substantial reduction in European Cymbalta sales resulting from loss of data package exclusivity.

Excluding Cymbalta, EuCan sales increased 10% in constant-currency term.

In Japan, pharma revenue increased 16% in total, driven by high teens volume growth.

You'll also see a slightly larger negative impact from price as the latest round of price revisions in Japan took effect on March 1. On a constant-currency basis Japan pharma revenue increased 14% and this performance growth was attributable to a number of products led by Cyramza but also including Strattera, Basaglar, Trajenta and Alimta, as well as by Cymbalta following a restructuring of our agreement with Shionogi last April.

Turning to emerging markets, we saw revenue decline 17%, driven primarily by the negative effect of foreign exchange.

On a performance basis, emerging markets revenue decreased 7% due to the continued impact of generics, including Cialis in Brazil and Korea and Alimta in Australia and Korea, the impact of the Brazil federal Humulin tender and stocking patterns in Russia and China.

Also this quarter our pharma revenue in China decreased 14%, or 9% on a constant-currency basis, with the growth rate negatively affected by high customer buying in Q1 of last year.

Adjusting for customer buying patterns, we see growth in our China pharma revenue.

Turning to animal health, we completed the Novartis Animal Health acquisition on January 1 last year, so year-on-year revenue growth comparisons are now at an apples to apples basis.

This quarter Elanco Animal Health revenue increased 1%.

Excluding the negative effect of FX, it actually increased 5%.

This performance increase was primarily driven by US products, both food animal and companion animal, including contributions from recently launched products Interceptor Plus and Osurnia.

As I mentioned a moment ago, excluding FX on worldwide revenue, our worldwide revenue grew 8% this quarter with nearly all that growth, 7%, coming from higher volume.

Our new products, Trulicity, Cyramza, Jardiance, Basaglar and Portrazza, were the engine of our worldwide volume growth.

Slide 12 shows these products drove over 5 percentage points of volume growth.

The take-back of Erbitux contributed 1.7 percentage points of volume growth, while in total, Humalog, animal health, Trajenta, Forteo and Alimta contributed over 2 percentage points of our volume growth.

You'll also see that the loss of exclusivity for Cymbalta and Evista, while largely in the rear-view mirror, still was a negative drag of over 150 basis points on our volume growth this quarter.

To anticipate a couple of likely product-specific questions, on this slide you can see that Humalog contributed nearly a full percentage point to our worldwide volume growth.

You'll also see in our press release, however, that our US sales declined 14% this quarter.

This decline is not reflective of the underlying trends.

Adjustments for estimated rebates and discounts primarily related to the fourth-quarter of last year affected our reported results for Q1 this year.

We believe the underlying revenue trend for Humalog is similar to the first nine months of 2015, representing mid single-digit growth.

And for Alimta, you can see that it contributed about 30 basis points to our worldwide volume growth this quarter.

I'd highlight that in the US our year-on-year growth rate benefited by a few percentage points from customer buying patterns, while in Europe our sales benefited from increased clinical trial demand.

We continue to be exposed to generic entry in multiple countries in Europe during 2016 that may erode sales significantly from Q1 levels.

Now let me turn the call over to Derica.

Thanks, Phil.

While Phil quantified the contribution to our worldwide volume growth coming from new products, I'd like to share some color behind the numbers.

While is too early to say much about Portrazza, I will provide a brief update on the other four new products: Trulicity, Cyramza, Jardiance and Basaglar.

During the Q&A session Sue and Enrique will be happy to provide more details.

As you can see on the graph on slide 13, our new products generated $325 million in revenue this quarter, led by Trulicity and Cyramza.

This represents about 7% of our total worldwide revenue.

After limited access for Trulicity in 2015, following its approval in late 2014, sales have accelerated this year.

Both commercial and Part D access are now in excess of 70%.

And Trulicity's total prescription share of the GLP-1 class is now 17% and growing, making Trulicity the second-most prescribed GLP-1 brand.

During the quarter, the class continued to grow at over 30% and we see continued upside from here.

For Cyramza, this product continues to grow, driven largely by increasing sales in Japan and Europe.

And sales growth in the US has slowed due in part to the competition in from the immuno-oncology agents.

Japan now makes up nearly 30% of our Cyramza's global sales.

We've had a strong launch in gastric cancer and we look forward to regulatory action in Japan later this year on our submissions for non-small cell lung cancer and metastatic colorectal cancer, while in Europe we just launched those two indications during the first quarter.

With Jardiance, we've seen a substantial increase in our new-to-brand share of market with both endocrinologists and primary care physicians.

In total, our new-to-brand share approached 30% in Q1, nearly double what it was a year ago.

The overall class continues to experience significant growth, with class total prescription volume up about 45% in the first quarter.

We continue to see regulatory approval of EMPA-REG outcome data as a catalyst for growth for both the class and for Jardiance.

The other catalyst for growth is inclusion of these data in treatment guidelines.

In general, we expect guideline updates to come after regulators implement label updates and we are pleased with the first treatment guideline update issued in Canada during Q1.

Basaglar is early in its global launch cycle and is now marketed in a number of European countries, Japan and Canada.

Early share of the total basal insulin market varies greatly by country.

To provide an idea of the differences in rates of adoption, Basaglar's share of market is 17% in Slovakia, 11% in Japan and 2% in Germany.

We look forward to launching Basaglar in the US in mid-December this year.

Finally, our newest product, Portrazza, launched in the US in December and in Europe earlier this month.

Moving to slide 14, you'll see the effect of changes in foreign exchange rates on our Q1 2016 results.

As mentioned earlier, this quarter FX was a top-line headwind, reducing revenues in US dollars by over 3 percentage points.

Excluding FX, revenue grew 8%.

In performance terms, growth in non-GAAP cost of sales, at 12%, outpaced revenue growth due to the negative effect of product mix and to lower production volume.

Excluding FX, non-GAAP operating expense growth also slightly outpaced revenue growth due to the baricitinib milestone payment.

Excluding these payments, non-GAAP operating expenses grew more slowly than revenue.

Excluding FX, non-GAAP operating income increased 1% while a lower tax rate led to a 5% increase in non-GAAP EPS.

Moving onto our pipeline update, slide 15 shows our pipeline as of April 19.

Changes since our last earnings call are highlighted with green arrows showing progression and red arrows showing movement out of the portfolio.

In terms of advancement, you'll see that Taltz was approved by the US FDA and by the European commission for psoriasis.

Olaratumab was submitted in the US in Europe.

The BACE inhibitor with AstraZeneca successfully passed its safety assessment and advanced into Phase 3. And two earlier-stage molecules advanced: our notch inhibitor for cancer moved into Phase 2 and a dyslipidemia molecule moved into Phase I. Since our last update, we also terminated development of three Phase 2 molecules and a Phase I molecule for diabetic nephropathy.

Slide 16 shows select new indications and line extensions.

You'll see the advancement of the empagliflozin/metformin XR combination tablet into regulatory review, as well as the initiation of Phase 2 work for baricitinib in both atopic dermatitis and lupus.

Turning to slide 17, let's recap the progress we've made on the key events we projected for 2016.

Since our last call, we've rated green check marks for the transition of the BACE inhibitor for early Alzheimer's disease from Phase 2 to Phase 3, a number of regulatory submissions including US and European submissions of Olaratumab, Japanese submission of baricitinib and US submission of empa/met XR and regulatory approvals for Portrazza in Europe and Taltz in the US and Europe.

We're off to a strong start this year and we look forward to sustaining this momentum throughout the remainder of the year and into the years to come.

Now turning to our 2016 financial guidance, the first thing you may notice on slide 18 is that there is a lot of yellow highlighting changes from our last call.

For our non-GAAP guidance, what this really represents however, is just two changes.

First, we lowered our full-year non-GAAP tax rate and raised our non-GAAP EPS range by $0.05 to reflect the discreet tax benefit recognized this quarter.

Second, we've updated our line item guidance for revenue, gross margin percent, SG&A and R&D to reflect recent foreign exchange movements.

At the bottom of the slide, you'll see the major foreign-exchange rates used for our revised guidance.

We've also updated our GAAP guidance for other income and EPS to reflect the Venezuela charge Phil mentioned earlier, as well as charges related to the closure of a manufacturing facility and Novartis Animal Health integration costs.

It's important to point out that our outlook for the underlying fundamentals of our business in 2016 has not changed since our last update in late January.

To illustrate this point, let's look at an updated version of a slide we showed you when we provided our initial 2016 guidance in early January.

You may recall that the version of slide 19 we showed in early January highlighted our expectation for non-GAAP EPS growth of roughly 15%, excluding the effects of foreign exchange.

As you can see, we continue to expect mid-teens non-GAAP EPS growth on this same basis.

As I mentioned earlier, we continue to expect robust operational growth in non-GAAP EPS, driven by positive leverage as revenue growth exceeds operating expense growth.

This reflects our commitment to reduce operating expenses as a percent of revenue and expand margin.

In summary, we are off to a good start to the year.

Excluding FX, we drove revenue growth of 8% with growing contributions from our recently launched products which this quarter drove 5 percentage points of our growth.

We are pleased to add Taltz to this group beginning in the second quarter.

We have strong momentum behind our innovation-based strategy.

Yet again, in Q1 we made significant progress advancing our pipeline.

Among many others, key milestones included the approval and launch of Taltz for psoriasis, the submission of Olaratumab for soft tissue sarcoma and the transition of our BACE inhibitor for early Alzheimer's disease into Phase 3 testing.

And as John mentioned when he kicked off the call, we continue to make steady progress against each of our strategic objectives: driving revenue growth, expanding margins, sustaining the flow of innovation and deploying capital to create value.

Continued execution of this strategy should position us to make it major contributions to medical progress and create value for shareholders.

This concludes our prepared remarks, I'll now turn the call over to Phil to moderate the Q&A session.

Great, thanks, Derica.

As we have on most recent calls, if you would do us a favor and your colleagues that are going to be asking questions after you, of limiting your questions to two or a single two-part question, that would be very much appreciated.

Dave, if you could give the instructions for the Q&A session and then go to the first caller please.

(Operator Instructions)

Gregg Gilbert, Deutsche Bank.

Thank you.

First on sola, how would you characterize your interaction with regulators around the decision to tweak the endpoint?

And secondly, can you remind us on abemiciclib, update us on what you will learn and when, over the course of this year?

And any updated thoughts on positioning and differentiation?

Thanks.

Great, Gregg, thank you for the questions.

Dave, if you'll take the first question on regulatory interactions for Solanezumab.

And Jan, feel free to complement that answer if you'd like.

And then Sue, if you'll give the update on what we expect for the rest of the year for abemiciclib and how we see this one fitting into CDK 4/CDK 6 landscape.

Dave?

Sure.

As we said in the March press release, we have made this change and it's really a decision of the sponsor.

We inform regulators but don't actually seek a formal approval step.

That's really in the category of a pre-submission or submission meeting.

FDA and other regulators have been consistent over the last four or five years that they would like to see co-primaries in these studies.

However, I think Lilly's belief -- and I don't think we're alone in the field -- is that the field has moved in that both detecting changes and function in these early patients, as well as maybe the utility of the scales we're using is more questionable than before.

However cognition is clearly something that can be detected easily.

As you know, we've moved cognition to the key secondary endpoint, or function rather, so that we'll continue to measure this.

If we hit a statistical significance on that as a key secondary, we feel confident that this is not very different in a scientific sense from dual primaries.

And I think it does allow us some additional degrees of freedom in submission to look at two different ways to measure function in early Alzheimer's patients.

Jan here.

I can add that we will give FDA a robust analysis of the overall Solanezumab's effect on cognition as well as function, including also the analysis of caregiver burden and various biomarkers, including imaging of amyloid and tau as well then as safety with the micro-hemorrhage and edema detection using MRI.

I think we will have a comprehensive program.

Thank you, Jan.

Sue?

With regards to the question on abemiciclib, we continue to believe that we could have a best-in-class CDK 4/6 inhibitor based on the differential potency of CDK 4 and 6, based on the ability to continuously dose this agent and on the robust single-agent activity that we have seen.

We have submitted the interim data for one which is the single-agent Phase 2 single-arm study.

We've submitted that to ASCO and we have a presentation at ASCO in on the Friday.

That is based on the eight-month interim analysis.

We hope to have the final data before ASCO and to include that data in the presentation.

Additionally, as you are aware, we have two Phase 3 trials ongoing: MONARCH 2 AND MONARCH 3. The final data on those studies should be next year, although we do have interims planned for this year.

And they are based on events.

Thanks.

Dave, we can go to the next caller please.

Jami Rubin, Goldman Sachs.

Thank you.

John, my first question for you is generally if you could talk about the drug pricing headwinds to date.

You've been obviously very proactive in defending the industry and calling attention to the big difference between list and realized price.

Don't know if politicians understand that yet but I think it's an important story to be told.

Can you talk about how -- is the 4% price that you took or were able to sustain in the first quarter, how sustainable is that?

What you see with respect to realized price going forward for the industry?

And if you could comment on whether or not there has been a change in gross to net in various therapeutic categories.

Specifically I think we've seen some differences in diabetes, if you can comment on that.

And then Sue, if you could comment generally on the impact of your oncology portfolio from PD-1 antibodies.

We saw bit of the impact this quarter but generally, if PD-1 antibodies in monotherapy work in front-line lung, what sort of impact should we see across your portfolio?

Thanks very much.

Great, thanks, Jami.

John?

Okay, Jami, thanks for your question.

I think a bit of the irony to me is as we hear a lot of rhetoric about drug prices increasing in the -- I guess what you'd say -- the lay press, I don't think there's ever been a time when this marketplace in the US has ever been more competitive.

I think that means ultimately that medicines that provide clear differentiation and clear value propositions are going to fare better in the future here than medicines that can be easily commoditized, which really don't adequately differentiate themselves from lower-cost alternatives.

Your question about is the 4% net price we realized in the US in the first quarter is sustainable, I think that's difficult to say.

Obviously there are different dynamics going on within different categories.

For Lilly and I think for most Companies, I think diabetes tends to be one of the most price-competitive parts of the business.

I think we've seen that and felt that with respect to net realized prices on our insulins, for example, over a rather prolonged period of time.

I recently, I think, in the Wall Street Journal piece, talked about Lilly's net realized price.

Clearly we get better pricing on commercial plans by far than we get from government programs where there is, largely based on the regulatory mandates, a much greater discount realized.

I think rather than -- to answer your question -- rather than to say there's going to be different pressure in different therapeutic areas, I think it's going to come down more to the products that are competing against one another.

And I think products really do differentiate themselves.

We believe that a number of the products we're launching really do differentiate themselves.

And therefore, while uptake, as you know, tends to be somewhat slower today based on getting listed on formularies because of the way the calendar often works, we nonetheless remain very optimistic about the prospects for those new products.

Thanks, John.

Sue, on the PD-1 impact to our oncology franchise?

Thanks, Jami, for the question.

Yes, we are seeing an impact in the second-line setting on Alimta and Cyramza programs of from PD-1 uptake.

I think it's hard to say from a first-line perspective, what may or may not be the impact because there are a lot of questions that remain at this point in time.

Will they be selective patients?

There's a lot of combo studies ongoing, for example, with Alimta.

We have a combination studies with Cyramza as well.

I think there's a lot of questions to be asked that we will see over the coming months and years.

I firmly believe that we will continue to have an important role for both Alimta and Cyramza and Portrazza in the non-mutated patient population.

What's going to be key going forward is really identifying those patients that benefit from particular agents and the role of combination therapies.

Also I think of note, it's important that as we're looking at our Cyramza cells, the majority of our Cyramza cells actually now are in the GI setting with both gastric and colorectal cancer.

I continue to see -- although the lung space is going to continue to be increasingly competitive, we have plenty of opportunity to continue to grow in the other indications as well.

Dave, we can go to the next caller please.

Tim Anderson, Sanford Bernstein.

Thank you, a couple questions.

On Jardiance, obviously the product has a natural tailwind because of EMPA-REG.

But other as SGLT2s are presumably trying to preserve their positioning in the market.

If I look at slide 38 on Jardiance new-to-brand share of the market, it suddenly seems flat from the start of 2016.

I'm wondering if you could talk about the dynamics in 2016 in terms of formulary shifts and possible price competition as other companies, like J&J, are trying to hold share here.

I'm trying to understand why slide 38 shows what it does.

And then second question is on Alimta patent litigation in the US.

Is year-end the likely time frame when we would have an Appeals Court decision?

And also related to Europe, what is your guidance for 2016 assume about European generic entry into the markets that were covered by that earlier UK ruling?

Great, Tim, thanks for the questions.

Enrique, if you'll take the first question on what we're seeing with Jardiance new-to-brand trends and what we're seeing in terms of formulary shifts.

And then, Sue, for the patent situation for Alimta.

Enrique?

Very good, Phil.

We are pretty enthusiastic about prospects with Jardiance overall, not just in US but outside of the US.

Probably the most significant aspect to our overall growth for this important product is going to be the overall class growth.

We are pretty pleased with the type of share growth that we have seen when it comes to new patient share and total prescriptions.

There are indeed some dynamics at the beginning of the year when it comes to switching and so forth but our overall access is very good.

It's 85% plus in commercial and over 65% when it comes to Part D access.

The one piece that we have a watch out for is, once again when we look at the class growth.

Even though total prescriptions are still growing above 30%, 46% I believe for year-to-date, when we look at new patient growth, that is basically in single-digits.

Now, we may recall that last year we saw the class starting to slow its growth with some of the reports when it comes to DKA and so forth.

With the EMPA-REG outcome data we saw some rebound in overall class growth when it comes to, once again, new patients.

So overall I think we have to wait and see.

Once again I think what I have shared is that it is critical that we see both a new label and new treatment guidelines on both of them, each of them independently, would represent important inflection points.

I do want to provide a little bit of color on Jardiance outside of the US because we are seeing some acceleration of the overall class growth outside of the US.

We see our share, whether it's Germany, at over 30%; Spain at 22%; Italy at over 40%; and in the UK and Canada over 10% basically a few months after launch.

All of the trends are very positive and we are actually very bullish when it comes to Jardiance overall.

Great, thank you, Enrique.

Sue?

Yes, with regards to the Alimta patent, in the US, as a reminder, we won our infringement and validity cases at the District Court.

This has been appealed but we don't have a date set yet for the appeal, although we do anticipate that a decision would be expected towards the end of the year, as you said.

With regard to guidance, we continue to actively defend our patent and believe that it is valid and would be infringed by the launch of generic products.

That said, as we mentioned in our guidance call, we have been prudent in our guidance and it does contemplate the entry of at least one competitor with an alternate salt form diluted in dextrose across major European countries.

Thank you, Sue.

Andrew Baum, Citi.

A couple questions on Jardiance to Enrique.

Firstly, given the excitement over the EMPA-REG outcome, have you asked for benefits and the rapidity of quickly the curves diverged in that trial, I imagine recruitment would be fast.

These trials, if there is a real achievement effect in heart failure, could be completed very quickly.

So in your expectations, do you think you could get a heart failure label for Jardiance by the end of 2020 or somewhere around that time frame?

That's the first question.

Second question is do you plan to include Entresco in the control arm, the patients with reduced fraction at CHF within either of those two planned trials?

Great, Andrew, thank you for the questions.

Enrique, were you able to hear those fine?

I did, yes.

Clearly we are very excited about the opportunity to conduct both trials when it comes to heart failure for Jardiance.

I'm not in a position at this stage, as we're finalizing our protocols, to comment on whether we're going to be looking at Entresco and so forth.

As you can imagine, all of those are important considerations as we are finalizing that.

Clearly we are trying to expedite this trial as much as possible.

We did see a very fast separation of the curves in EMPA-REG outcome.

That repeated itself in the heart failure trial.

The hypotheses likely yes, but we do need to conduct the trial.

I don't want to speculate on what the indication would read like.

We need to conduct these trials and see what the results are and then we can discuss more appropriately.

I'm unable to provide a timing but given what we've seen, you can expect that we're going to conduct these in an as expedited fashion as possible.

Great, thank you, Enrique.

Mark Schoenebaum, Evercore

Hey, guys, a couple things.

Number one, hey, John and Derica, I'd like to congratulate you for taking leadership in the mega drug biotech universe four or five years ago, providing long-term guidance and delivering on it.

Number two, Derica, this is one of these questions that's always awkward for an analyst to answer, but I think you owe it to your shareholders to come clean here.

Did you root for the Blue Devils or the Hoosiers in the NCAA tournament?

(laughter) And answering that you rooted for both of them is an unacceptable answer.

And then I have a follow-up.

(laughter) Well, Mark I rooted for the Hoosiers and I actually serve on the Board of Trustees, so my roots run deep.

(laughter)

There were just nasty rumors out here on the East Coast that you were rooting for the Blue Devils.

I just wanted to clear that up.

I thought you had better ethical integrity than that, but I appreciate it.

And maybe, John, on the part, specifically back in reimbursement, where Jami was probing you guys on, on the specific proposal that Part B, that CMS has outlined for the way Part B works, I'd like to know your thoughts on those proposals.

Are those good ideas, bad ideas, incomplete ideas?

Do those form a structure for where things are going to go going forward in the Part B market, which of course is a relatively small part of the drug market.

And number two, Enrique, we've asked you about this in prior calls, just that it continues to emerge, that the oral GLPs, mainly out of Novo Nordisk, seemed to look pretty good, and if they continue to look that good, and if they continue to look that good it could be obviously some type of existential threat to the GLP business like Trulicity.

Love to hear updated observations on what's going on there.

Thanks a lot.

Great, thanks, Mark, and just for the record, it was Ilissa that was rooting for the Blue Devils.

(laughter)

John, if you'd go ahead and handle the Part B proposal question.

And then, Enrique, if you'll give your updated thoughts on how you see the oral GLP-1s evolving and potentially being a threat to the injectable franchise.

Mark, thanks for your question.

This is John.

This so-called Part B that is the pilot pricing scheme which has been laid out by CMMI within CMS, we believe it's bad policy and ultimately we believe it's bad medicine.

The term is "pilot" but it's going to be virtually cover -- it's going to cover everybody and it's going to essentially, I think, lay out experiment on the backs of some very sick people who we want to make sure remain able to gain access to the medicines they need and not be directed toward a certain course of treatment based on how this formula is going to, in essence, change physician -- or potentially change physician prescribing behavior.

We've made it very clear that we are opposed to this.

We've made our elected officials very clear that we're opposed to this and will continue to fight it.

Thanks, John.

Enrique?

Mark, first I have to say that the Blue Devils are planning to come back next year, okay?

(laughter) Your question on oral GLP-1s, first providing some context on Trulicity, because I think it's important as we look at the type of acceptance that the product is having right now.

We are seeing excellent sequential growth, $74 million in Q3, $113 million in Q4 and $144 million in Q1 of 2016.

Class growth is exceptional, higher than we had expected.

You may recall before Trulicity launched we were in high single-digits, hovering around 10%.

We did see Trulicity as a catalyst for growth of the overall class and that has actually exceeded our expectations.

Derica spoke to this, about our share gains and so forth.

We are now at 18% when we look at the total prescription growth.

Probably the one element that I do want to share is the feedback that we see from patients and physicians from using the products, from adopters of the product, is truly exceptional.

So unprecedented rate in terms of overall satisfaction.

Now, what does that mean when we look at oral GLP-1s?

We like where Trulicity stands.

We do believe it's going to be a very important option long term for us, regardless of whether oral GLP-1s come into the market or not.

Oral GLP-1s are going to have to show appropriate efficacy and tolerability.

I think given the bioavailability of some of the options out there, you have to question what is going to be the relevance outside of the US from a cost of products sold, how profitable is that going to be.

Now, having said all of that, we do like oral GLP-1s but we are behind Novo.

It is an area of interest and one that we are investing to try to catch up in.

Great, thank you, Enrique.

Steve Scala, Cowen.

I have two questions.

First, I assume Lilly has not submitted the abemaciclib interim date to FDA.

But what are the FDA requirements that MONARCH 1 has to meet in order to be registrational?

Is there a specific response rate, or durability of response or a median PFS that needs to be hit?

And is this bar lower at the final look than it was at the eight-month interim look?

So that's the first question.

The second question is in the last decade, how many times has Lilly increased guidance after Q1 results?

I think it's quite rare.

So what gave you the confidence to do it this quarter?

Thank you.

Sue, if you'll take the abemaciclib question and then Derica, the Q1 guidance change question.

Sue?

Steve, as I mentioned earlier, we have the interim eight-month data.

We are hoping to get the final data and to present that at ASCO.

We have breakthrough therapy designation on this so we will work with the FDA regarding the best regulatory path forward.

And then of course we have also got the two Phase 3 studies up and coming as well.

I can't comment on specifics with regards to FDA discussions.

They generally will look, as you know, at the totality of the data and we look forward to having discussions with them on this.

Thanks, Sue.

Derica?

Steve, we continue to feel very good about the underlying fundamentals of our business.

We continue to execute very well and very consistently with the guidance that we shared at the beginning of this year.

So from our perspective everything continues to be on track and really spurred by the uptake of the new product launches that we've been talking about.

In regards to the change in guidance, it really was just two things.

One, we made some assumptions at the beginning of the year about the FX rate.

While it's a headwind, it's been a bit less of a headwind than we had anticipated.

So it has a line item impact but not a bottom-line impact.

What drove the EPS change is really the discrete tax benefit that we received in the first quarter and we're essentially saying that should carry through for the year.

That, combined with the continuation of our strong underlying business fundamentals, is what gave us the confidence to raise our guidance for the year.

Great, thanks, Derica.

Seamus Fernandez, Leerink.

Thanks a lot.

I have a question for Enrique and one for Dave.

Enrique, can you clarify what you submitted to the agency with Jardiance?

Specifically, are you requesting an indication and a claim?

Or just inclusion of efficacy data in the clinical section?

And just to clarify, can you help us understand how promotion in the US can differ with an indication versus just inclusion in the label and what you're base-case planning assumptions are?

And then my question for Dave is, can you give us a sense of early feedback on Taltz and some of the differences in the label versus the current IL-17 competitor?

And how you see that competitive landscape continuing to evolve?

Thanks.

Thank you for the questions.

Enrique and Dave, since you're both remote, if you did not hear the questions let us know, we can repeat it.

But if you heard it, we'll go ahead to you first, Enrique, and then we will swing it over to Dave.

Enrique?

We are requesting an indication for Jardiance and Glyxambi.

We do believe we have the data to be able to request that.

I'm not going to speculate in terms of what the indication would read, but if it were just adding data on the label from an efficacy perspective and so forth, it will fall short of the expectations that we have.

Now there are differences in terms of what we can do and in terms of the value in how payers will see that and also in terms of how we would be able to promote the product.

Of course, we plan for different types of scenarios but right now our expectation is that the data warrants a full indication for the product.

Great, thanks, Enrique.

Before we go to Dave, just a point of clarification, you said Jardiance and Glyxambi.

I think you meant to say Jardiance and Synjardy as the products to be submitted to FDA.

Dave, if you'd like to take the next question then on Taltz.

Yes, thanks Seamus.

As was mentioned in the prepared text, we've launched in the US now, just a week and a half or so ago began shipment.

At the beginning of the month we began active promotional roll-out and that's happening across the country now.

As well as we are excited that EMA approved Taltz last night in Europe and promotion will begin in June in certain geographies in Europe, based on the approvability of access that happens over here.

Again, how we differentiate, we're focused on the outstanding efficacy of Taltz, which again, has proven a 90% PASI 75 rate, 70% PASI 90 and 40% PASI 100.

Really rates not seen in any other program with all the caveats on comparisons of these programs.

The drug works very fast, it lasts a long time.

This data has been published most recently at AAD.

I think it provides a really uniquely positive and easy use experience for the patient and the doctor.

So we're really excited as the class of IL-17s appears to be demonstrating really the unmet need and the benefits of this new threshold of efficacy, which we Taltz has best-in-class data on.

We'll have to see about exactly the business results that come as we exit Q2.

But so far, so good qualitatively.

The team is excited, physicians are excited and the roll-out is underway.

This is Phil.

To add on briefly to Dave's comment, to date we've seen relatively limited use of biologics in the treatment of psoriasis compared to something like rheumatoid arthritis.

And we certainly see these higher levels of more complete clearance that this whole class offers, including Taltz, as being essentially a catalyst for significant increases in the use of biologics to help patients deal with this disease.

We very much look forward, as Dave said, to our upcoming marketing activities and believe this class can be a very significant one for the treatment of psoriasis.

John Boris, SunTrust.

Thanks for taking the questions.

First question for John.

Obviously Japan appears to be becoming a much, much more important market, as you're able to launch your products almost in line with launching in the US and EU.

Volume growth was 18%.

However, Japan does have every other year price increases and are contemplating going to every year price decreases going forward.

What is the industry doing to help educate the Japanese market to potentially to prevent them from going in that direction?

Second question for Derica, just on -- or Phil -- on the gross margin benefit from the improvements made to your insulin production.

Can you quantify what that benefit is in your gross margin?

And then last question, for Jan on Jardiance and the two heart failure trials.

Has the Company's been able to identify, aside from the diuretic effect, what other effect is occurring that could potentially benefit heart failure patients here pre-clinically?

Great, John, thank you for the questions.

John, if you'll start off with the Japan question.

Derica and I may tag-team the manufacturing.

And then Jan for Jardiance.

Okay, John, thanks for your question.

With respect to Japan, first of all, I'd say Lilly is well-positioned in Japan.

We've been one of the fastest-growing, if not the fastest-growing Company in Japan now for a number of years, actually, and these recent new product launches are keeping us on a strong trajectory there.

We are very concerned about the threat of annual repricing.

The industry's been quite active in engaging with the policymakers in Japan.

I myself have been engaged in that quite recently.

Japan is seeing a more rapid uptake of generics; they're ahead of the time scale for generic adoption that was initially laid out by the government.

We believe that, in combination with the current biennial price decreases, puts Japan on a trajectory to keep their drug costs essentially flat for the remainder of this decade and beyond.

Now, of course, there are macroeconomic considerations that the government is building into the entire calculus there as they try to help the economy recover.

But certainly part of that economic recovery, a key part of Abe's platform has been to actually develop and grow the indigenous biopharmaceutical industry there.

Part of our messaging has also included the fact that without an opportunity to realize full value from the products that we do launch there, I think the emphasis on the discovery and development of innovative new medicines in Japan is going to suffer as well.

Great, thanks, John.

Derica?

John, in regards to your gross margin question regarding the impact of our insulin agenda, tech agenda, we anticipate about an $80 million benefit for the full-year 2016.

But also recall, in addition to that, the fact that we can utilize our current footprint also allows us to have significant capital avoidance.

Meaning that we do not have to build a new bulk insulin manufacturing facility and that would be in the hundreds of millions of dollars.

Thanks, Derica.

Jan?

Let me just remind you that Jardiance had an impressive reduction in hospitalization for heart failure which was kind of an unexpected finding.

So we are now planning then, to perform studies in both types of heart failure patients, both with a preserved ejection fraction where the filling is the problem and the reduced ejection fraction where there is more contractility of the heart that is a problem.

And we will do these not only in type II diabetics but also in non-diabetes patients to see if we see similar benefits there.

Regarding the mechanics, as you know Jardiance has reduction in blood pressure, it causes diuresis, which together then could be an overall volume reduction benefit.

There could be other vascular effects still to be characterized.

We should also emphasize that Jardiance not only has an effect on CV outcome but also kidney benefits that I think need to be characterized further.

Overall, we are very excited about this opportunity but I think the exact mechanism, there are more to be learned.

Thank you, Jan.

Chris Schott, JPMorgan.

Great, thanks very much for the questions.

Just two here.

Following up on the BACE commentary earlier, can you elaborate a little bit about how you're thinking about endpoints for Alzheimer's studies going forward?

I guess specifically it is Cogs versus CDR Sum of Boxes.

What type of functional data, if any, do you think you're going to need for these early Alzheimer's studies?

Any comments there would be appreciated.

Second was on Trulicity and how you're thinking about the Victoza CV outcome study.

Clearly it seems positive for the class and to the extent you're studying it as well, it's a positive.

But I'm more interested in the near-term dynamics as you're ramping Trulicity.

And as you think about a competitor with CV outcomes data, how that plays into the near-term ramp of the drug.

Thanks very much.

Thanks for the questions, Chris.

Dave, if you'd like to start off on the question with regard to endpoints in the Alzheimer's disease studies.

Jan, feel free to complement that answer, if you'd like.

Then, Enrique, if you'll take the Trulicity CV outcomes question that Chris had.

Dave?

Thanks, Chris.

And Jan, jump in as we go through this.

In terms of the BACE announcements today which are that we're bringing coherence to the idea that early Alzheimer's studies, the primary endpoint should be cognition.

We are using ADAS-Cog in the sola study and 13 in the two AZ BACE studies.

That's purely a function of two very similar instruments and one we started with and AZ BACE was different than sola.

But we expect them to yield very, very similar outcomes.

As we said before on the sola announcement, we think that this is a much better way to detect changes, that changes in cognition preclude and predict changes in function.

And then measuring function anyway in early Alzheimer's is a difficult prospect both because patients are losing function typically at a very, very slow rate early and then accelerating as they get the disease.

But also because the instruments being used really are unproven in drug trials.

As you know, Chris, we've done a lot of drug trials, both placebo-controlled and active, failed, and some with some positive results.

You mentioned CDR Sum of Boxes.

This is a composite index that looks at both function and cognition.

It's quite a complicated instrument.

Training and implementation at sites is one of the more onerous ones.

And although it does show coherence with disease progression across the whole continuum, we have had less of that observation in our programs and find that ADAS-Cog for functional IADL and FAQ and other measures of function probably are a bit better in early disease.

Final comment is AMARANTH includes prodromal patients, so this is really pre-diagnosis Alzheimer's.

The new study, DAYBREAK, will include mild.

And of course EXPEDITION3 is mild.

We think the appropriate primary endpoint in all those settings is a cognitive endpoint with multiple secondaries and measurement of function, as well as biomarkers.

I can complement by just some future than opportunities in relation to biomarkers as potential surrogate markers of efficacy.

Here, as you know, we have our Tau imaging agent in Phase 3 which is undergoing studies done right now to correlate them.

the PET imaging invivo to autopsy location of Tau.

And we're also following disease progression.

We are using these as a potential surrogate marker then in EXPEDITION3 for sola and also then we include this in our BACE studies to see then of amyloid reduction can influence actually the Tau signals spreading in the brain.

We also have a Tau imaging in the A4 and ion studies of pre-clinical Alzheimer's.

So I think that's a potential next evolution that could then also reduce the time needed then to do potentially studies in the Alzheimer's space, if we could have a surrogate marker, actually, of efficacy.

Thank you, Jan.

Enrique?

Sure.

We view in a positive way the CV results of liraglutide.

We think this is going to have a huge positive overall.

It's going to be a huge catalyst for the overall GLP-1 class.

We view it with optimism because of REWIND.

You may recall that we had powered REWIND, our CV trial for Trulicity, is powered for superiority.

We expect to have an interim look sometime later this year.

The trial is expected to be concluded sometime in late 2018.

Before I can comment on any type of near-term impact, I'd like to see the data which is going to be released in detail at ADA.

Enrique.

Vamil Divan, Credit Suisse.

Thanks for taking my questions.

The first one again on sola.

Just to clarify, I think you mentioned before the final patient for EXPEDITION3 in October and we should get some sort of top-line press release by the end of the year.

I'm just curious will that top-line release also include some of the functional endpoint information?

Or will it strictly stick to the primary that's on the cognition side?

And then my second one, also on sola, I'm curious, you talked a lot about the regulatory side and the change in endpoints here and how cognition may be the better way to look at this earlier group of patients.

What about on the commercial side?

Do you see any more challenge in terms of reimbursement for our product if it's only showing cognition benefit and maybe a very mild impact on the functional side?

Maybe you could comment on US versus ex-US dynamics there in terms of acceptance of a product that's more driven by a cognition benefit and less on the functional side.

Thanks.

Great, Vamil, thank you for the questions.

Dave, if you'd like to take those, feel free to flip the first one back to me if you'd like.

But if you want to comment on either or both of those, please do so.

Sure, yes.

You have the time line correct from our previous communications in terms of what we expect.

October and then sometime before Christmas, maybe just before, a top-line read-out.

I think it's probably premature to comment on the exact content of that.

Although, as usual, we'll try to be as transparent with our investors as we can be without jeopardizing publication.

I think we've also said it's difficult to predict right now at what meeting we will be presenting that data, because there isn't actually an obvious one shortly after that.

So we're working on finalizing all of this.

If we can, we'd like to be as transparent as we can with the top-line results, including key secondary endpoints like function and make sure we're guarding against jeopardizing publication which hopefully will be shortly thereafter.

Feel free to jump on that, Phil, if I got any of that wrong.

Then in terms of commercial impact, we do believe demonstrating impact on function as well as biomarkers is important.

But I think the most important thing is to establish that solanezumab is a disease-modifying agent, meaning unlike symptomatics, that if you remove the therapy, patients don't simply return to their previous state.

But there's a permanent alteration and a trajectory of decline.

Decline measured by whatever measure we want, whether that be function or cognition.

I think we've established some important information around that with the EXPEDITION extension data presented last summer.

But obviously we need to repeat that finding in EXPEDITION3 and really demonstrate that there's a building effect through time and that in the open-label extensions that come out of all these studies, we can again replicate that.

Disease modifications is the key commercial handle, I think, to set up a new class for really changing the outcome for patients with Alzheimer's.

Great, thanks, Dave.

You summarized the team's plans for disclosure for the EXPEDITION3 trial perfectly well, so I'm not going to add to that.

David Risinger, Morgan Stanley.

Thanks very much.

My questions are also on sola.

I will start with a constructive question and then transition to a more critical question.

With respect to changing the endpoint, could you talk a little bit how making cognition the only primary endpoint makes it easier to achieve statistical significance?

And explain how the statistics are now different in that function, I believe I guess, will be tested at a 0.05 statistical hurdle.

Previously the co-primary endpoint, the statistical hurdle, would have potentially been more challenging.

So if you could please explain how the statistics benefit, that would be helpful.

And then, in looking at, and trying to understand, the lack of confidence that you have in showing a functional benefit, it's a little bit perplexing because Aricept shows a functional benefit within six months in just a few hundred patients.

Now granted, it's a different type of drug and their test did include moderate patients.

But since EXPEDITION3 has 2,100 patients, so it's dramatically larger than historical Alzheimer's trials, I'm just wondering how to think about a potential lack of functional benefit over 18 months, particularly since the mild patients will transition to being moderate patients over time.

And I think Lilly's conclusion is that sola doesn't work in moderate patients.

I guess the question is specifically, how should we think about a potential lack of functional benefit in a 2,100-patient trial if patients are progressing towards being moderate and the general view is that sola doesn't work in moderate patients?

Thank you.

All right, Dave, thanks for the questions.

We'll go to the tag team again of Dave Ricks and Jan Lundberg.

Dave, if you'd like to lead off and, Jan, feel free to fill in.

Let me address the second question first, Dave, because I don't think, based on your question, we see things the way you characterize them.

We don't have a lack of confidence that solanezumab won't affect function.

In fact, if we go back to the pool of mild disclosure back in 2012, you will see that we had a 0.001 impact on all measures of cognition that we listed and a 0.057 on ADL, a 0.045 P-value on IADL.

So it's based on how we selected ADAS-Cog 14 in IADL as the original endpoints.

Our design both powers the study more significantly and excludes patients who lack amyloid which we believe should give us a better signal-to-noise ratio for an anti-amyloid therapy.

So I would encourage investors not to be confused that this change has any bearing on our confidence.

And again, to remind everyone, we have seen nothing as it relates to the blinded data on EXPEDITION3 and won't until the final database lock later this year.

So why did we do this?

I guess there's three hypothetical scenarios of the outcome.

On the extremes you have a total failure to replicate the pool of mild data, meaning there is no relevant effect of solanezumab.

If that ends up being truth out of EXPEDITION3, I don't think this matters and probably nothing would have.

We don't believe that's the most probable case but I guess critics might highlight that.

On the other hand is a scenario where we hit or replicate EXPEDITION1 and 2 pool of mild data as strongly or maybe even with a better P-value than the pool of mild information previously published.

In that case this change doesn't really matter either because we will have if hit the primary and hit the key secondaries.

We'll go to the regulators with both of those data sets, and I believe, meet the qualifications for approval that existed previously.

I think the reason to do this is a scenario where you achieve cognition but have a close call on function.

And given the measurement issues with function in mild Alzheimer's, that I described in an earlier answer on the call, that is a possibility.

We don't think the most probable, but it's a possibility.

We want to allow for that by being able to, A, measure function two ways.

FAQ is another instrument, a more tailored instrument for early Alzheimer's and the IADL which I've described already.

Additionally, as Jan mentioned, we're measuring caregiver activity in a broad light and many, many other instruments we can draw upon.

We think this will maximize the chance of both a submission and potential for approval.

That's why we made this move to be clear on all of that.

I think we already have shown data that intervening with disease-modifying agent in mild Alzheimer's Disease does carry over into moderate phase that was published last year in the EXPEDITION extension data.

We can talk about that off-line if you'd like to.

Finally your first question was how do the statistics work.

I want to highlight we have not finalized our statistical analysis plan in the finer point of detail, so I will talk in broad strokes here.

When you have dual primaries, you need to split your 0.05 alpha in half and allocate it to the two primaries to achieve statistical significance on both versus just one.

So in this way there's a little wider moat on achieving ADAS-Cog 14.

Based on our previous finding I'm not sure that's critical to achieve ADAS-Cog 14 but it is a point to note.

We can then divide the alpha that's left among the key secondaries, which in this case will be the FAQ as well as the IADL functional instruments.

So in theory there could be more alpha allocated to the IADL or the FAQ based on our final design.

So there is an incrementally positive impact on statistical calculations at the end of the day.

Again, that's not the primary reason we are doing all this, it's because we really do believe cognition matters, it predicts functional decline and we've powered a study, as you point out, to achieve significance on both.

Great, that's an excellent response.

No further comments from the group here.

Geoff Meacham, Barclays.

Morning, guys, thanks for taking the question.

One on the BACE and one on Taltz.

On the BACE, I know there's a safety look, was there any efficacy hurdle at all to transition AMARANTH to Phase 3. And then how do you think about the rate of amyloid plaque reduction or cognitive decline for the BACE class in general compared to direct beta amyloid antibodies?

And then on Taltz, clearly your competition has informed us, the market, about the attitudes towards the IL-17 class.

But as you guys prepare for the EU reimbursement discussion, what, if any, are there subtleties between the US and European markets?

And how much of a role do you think switching will play in the initial stages of the launch?

Thanks, guys.

Great, Geoff, thank you for the questions.

Dave, if you'd like to start off on those and then, Jan, feel free to add as you like on, particularly the rate of amyloid reduction that we might expect with BACE inhibitors, what we've seen already, either in pre-clinical or clinical studies.

Dave?

I think my part on that will be short because, as we previously announced, the interim look on safety which triggers a move of the BACE inhibitor from Phase 2 to Phase 3 was predefined and really focused only on safety.

We do have biomarker data on A-beta clearance.

Maybe Jan can comment on here with the AZ BACE inhibitor.

But we really just focused on discharging safety in a class that has had off-target safety effects and we were pleased with result announced earlier this month.

Maybe I'll transition to Jan on the mechanistic question in Alzheimer's and we can go back to Taltz in the EU and switching question.

As you know, solanezumab is an antibody that has a limited penetration to the brain, about 0.1% and it binds free amyloid beta.

BACE inhibitors, on the other hand, are oral agents that better penetrate the blood-brain barrier and prevent the formation of amyloid beta from the amyloid precursor protein.

If no real clinical comparisons have been made, then, on these agents, what actually happens with the amyloid content overall in the brain, realizing that the amyloid in the brain is probably in different forms.

Yes, there is plaques which are very solid but there are also, then, intermittent forms and free amyloid there.

I think what we have seen in pre-clinical models is that BACE molecules can reduce the amyloid load, then, in the various transgenic mice models.

The effects of solanezumab in those models have been more difficult, I think, to demonstrate in the same way.

But I think overall, we have to look at the clinical data in the end.

Sola has a very favorable safety profile, if you look overall, even then compared to some other anti-amyloid antibodies which are in development.

Whilst the safety of the BACE inhibitor is particularly larger trials have still to be proven, recognizing that old-age Alzheimer patients are fragile and you need also very safe agents.

So more to come.

Great, thank you, Jan.

Dave, on Taltz in Europe

As you point out, we were quite encouraged by the early adoption of the class.

I didn't read it too carefully but I noted the Novartis antibody had strong success OUS, I think particularly in Germany, early uptake.

As we look at Europe, which we do expect roll-outs and launches beginning this summer and then through, really, the end of 2018, that's the cycle for reimbursement assessment.

So the full revenue picture won't be elucidated until after 2018, really.

But in Germany, we'll get an early read because of the way the reimbursement works.

We have a very strong and competitive label in Europe, including first-line indication for treatment of moderate to severe plaque psoriasis, all at the same efficacy endpoints and maybe a few others that I mentioned from the US question earlier.

The drug works rapidly, that's noted in the label, and consistently with long duration of effect.

Switching is an important factor in this market.

But perhaps not in the sense that someone achieves success and then switches to a brand that could give them even better success.

What we see is a lot of patients try and lapse treatment.

As Phil mentioned earlier, we estimate less than 1 in 10 patients with moderate to severe plaque psoriasis is currently on a biologic.

But there's quite a number that have tried one in the past and they are no longer using it.

In this way switching, meaning they were on something before and now can reinitiate on this promising new therapy, Taltz.

Our share of label in Europe highlights that, that the drug is both durable and effective in patients independent of whether it's a first-line biologic, a switch, a lapsed biologic, or some of the refractory to multiple biologics.

So that's an important pool of patients as we have early launch and uptake.

And again, we are very optimistic for this product.

Thank you, Dave.

I think by the count, we got through about a dozen callers in the hour Q&A that we have.

I do apologize for those of you that are still in the queue but we have reached the end of the call.

The IR team will give you guys a call back and gals a call back after this call concludes.

I'll now turn it over to John for some closing remarks.

Okay thanks, Phil, we appreciate everyone's participation in today's earnings call and your interest in our Company.

We hope you'll take part either live or via webcast in our investor event on May 24 in New York City.

Last December in Boston we reviewed our animal health business and our broad R&D program in Alzheimer's Disease.

At our May 24 meeting we'll review in detail our research and development efforts in oncology, diabetes, immunology and pain.

We hope these periodic updates allow you to more fully appreciate the substantial opportunities before us and why we are bullish on our future.

Finally, if you have questions we did address, as Phil said, please contact our IR team.

They will be happy to help.

Thanks and have a great day.

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