禮來公司 (LLY) 2016 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Q3 2016 earnings call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Dr. John Lechleiter. Please go ahead, sir.

Thank you. Good morning, everybody. Thanks for joining us for Eli Lilly and Company's third-quarter 2016 earnings call. I'm John Lechleiter, Lilly's Chairman, President, and CEO.

Joining me here in Indianapolis on today's call our are Derica Rice, our Chief Financial Officer; Dr. Jan Lundberg, President of Lilly Research Laboratories; Dr. Sue Mahony, 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 Kristina Wright, Brad Robling, Chris Ogden, and Phil Johnson of Lilly's IR Team.

During this 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. Is not intended to be promotional, and it's not sufficient for prescribing decisions.

Before discussing key events for the quarter, I'll start, as usual, with a summary of our progress since the second-quarter earnings call in late July, and I'll use our strategic objectives framework for this discussion. Our first strategic objective, grow revenue. Q3 revenue increased 4% on a constant currency or performance basis, driven by 7% pharmaceutical volume growth. Consistent with previous quarters this year, our new products -- Trulicity, Cyramza Jardiance, Basaglar, Portrazza, and Taltz -- accounted for nearly all of that growth.

On our strategic objective expand margins, our non-GAAP OpEx as a percentage of revenue declined 20 basis points compared to the third quarter 2015. We expect continued progress in the fourth quarter, as our full-year guidance at the midpoint of our ranges implies an improvement of about 200 to 250 basis points in OpEx as a percent of revenue for the year.

Under the heading of sustaining the flow of innovation, olaratumab was approved in the US last week for soft tissue sarcoma and will be sold under the trade name Lartruvo. Europe's CHMP provided positive opinions, recommending approval of olaratumab for soft tissue sarcoma and of Glyxambi for type 2 diabetes. And along with AstraZeneca, we received Fast Track designation from the US FDA for AZD3293, the oral BACE inhibitor for Alzheimer's disease.

On our strategic objective deploy capital to create value, we announced an agreement to acquire Boehringer Ingelheim's US animal health vaccines business, filling a key strategic need in our companion animal portfolio. In both human pharma and animal health, we will continue to actively pursue external opportunities to enhance our future growth prospects.

Finally, during the quarter, we returned or $500 million to shareholders through our dividend. In summary, the progress we're making in 2016 places us on track to achieve each of our strategic objectives through 2020.

Now, let's move on to a review of the key events that occurred since our last earnings call. We continue to make progress on the regulatory front. As I just mentioned, here in the US, the FDA approved Lartruvo in combination with doxorubicin for the treatment of adults with soft tissue sarcoma with a histologic subtype for which an anthracycline-containing regimen is appropriate and which is not amenable to curative treatment with radiotherapy or surgery.

This is the first FDA approved front-line therapy for soft tissue sarcoma in four decades. It also marks the third product from our ImClone acquisition to receive regulatory approval. This is an accelerated approval based on data from our Phase 2 trial. Continued approval for this indication may be contingent upon verification and description of clinical benefit in a confirmatory study. The Phase 3 announced study is fully enrolled and is currently expected to complete in late 2018.

In Europe, we received a pair of recommendations for approval from the CHMP. The first recommendation was for granting a conditional marketing authorization for Lartruvo in combination with doxorubicin for the treatment of adults with advanced soft tissue sarcoma not amenable to curative treatment with radiotherapy or surgery and who have not been previously treated with doxorubicin.

Similar to the US, Lartruvo was reviewed under the EMA's accelerated assessment program. As part of a conditional marketing authorization, we will need to provide results from our ongoing Phase 3 study. Until availability of the full data, the CHMP will review the benefits and risks of Lartruvo annually to determine whether the conditional marketing authorization can be maintained.

The second recommendation was for Glyxambi, a single tablet combining Jardiance, our SGLT2 inhibitor, and Tradjenta, a DPP-4 inhibitor. The specific recommendation was for use in adults 18 years and older with type 2 diabetes to improve glycemic control when Metformin and/or sulfonylurea and one of the individual components of Glyxambi do not provide adequate glycemic control, or when a patient is already being treated with the free combination of Jardiance and Tradjenta. Glyxambi, Jardiance, and Tradjenta are products of the Boehringer Ingelheim and Lilly diabetes alliance.

Finally, along with AstraZeneca, we received Fast Track designation from the FDA for AZD3293, an oral beta secretase cleaving enzyme, or BACE inhibitor, being studied in Phase 3 trials for Alzheimer's disease.

On the clinical front, we announced that following a pre-planned interim analysis, or MONARCH 2, an independent data monitoring committee provided the recommendation to continue the study without modification as the interim efficacy criteria were not met. The MONARCH 2 trial compares abemaciclib with fulvestrant versus placebo, versus placebo with fulvestrant in women with hormone receptor-positive, human epidermal growth factor receptor 2 negative, locally advanced or metastatic breast cancer. The trial will continue to completion in the first half of 2017.

At the European Society for Medical Oncology meeting, early data in lung cancer were presented on the combinations of Keytruda with Alimta and of Keytruda with Cyramza. KEYNOTE-021, a randomized Phase 2 study, included cohort G, studying Keytruda added to Alimta plus carboplatin, versus Alimta plus carboplatin in first-line nonsquamous non-small cell lung cancer patients regardless of PD-L1 expression level. The combination of Keytruda and Alimta-carbo nearly doubled the response rate compared to Alimta-carbo alone.

There's been considerable focus within the investment community on the durability of responses. In this study, we were very pleased as patients on the Keytruda-Alimta-carbo arm experienced progression-free survival of 13 months. While the overall survival data were not yet mature, roughly 75% of patients on both arms were still alive at one year. This is at the top end of results we've seen for any combination trial in a broad population of first-line nonsquamous, non-small cell lung cell cancer patients, and we look forward to the presentation of additional data from this trial at future medical conferences.

Updated data were also presented from the KEYNOTE-098 study, evaluating Keytruda with Cyramza in second- to fourth-line non-small cell lung cancer. Here, too, we observe promising clinical activity, including durable responses. 80% of patients experienced a decrease in target lesions, spanning the spectrum of PD-L1 status, while the objective response rate was 30%, with responses seen in both nonsquamous and squamous non-small cell lung cancer patients. In addition, the disease control rate was 85%, and median progression-free survival was not yet reached.

The data from both KEYNOTE-021G and KEYNOTE-098 provide proof points for how we intend to deploy our diverse oncology portfolio across the three platforms of cell signaling, tumor microenvironment, and immuno-oncology to pursue a rational and differentiated combination strategy across our diverse oncology portfolio in order to improve outcomes for patients.

Shifting to immunology, I am pleased to report that we achieved the primary end point in the SPIRIT-P2 study of ixekizumab in patients with active psoriatic arthritis who had been treated with one more conventional DMARDs, as well as had an inadequate response to one or two TNF inhibitors or intolerance to a TNF inhibitor. The results of SPIRIT-P2 further build on the existing benefit-risk profile of Taltz obtained from a very large clinical program.

With this second positive psoriatic arthritis study, we plan to submit ixekizumab for psoriatic arthritis in the US in the first half of next year, followed by submissions in Europe and other geographies, and we plan to present the data at a medical meeting in 2017. Keep in mind that psoriatic arthritis has already been approved in Japan.

At the EADV meeting in Vienna, we also presented initial data on our head-to-head study, called IXORA-S, of Taltz versus Stelara in patients with moderate to severe plaque psoriasis. The primary end point of this study was met, as Taltz demonstrated superiority to Stelara on the PASI 90 score at 12 weeks. These data reinforce the strong clinical profile of Taltz, and we look forward to presenting additional data from this study next year.

As expected, earlier this month we achieved last patient visit in the EXPEDITION3 trial of solanezumab in patients with mild dementia due to Alzheimer's disease. As a result, we plan to issue a top-line press release before the end of the year.

In other news, we announced the retirement of yours truly as President and Chief Executive Officer, effective December 31 of this year. I will continue on Lilly's Board of Directors until the end of May, serving as Nonexecutive Chairman. Dave Ricks, currently President of Lilly Bio-Medicines, will assume the role of President and Chief Executive Officer and join the Board on January 1. Dave will become Chairman of the Board on June 1.

We announced an agreement to acquire Boehringer Ingelheim Vetmedica's US feline, canine, and rabies vaccines portfolio, as well as a fully integrated manufacturing and R&D site and a number of pipeline asset, for approximately $885 million, including the estimated cost of acquired inventory. This innovative platform of companion animal vaccines has high brand awareness and an established, loyal customer base. The addition of these assets advances our strategy of offering a balanced portfolio to both prevent and treat disease. This acquisition is subject to FTC approval and closing of the BI Sanofi asset swap. We expect to close the deal early next year.

The US District Court for the Southern District of Indiana ruled against Lilly and its partner Acrux in a patent case for the testosterone treatment Axiron, ruling that Axiron's formulation and axilla application patents are invalid, and the applicator patent, although valid, would not be infringed by generic competitors. We have appealed the ruling. The formulation patent expires in February, 2017, while the axilla application and applicator patents expire in 2027.

The US Patent and Trademark Office determined that the method-of-use patents for Effient are invalid. Lilly, Daiichi Sankyo, and Ube strongly disagree with the PTO's ruling regarding validity of the Effient method-of-use patent and have appealed the ruling.

Separately, next steps are being discussed with the District Court in ongoing litigation on both the method-of-use patents and the compound patent. As a reminder, the method-of-use patents expire in 2023, while the compound patent expires in April of 2017, and we are entitled to pediatric exclusivity until October 2017.

Finally, we did we distributed over $500 million to shareholders via our dividend. During the quarter, we did not repurchase any stock, leaving $2.65 billion remaining on our $5-billion plan. As we announced on our second-quarter earnings call, we do expect to provide annual increases in our dividend and will continue to balance share repurchase with external opportunities to enhance our future growth prospects. And now, I will turn the call over to Phil for a discussion of our financial performance for the quarter. Phil?

Great. Thank you, 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 this morning on our non-GAAP adjusted measures to provide insights into the underlying trends in our business, so please refer today's earnings press release for a detailed description of the year-on-year changes in our third-quarter GAAP results.

Looking at the non-GAAP measures on slide 9, you can see that Q3, 2016, revenue increased 5%, compared to Q3, 2015, reaching $5.2 billion. Gross margin as a percent of revenue decreased 1.4 percentage points, to 76.4%.

This decrease was driven by the effect of foreign exchange rates on international inventory sold. This effect resulted in a benefit to 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 increased by 30 basis points, going from 75.2% in last year's quarter to 75.5% this quarter.

Total operating expense, defined as the sum of R&D and SG&A, increased by 4% compared to Q3 of 2015. Breaking this into its component parts, marketing, selling, and administrative expenses increased 2%, while R&D increased 8%. The slight increase in marketing, selling, and administrative expenses was due to higher spending on new products, largely offset by lower spending on the late-lifecycle products. The increase in R&D expense was driven primarily by higher late-stage clinical development costs

Other income and expense was income of $27 million this quarter, compared to the $87 million reported in last year's quarter. Our tax rate was 22%. This is a decrease of 290 basis points compared with the same quarter last year. This decrease was primarily due to certain US tax provisions, including the R&D tax credit, that are in force in 2016 but had lapsed during last year's third quarter. At the bottom line, net income decreased 2%, and earnings per share decreased 1%.

Slide 10 contains non-GAAP adjusted information for the first nine months of the year, while slide 11 contains a reconciliation between reported and non-GAAP EPS, and you'll find additional details on these adjustments on slides 24 and 25.

Now, let's take a look at the effect of price rate and volume on revenue growth. On slide 12, in the yellow highlighted row at the bottom of the table, you'll see the 5% revenue growth I mentioned earlier. On a performance basis, our worldwide revenue grew 4% this quarter, driven entirely by volume.

By geography, you'll notice that the US pharma revenue increased 17%, driven primarily by volume. Trulicity and was the main driver of US volume growth, with meaningful contributions also coming from Humalog and Taltz. Having completed the take back of North American rights for Erbitux on October 1 last year, we also benefited from booking end sales of Erbitux this quarter.

As cited in our press release issued earlier this morning, we've experienced less product returns than anticipated for Cymbalta, post its patent expiration, leading to a reduction in the returns reserve this quarter of approximately $145 million. Excluding this item, our US pharma revenue grew 10% this quarter, with an 11% increase due to higher volume and a 1% decline due to lower realized prices.

The decline in EuCan revenue of 8% was driven by the negative effect of price, and to a lesser extent, lower volumes and unfavorable FX movement. On a constant currency or performance basis, EuCan revenue decreased 6%. This decrease was driven primarily by lower volume and price for Cymbalta and Alimta following patent expirations, partially offset by the uptake of new products, including Trulicity, Basaglar, Cyramza, and Jardiance, as well higher sales of Humalog, Tradjenta, and Cialis.

In Japan, pharma revenue increased 15% in total, driven by an 18% benefit from a stronger yen, and to a lesser extent, increased volume, partially offset a 6% negative price effect from the latest biannual price cuts. On a constant currency basis, Japan pharma revenue decreased 3%. This performance decline was attributable to the entry of generic olanzapine this past June. Excluding Zyprexa, Japan pharma revenue in Q3 grew 6% on a constant currency basis, led by Cyramza, with additional contributions from Cymbalta, Strattera, Trulicity, Basaglar, and Jardiance.

Turning to emerging markets, we saw revenue decline 8%, primarily driven by the negative effect of foreign exchange. On a performance basis, emerging markets revenue decreased 3% due to lower volumes for off-patent brands, including Cialis, Zyprexa, Alimta, and Cymbalta, partially offset by higher volumes for Humulin, Trulicity, Tradjenta, Cyramza.

Also this quarter, our pharma revenue in China decreased 7% due to foreign exchange, while revenue was flat on a constant currency basis. Changes in order timing from our distributors negatively affected growth this quarter while positively affecting growth last quarter. We estimate the growth in underlying demand for our products in China this quarter was about 5%

Turning to animal health, this quarter, worldwide revenue decreased 9%, both in total and on a constant currency basis, including a 14% decline in companion animal and 6% in food animal. Animal health revenue was significantly impacted by distributor inventory destocking in the quarter following a changeover to SAP at the end of Q2. This inventory impact represented the majority of the decline in companion animal revenue in Q3 and has contributed to the volatility in our animal health results.

In food animal, economic weakness in Latin America, combined with market access pressures in the US, contributed to lower revenue in the quarter. Note that on a year-to-date basis, which includes the SAP inventory impact in both Q2 and Q3, animal health revenue is flat.

On slide 13, you will find the same price, rate, and volume analysis, but on a year-to-date basis. As I mentioned earlier, excluding foreign exchange, our worldwide revenue grew 4% this quarter, with nearly all of that growth coming from higher volume. In total, our new products, Trulicity, Cyramza, Jardiance, Taltz, Basaglar, and Portrazza, were the engine of our worldwide volume growth.

Slide 14 shows that these products drove 6.6 percentage points of volume growth this quarter. The take back of Erbitux contributed nearly 2 percentage to our volume growth, while Humalog contributed nearly 1 percentage point. You'll also see that the loss of exclusivity for Zyprexa, Cymbalta, and Evista, while largely in the rear-view mirror, still provided a drag of roughly 2 percentage points on our volume growth.

Specifically on Humalog, you will see that US sales this quarter are down 14%, as higher volume was more than offset by lower realized prices. This quarter's net realized price was negatively affected by changes in estimates for rebates and discounts. Normalizing for changes in estimates for rebates and discounts in both Q3, 2016, and Q3, 2015, the underlying US sales trend for the quarter for Humalog was basically flat. Now, let me turn the call over to Derica.

Thanks, Phil. As in prior quarters, I'll start by sharing some color on our new product launches. During the Q&A session, Sue, Enrique, and Dave can provide more detail.

As you can see on the graph on slide 15, our new products generated over $0.5 billion in revenue this quarter, led by Trulicity and Cyramza. This represents about 10% of our total worldwide revenue, up from 8% last quarter. And as Phil mentioned earlier, these products drove over 6.5 percentage points of our worldwide volume growth this quarter.

We continue to be pleased with the uptake of Trulicity. Here in the US, we're capturing nearly 30% of new patient starts in the GLP-1 class. In addition to our strong performance, we are benefiting from strong growth of the class itself, with the US GLP-1 market growing nearly 30%. As I mentioned last quarter, in many OUS markets, we're seeing uptake comparable to that seen with the early uptake of Victoza.

Cyramza continues to grow globally, driven largely by strong gastric cancer uptake in Japan. OUS markets now account for nearly 60% of our worldwide Cyramza sales, and we look forward to continued growth in these markets, not only in gastric cancer, but also supported by the ongoing launches of the colorectal and lung cancer indications. US Cyramza sales declined this quarter, largely as a result of competitive pressure from immuno-oncology therapies and non-small cell lung cancer, while our share of market in gastric cancer has been relatively stable.

Moving to Jardiance, while less than we expected, the SGLT2 class in the US is growing over 20%, and our new-to-therapy share with endocrinologists is now over 35%. Along with Boehringer Ingelheim, we expect FDA action on the EMPA-REG OUTCOME submission in early December and continue to see an update of the Jardiance label to reflect the compelling CB data from EMPA-REG OUTCOME as a catalyst for the growing of the class and of Jardiance.

Taltz, which launched in the US in April, is off to an excellent start. We're seeing strong growth of the IL-17 class of psoriasis and are pleased that our new-to-brand share of market with dermatologists, a proxy of use in psoriasis, is already over 10%. While it is still early in our OUS launches, feedback has been positive, and we look forward to launching Taltz in Japan this fall for both psoriasis and psoriatic arthritis.

The rollout of Abasaglar in OUS countries continues, and we are preparing for US launch in mid December. Finally, we continue to see strong uptake of I/O agents in first-line squamous non-small cell lung cancer, which is clearly affecting use of Portrazza.

Moving to slide 16, you'll see the effect of changes in foreign exchange rates on our 2016 results. This quarter, FX had a small positive impact on revenue growth. Excluding FX, worldwide revenue grew 4%. In performance terms, growth in non-GAAP cost of sales, at 4%, was in line with revenue growth, while non-GAAP operating expenses grew just slightly faster than revenue, at 5%. Finally, excluding FX, non-GAAP operating income increased 2%, and non-GAAP EPS increased 1%.

Moving on to our pipeline update, slide 17 shows our pipeline as of October 19. Changes since our last earnings call are highlighted, with green arrows showing progression and red arrows showing movement out of the portfolio.

In our NME pipeline, you'll see the green arrow denoting FDA approval of Lartruvo in soft tissue sarcoma. We began Phase 2 testing of two molecules, the low-dose BACE inhibitor that we discussed at our Alzheimer's disease meeting last December and the BTK inhibitor in immunology we license from Hanmi. We also started Phase 1 testing for a small molecule cancer compound, and we terminated development of two Phase 1 oncology assets and of Blosozumab, a sclerostin monoclonal antibody for osteoporosis.

In our NILEX pipeline, as shown on slide 18, we began the Phase 3 study of solanezumab in prodromal Alzheimer's disease. Currently, we plan to recruit nearly 2,500 amyloid-positive patients for this study. The blinded treatment period will be 24 months, and we anticipate trial completion in mid 2021.

On solanezumab, John mentioned earlier that we are on track to issue the top-line press release for EXPEDITION3 before the end of the year. I would also note that we have a small number of investor interactions with Management scheduled this quarter, and all these interactions will occur before Management sees the EXPEDITION3 study results.

If we hit the most aggressive timeline from moving from last patient visit to database lock, we may be able to present the EXPEDITION3 data at the CTAD meeting in December. However, it is also quite possible that we will not present the data at a medical meeting until next year. Should we present the EXPEDITION3 data at CTAD, the presentation will be made available via a live webcast open to the investment community, so live participation will not be required to access the information in real time.

Turning to slide 19, let's recap the recent progress we've made on the key events we projected for 2016. Since our last call, we've added green checkmarks for the initiation of the Phase 3 study of solanezumab in prodromal Alzheimer's disease, the internal data readout that John mentioned earlier of the Phase 3 SPIRIT-P2 study of ixekizumab in psoriatic arthritis, the presentation at EADV of data from the IXORA-S study evaluating ixekizumab head-to-head against Stelara in psoriasis, and the US approval of Lartruvo for soft tissue sarcoma. Also, one event we've thought that might occur in 2016 which is now expected in 2017, action on Cialis pediatric exclusivity, while another was expected 2018, the cluster headache readout for galcanezumab.

Turning to our 2016 financial guidance on slide 20, at a high level, our expectations are largely unchanged. You'll see that our outlook for non-GAAP earnings per share is unchanged, while we've made small adjustments to our GAAP earnings-per-share guidance range, as well to our line item guidance for revenue, SG&A expense, other income, and capital expenditures.

In summary, our Q3 financial performance places us on track to achieve our full-year guidance. In the quarter, we posted revenue growth of 4% on a constant currency basis, driven by 7% pharmaceutical volume growth. We made progress on the pipeline with the FDA approval of Lartruvo, recommendations for approval of olaratumab and Glyxambi in Europe, and granting of FDA Fast Track status for our BACE inhibitor AZD3293. We continue to have strong momentum behind our innovation-based strategy, and as we transition to new leadership next year, our Management Team will remain focused on executing our strategy to create value for all stakeholders, including shareholders.

We also remain firmly committed to achieving the midterm financial goals we articulated on our earnings call in July, which included: driving a minimum of 5% compounded annual revenue growth from 2015 to 2020, even without solanezumab; reducing OpEx as a percent of revenue to 50% or less in 2018, increasing our gross margin as a percentage of revenue in 2020 compared to 2015; launching 20 or more new products in the decade from 2014 through 2023; and providing annual dividend increases to our shareholders.

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

Thank you, Derica. So we've got nearly an hour for the Q&A session. We would like to get to as many of the callers on the line as possible, so if you would please limit your questions to your two most important ones or one with two parts, that would be very much appreciated. Mary Beth, if you could go ahead and give the instructions for the Q&A session and then go to our first caller, please.

(Operator Instructions)

Jami Rubin, Goldman Sachs.

A couple questions on Jardiance. My first question is, why do the FDA require three more months for review? Is this a positive? Is this a negative?

And Enrique, how are you feeling about getting the superior label in Jardiance. And what are the options? Is the option to get a superior label, i.e., an indication for CV risk reduction, or is the other alternative to get no mention of that in the indication section but the EMPA-REG trial mentioned in the label somewhere? If you can talk about those two possible scenarios and what they mean in terms of consensus expectation.

Secondly, just curious to know what's happening with pricing and diabetes because it does seem to be getting worse. You talked about rebates and discounts with Humalog, but we're also seeing some price discounting SGLT2 just based on INVOKANA's recent performance and their weakness due to discounting. So if you could talk about that as well. Thanks very much.

Great. Thank you for the questions, Jami. Enrique, those are all yours.

When it comes to the Jardiance review by the FDA, we did get this three-month extension on the action date. The new action date is now December 4 of this year. It's difficult to say always what drives that, but the FDA considers some additional information analysis that we have provided basically, major amendments, and they basically have the right to do so.

I would highlight that this is not the only major amendment that has happened in the diabetes area. There have been a number of three-month extensions. But I don't think it will be appropriate to color this in any way, positive or negative.

When it comes to the indication and the label, as you know, we have basically requested a separate, distinct indication for Jardiance given the data from EMPA-REG OUTCOME, something along the lines of reducing the instance cardiovascular death in patients with type 2 diabetes and established cardiovascular disease. We believe that the data warrants this type of indication.

Clearly, there are a number of different potential outcomes when comes to the label that we would get. The FDA is reviewing the label, and it's probably not appropriate for me to comment more at this stage given that the action date is getting very near. I will continue to highlight that I believe that we have the strength of the evidence to be able to have a new indication. Clearly, whether we have it -- in particular in the US, having an indication does make an important difference, so we are seeking that.

Of course, if the clinical data is included in the body of the label, yes, we could still make a claim, but the strength of the claim is another thing. So we view this is important for us and for Jardiance and for Lilly and BI.

Let me answer your question on pricing and diabetes. First, when it comes -- as it was stated as part of the remarks by Phil, when we normalize for changes in the estimates of rebates and discounts for both Q3 and Q4, we basically see in the case of Humalog that our normalized sales would have been minus 1% instead of minus 14%. Now, minus 1% is still in price a pretty important impact. It implies lower prices because we grew volume 10% with Humalog in the US, so that's basically minus 11% when it comes to price.

What are we seeing? We are seeing two things. Increased rebates across the board, but in particular, when it comes to Part D, at least from how Lilly views the business, and we basically see a significant more business flowing through less profitable books of business, less profitable channels, Medicare/Medicaid chargebacks. So we look at those books of business, there's been an acceleration of those books of business at the expense of commercial and cash. So those impacts are pretty significant.

Now, you have seen, and in the case of Humalog, we have quite a bit of volatility. We expect for this volatility, unfortunately, to continue given that we make estimates at the end of each quarter on those rebates and discounts, but we find out what those -- where the product flow through, which books of business afterwards, and in some cases, many quarters afterwards.

The last point that I would make because it's probably important, as you look at your different models and as we think about Humalog and what is the ongoing growth trend for this product, as we look at the normalization that I referred to, one-third of that normalization refers to Q3 of 2016. Two-thirds is really related to Q3 of 2015.

Thank you very much for comprehensive response. Mary Beth, if we can go to the next caller, please.

Tim Anderson, Bernstein.

On solanezumab, I know -- obviously, I was expecting and watching the result of EXPEDITION3, but at that trial is a total fail, what happens to the prodromal trial? Would that completely continue unchanged, or could it potentially get scrapped?

The second question was on baricitinib. I know there's a fair amount of excitement around the upcoming launch, and the does look promising, but I can't help but think that it's going to get meaningful sidelined by [pairs] in the US given how crowded this market is, and if that happens, then it would be a very slow launch curve like we've seen with a lot of other products. I'm wondering if you can comment on this assessment.

Thank you for the questions. David, will move over to you for these two.

Thanks, Tim. I think we talked about the various scenarios with sola before. We continue to characterize it as a high-risk category program. The scenario you paint is, we think, is the least probable, but it certainly could happen. In this scenario, sola would really not separate at all from placebo. I think we would be reevaluating all of the sola programs, frankly, Tim.

And the way we've set up the prodromal program, which we've just begun, is there's a recruitment start with a special cohort that we can also evaluate more information on. We're doing this for a couple of reasons, but one of the reasons is the ability to stop the trial should EXPEDITION3 be negative. So we've gated the investment in that way. As I said, we're not counting on that at the most probable scenario, but we've prepared for that contingency.

We're excited about baricitinib, too. The profile from the Phase 3 program, four very large studies, is extremely positive. That drug is under review with the FDA, and we're anticipating a launch sometime in 2017.

You are identifying a key issue in that class. RA is crowded. It is heavily managed by payers. Lilly has a strategy in baricitinib to really focus on the differentiation of the product versus the standards of care of methotrexate and Humira. We want to position the product in really the pre-biologic setting, and that may take some time to achieve, as you are pointing out.

However, I would say there are all kinds of payers, and those more clinically focused and focused on improving outcomes for a pretty significant condition, lifelong condition for young people, RA. We think we can make early headway in those settings. Others, which may be more sensitive to rebate flow, et cetera, obviously, that's going to be more difficult, but I think Lilly is prepared to be patient and build out the product through time, reminding everyone that the current IP is very long and we have a long time to fulfill full value for baricitinib. Thanks for the questions.

Mary Beth, if we can go to the next caller, please.

Tony Butler, Guggenheim Partners.

Dave, a question on Taltz and the anti-L17 class. I understand the commentary around the growing class, and clearly, if we listen to Novartis, they'll be quite enthusiastic. I'm just wondering, though, as we look quarter to quarter at the US sales, while the rate is nice, the absolute numbers, one could say it's rather anemic.

And so the real question is around payers and whether or not the full channel opportunities being utilized by Lilly, and more importantly, how you think you might be able to address that relative to Cosentyx or others that might enter that market in psoriasis.

Thanks for the question. We are both excited about the uptake of the L17 class and Taltz within it. In fact, as we exited Q3, we're seeing Taltz new-to-brand share in dermatology, which is really our key leading indicator for performance, as peaking over 10% already ahead of Enbrel, for instance, and at least at par with Cosentyx in that setting. So we are happy with the initial adoption and the breadth of trial usage, which are other key indicators for us.

At this point in launch cycle, I'm not sure net sales should be the absolute marker we'd be looking at, although, of course, we're looking forward to growing that quarter on quarter going forward, and you did the growth from Q2, which was -- reminding everyone -- just a few weeks of shipments in Q2. It wasn't a quarter. Also vis-a-vis Cosentyx, which enjoys three indications, we can only have the one in psoriasis, as was mentioned in the call text earlier. We do plan submissions now for PsA in the US shortly, and we have an AxSpA program ongoing.

So net-net, I think we are happy with where we are. Global rollouts are beginning in the second half of the year, as well, in Europe and Japan, which are also significant opportunities. We've got a lifecycle coming. And where we are headed to head against the incumbents of TNF, Stelara and even Cosentyx, within the class, which is the US derm market, I think early performance indicators are quite strong.

Mary Beth, if we can go to the next caller.

Steve Scala, Cowen.

I have a couple. Assuming solanezumab data is tracking toward CTAD presentation, would there be a top-line release? And if so, when would that be issued?

And externally, of course, we know nothing about what was seen in EXPEDITION3. Does Lilly also know absolutely nothing about what was seen in EXPEDITION3, or is some data being analyzed or already has been analyzed? That the first question.

The second question is, Lilly seems to have done some opportunistic spending in Q3. Companies typically do this for various reasons, one of which is anticipation of positive upcoming developments. Certainly, it would not be done when delay or disappointment is expected. So how should we interpret your opportunistic spending in the third quarter?

Thanks for the questions. It's always an exciting moment awaiting to hear you give them. If we can go to Dave for the sola questions on the CTAD and potential timing for a top-line press release issuance, as well as whether or not people have seen anything at Lilly on EXPEDITION3 to date. And then Derica, if you'd like to handle the spending question, that would be great.

Let me answer the second sola question first. Steve, we have seen nothing on EXPEDITION3, and that will remain true until literally a few days before your second question, which is the top-line press release, which we will do with absolute urgency after Management has had a chance look at the data coming in, reminding everyone that period between last patient visit and that Management review involves a lot of data cleansing, QAQC effort to make sure what we are looking at is a true signal, and those are normal procedures that do need time and effort to make sure that the much-anticipated readout is accurate.

Following a top-line release, but probably by just a few days, would be CTAD, if we can make it. This will be a slide format of a summary of the top data points, which would fill out things beyond what would be anticipated in top-line release at that time. That's -- just reminding everyone -- a best-case scenario for us right now if everything goes smoothly operationally. And just to remind everyone, you do not need to register for CTAD -- they've asked us to say that -- and it will be available from the comfort of your computer to view in real time should that presentation occur in first week in December.

In regards to our operating expense and spending in the third quarter, it was really nothing unusual, our lack of transparency in terms of what we're doing behind the scenes. It really is driven by the new product launches and our support of that. You've probably seen some our new DTC ads that we launched in the quarter as well. That's driving the spend as well as our launch prep. We talked about the recent approval of our Lartruvo, and we've been anticipating that for some time.

In addition, you also see that we continue to invest in our pipeline. And if you look at our total operating expenses for the quarter, our biggest growth was in that realm in terms of R&D, and it really is progressing and continuing to progress our pipeline and to pursue the opportunities that we have embedded there that we believe still keeps us on track to achieving that potential of 20 launches in a 10-year span. So whether you call it opportunistic, we see it more in a sustained fashion, that this is what we've been geared up to do.

Mary Beth, if we can go to the next caller.

Chris Schott, JPMorgan.

Thanks very much for the questions. The first one was on Basaglar. You've had a few big formulary wins for 2017. Can you help us just understand the dynamics of that product in the US next year? Specifically, what percent of market do you have access to, and how should we think about Lilly prioritizing that product relative to other assets in the diabetes portfolio?

My second question was on abemaciclib, just helping us put a little bit the continuation of the MONARCH-2 study into context. Do you still believe you can differentiate that asset from Ibrance even though the product didn't achieve its interim efficacy criteria?

We'll go to Enrique for your Basaglar questions and then to Sue for abemaciclib.

We've had a successful contracting season with Basaglar, so we feel good about our commercial access in particular. Clearly, contracting is not done yet, and just to remind everyone, we expect to launch on December 15 of this year. So I won't be able to provide specific numbers at this stage, but just we are very pleased with the access that we will have.

In terms of the priority that we will basically have on -- Basaglar, clearly, is a newly launched product, and we need to make this product relevant in the basal insulin space. Really, a new segment for us, so from that perspective, it's important, and it's important because also it really fully completes the diabetes portfolio that we can offer our customers. We now have a complete portfolio, a full range of insulins, a GLP-1 with Trulicity and then great oral products.

As we look at our performance in the US market and the other major markets, we're actually growing market share with every single product. I think as we launch Basaglar, it is key that we continuing driving the entire portfolio on the success that we're seeing with Trulicity and the opportunity that we have with Jardiance.

With regards to abemaciclib, we continue to be very excited by this molecule. And if we look at the interim, as we've said previously, it was a high bar. If we look across to CDK4/6 inhibitors, about 50% of interims have been met and 50% haven't.

So I don't know we should read too much into us progressing with MONARCH-2. We're looking forward to seeing the final data next year. And of course, we've also got the MONARCH-3 data as well expected towards the end of next year with an interim also earlier.

From a differentiation perspective, there are no head to heads, but if we look at abemaciclib, it is -- we've seen single-agent activity now in the MONARCH-1 trial and also (inaudible) the neoMONARCH data that was presented at ESMO, we saw single-agent activity there. We see 14 times more potency to CDK4 than CDK6 with abemaciclib. We continue to be up to dose this continuously. And it crosses the blood-brain barrier. So we, as I said, continue to be excited by the molecule and do believe that it actually could be a best-in-class CDK4/6 inhibitor.

Mary Beth, next caller please.

Gregg Gilbert, Deutsche Bank.

First, on CTAD, is there other data you plan to present there if not EXPEDITION3 -- or with or without EXPEDITION3? And what longer-term strategic and financial and possibly R&D decisions are tied to the outcome of EXPEDITION3? I think you already touched on the R&D piece, maybe strategic financial longer term.

And then, Enrique, what can you say about the launch of Basaglar in the US. It's somewhat imminent. I'm sure you have a pretty good sense of demand and what price you are willing to part with the product. So whatever you could help us understand heading into that would be very helpful.

Thank you for the questions. Dave, if you could answer the question on the CTAD data being presented, anything other than on EXPEDITION3 three, and maybe at least within the overall Alzheimer's disease portfolio and Bio-Med's portfolio, what that might mean from an investment perspective. Derica or John, feel free to chime in from a corporate perspective if you'd like, and then we'll go over to Enrique for the Basaglar launch question. Dave?

CTAD is an important Alzheimer's meeting. It's not a large meeting, but it's one where top experts who do clinical research around the globe in Alzheimer's all come. As a result, we are consistently at that meeting with posters, other presentations. As you know, Lilly has done a lot of work, whether it be in diagnosis work with our PET scanning business -- we have some data reading on that area -- as well as other supportive data looking at disease modification, et cetera, in different populations. So there are other presentations. I don't have a list in front of me, but we can provide that in follow-up.

The second question is really what would change going forward if sola is positive, and I think here we've given long-term guidance without sola, but certainly, we would anticipate a rapid submission and introduction to the major markets in the normal go-to-market commercialization effort that would come with that, which is typically expense followed by revenue.

I would also say this. We will present two new opportunities for Lilly, I think unique ones, within the field of neuroscience and Alzheimer's. One would be to look at acceleration and full funding for other Alzheimer's products, particularly those with a beta-based mechanisms. Certainly, with a lead like that in sola, we would want to fast follow with other innovations we have coming. We are doing that, but we can always look at speed and veracity of that effort.

And then finally, looking combinations and sequences of therapies that could be combined with solanezumab to further arrest the disease, that only makes sense is sola works, and we have those queued up, but certainly not in our funding and expense base today. So there are many we'll have to prioritize amongst those, and I think, of course, qualitatively, the way sola works will have some bearing on how much of that additional investment we would trigger.

John or Derica, any comment? No? Okay. If we can go to Enrique for the Basaglar question.

So maybe just a few additional comments on Basaglar. Clearly, we will be disclosing the list price in the near future, but it think it's fair to say that the real competition when it comes to prices really happens with the rebate levels and the net price level.

As I mentioned, we will have good access. Now, this doesn't automatically mean that Basaglar is going to be a win. We need to make this product relevant with our customers. We need to build that brand, and we need to provide great experiences.

Yes, in some cases, Lantus and Toujeo are excluded from formularies, but this is not the case for Tresiba and Levemir, so at the end of the day, we need to make sure that Basaglar is an important compelling option for those patients and those customers, and we are working to make sure that that happens.

Mary Beth, next caller, please.

John Boris, SunTrust.

First question just has to do with the pricing risk and election cycle. If you look at most of the election cycles historically, it would seem as though that if investors actually own group coming out of an election cycle, they would be rewarded pretty handsomely.

However, you do have some things that are being tossed about, most notably Proposition 61 that will be on the ballot November 8, on the California ballot, proposing a statute which could create a price ceiling and prescription drug cost by state programs. Just your thoughts about this election cycle and what might be different, and is there any silver lining on pricing coming out of that?

Second question just has to do with Trulicity, just an update on REWIND and thoughts around the upcoming interim analysis and stoppage of that trial.

Thank you for the questions. John Lechleiter, if you'll take the first part of that question, and then we'll come over to Enrique for the rewind question.

Prop. 61, we're fighting that tooth and nail in California. It's not only bad legislation, it's bad for your health, and we're trying to impress that on the voters. What we've found is that the more people become aware of what's at stake here and what's the likely outcomes of Proposition 61, the more they are prone to vote against it and vote it down. We have a pretty big campaign underway in California right now to increase that level of awareness and hopefully to continue to shift voters toward a position of being against it for a whole variety of reasons.

It's difficult to say on a larger -- are we going to see some price relief after the election? I think in terms of where drug pricing fits in what I call that rhetoric that you're always going to get in a campaign season, particularly one that's as polarized as this one, so I think there might these some acute relief.

I think the bigger question is, Hillary Clinton wins, what does she have in mind for healthcare? If Donald Trump wins, what's the direction going to be? It's pretty clear, whether you say you want to repeal and replace the Affordable Care Act, something needs to be done if we're going to render a health insurance availability for everybody in this country, sustainable, on an ongoing basis. So I think that's going to be the focus for the industry is what happens in those probably critical first two years of the first term, which we know what happened in 2008, 2009, and I think that's what the industry has to be prepared for.

At the same time, I think that frankly, if we're are successful with sola, the outcome of sola, and there's hope for Alzheimer's, keep in mind of the top-10 causes of death in this country, I think I heard the other day, Alzheimer's is the only one where we continue to see increases in the rate of mortality.

So I think if the industry can demonstrate once again, like we did with HIV-AIDS, like we did with hepatitis C and so many other diseases, that we can make an impact on something that increasingly everybody is fearful of and concerned about. I think that changes the dynamic, too. We don't know that outcome is going to be, but it's going to be very interesting mix come January 1, and I'm sure Dave Ricks is ready to jump all over it. (laughter)

Enrique, for the REWIND update?

Sure. So our REWIND trial with Trulicity has scheduled completion date right now of July of 2018. We expect the interim later this quarter. We already had the number of events to be able to reach the interim, but the DMC [Data Monitoring Committee] will be meeting later this quarter. And clearly, we've learned a lot from both the LEADER and the SUSTAIN trials.

I think it's important to remind everyone that given the number of events that we have in interim is significantly lower than what Victoza had with LEADER, so the hazard ratio for us to be significant will have to be quite impressive. We will see what the data says once we have the readouts.

Thank you, Enrique. Mary Beth, next caller, please?

Marc Goodman, UBS.

Yes --

Marc, if you can hear us, it sounded like we lost you.

Hello.

Yes, we can hear you now.

Enrique, first, can you help explain why Glyxambi is not doing better? Look at the prescription trends, and I just would have thought this product would have taken off much better.

Second question is, can we get a little more color on animal health and just what happened in the quarter and what's going on there? Third, you mentioned the CGRP headache cluster. Can you just talk about the timeline change there and what happened and if there's been any other timeline changes to that program?

We'll go around the table here. We'll start with Enrique on the Glyxambi question, over to Jeff for color on what's going on with animal health business, and then back over to Dave for the CGRP timeline question. Enrique?

The strategy that we had for Glyxambi was a different one prior to the readout of the EMPA-REG OUTCOME trial. As we see it today, we need to make sure that we are positioning Jardiance as a standard of care, and we need the new indication to truly do so and really reinvigorate the growth of the SGLT2 class. We believe Glyxambi will have very significant benefit once this happens.

But investing today in a really big way with Glyxambi really doesn't make sense, whether it's access or promotional investment. Glyxambi has today fairly low access. We are in the 20s when we look at commercial access, and it's even lower than that in Part D. We need to rethink that once we get the new label for Jardiance.

Jeff?

Thanks for the question on animal health. Bottom line, our animal health quarterly results have been more volatile this year, as you know. Inventory destocking was a significant event in Q3 and it contributed to the revenue decline this quarter.

We don't see these results as a trend. Just as we enjoyed the benefits, as you recall, of the distributor purchases in Q2 ahead of our SAP cutover in the US, inventories were depleted in Q3, which caused the majority of the decline in our companimal.

So I would note the SAP transition has gone very smoothly. On the companion animal side, our businesses is up 3% year to date, which really normalizes for the Q2 and the Q3 inventory impact. And what's driving this is one, successful launches of some new innovation, as well as, we believe, our improve competitiveness with the combination of Novartis and Elanco.

On the food animal side, food animal is down 1% year to date, and really, outside the US, we've experienced weakness in Latin America, and really, this region represented the entire decline for our OUS food animal in Q3.

And then in US, we faced some market access challenges this quarter, in particular, Paylean, a product in our US swine business. Pork customers pursuing the China export market removed Paylean. They'll do that on and off. They'll come on and off the product, depending on needing the export markets or not. So that, in summary.

And then as John noted, two weeks ago, we announced the acquisition of BI's companion animal vaccine business subject to the closing, again of the BI Sanofi asset swap. We see this as a tremendous complement to our companion animal business in the US.

Just a clarification. The number I quoted for Glyxambi is as a preferred position, so lowest branded copy. The access is higher than that when we look at overall access [Commercial access is 64%] (information added by company after the call).

Thank you for the clarification, Enrique. Dave, on the CGRP timeline?

I think, Marc, you are asking about the push-out on cluster headache. This is galcanezumab, reminding everyone that galcanezumab would be the first therapy in this class -- actually, the first therapy ever to our knowledge to be approved with well-controlled studies in cluster should those studies read out. We have pushed back the timeline into next year based on enrollment, and really, to clarify that, it's actually the ability to have subjects have cluster headaches. Some forms of the condition are episodic, so while we recruited well the number people in the program, we're waiting for the cluster events to start which can demonstrate the value of the product. So that goes part and parcel with any new -- pushing into a therapy area like this where studies haven't even been done before with medicines on a large scale.

But we're excited about that part of the program. Again, it would be first with that indication to our knowledge. It gives us some credit with the neurologists for tackling a tough condition and potentially some value support as we go to market.

Also, I'd say the migraine program is on track. We've communicated previously that that's a mid-2017 readout with potentially submission by the end of 2017. So we're feeling good about galcanezumab overall.

Thank you. Mary Beth, we can go to the next caller, please.

Vamil Divan, Credit Suisse.

Thanks for taking my questions. So first is on the diabetes side, Trulicity and Jardiance. Can you provide a little more color in terms of how much of the sales is coming against the classes as a whole and also your products from specialists versus generalists. Just trying to see if they're getting better traction with the primary care physicians.

And then second, on Taltz, you mentioned psoriatic arthritis and also ankylosing spondylitis. Can you just give us a better sense there in terms of how you view the commercial opportunity for those two indications relative to the psoriasis indication?

Enrique we'll go to you for Trulicity and Jardiance question on specialist use versus PCP prescribing, and over to Dave for the psoriatic arthritis and ankylosing spondylitis opportunity.

I don't have the exact numbers in front of me, but when we think about specialist versus primary care, for this product to be successful, we have to be relevant when it comes to primary care. We expect long term that over 80% of volume will basically come from primary care as we think about these two products.

Something that is encouraging about the uptakes of both of these products is that our share with specialists, it is indeed higher with endocrinologists than with primary care physicians. This is important as a leading indicator as we look at the future and a great prognosticator of what is to come ahead.

Dave?

Thanks for the question. What I hear you asking is as we look forward to the future indications, how do we think about the size of these markets? I would say on PsA, which will be the next one for us, based on a differentiation we think we have versus standards of care like Humira, reminding everyone that IL-17s can be used without methotrexate and you get a stool, skin, and joint benefit that's at least as good on the joint, we are encouraged by what we see so far in our estimates. Our own estimates, actually, have gone up since we started the program because treatment rates for the PSA appear to be quite a higher than psoriasis when it comes to using biologics.

Just to give everyone a bit of frame on that, when you look at products that are indicated only for psoriasis and psoriatic arthritis, take Cosentyx, for instance, they should have a little bit more volume coming out of non-derms than derms right now. And I think that indicates that although the incidence rate is lower for PSA, rheumatologists are more comfortable with biologics. They are treating PSA a higher rate.

Ax-SpA is, I would say, even more of an underdeveloped opportunity. In particularly, Lilly's program will feature the potential to be indicated in non-radiographic AxSpA, so there's an absence of x-ray proof of the condition.

This is a recognized indication in Europe but not yet by the FDA. Should we achieve that, I think that presents a very significant market expansion opportunity for AxSpA where the biologic basis of the condition is known to be quite similar to PsA and psoriasis, so there's a lot of promise being held out for the class in ax-SpA. We see some early data from Cosentyx in that regard. Using even higher doses. So I think we are optimistic on all those indications as being a meaningful part of the ultimate success story of Taltz.

Mary Beth, next caller, please?

Jeff Holford, Jefferies.

First one just very quickly on Effient. Assuming that the exclusivity wouldn't be based on a 2023 patent, could you just give is what the more conservative timeline to think about for loss of exclusivity in the US would be?

And then secondly, just thinking about going into next year post election, and just think about some of the rebating you've already mentioned on Humalog, with the LIS [Low Income Subsidy] and duals rebating changes that have been kicked around a few times and are being kicked around again during this election cycle, could you just talk a little about your exposure to the LIS and dual-eligible population, what you think the probability of any rebating changes could be there and any ways the firm could potentially mitigate those?

Dave, if you'd like to go ahead and comment first on the Effient question, and then maybe, John, do you want to comment just generally on the size of the impact of the dual LIS, and then maybe Enrique or Dave, Sue, if you want to comment on any specific impacts or mitigation that you see with your particular areas of the business, that would be great.

I'll be brief. We've been I think consistent through time and saying that the IP that we are counting on for our own plans as being quite firm is the compound patent, which expires naturally in Q2 of next year, and then as extended with the pediatric work, which we have confirmed would take us into early Q4. The other IP, we are disappointed, and we plan to continue to fight on those, but I think we've been consistent in our own planning as that's the firm date that we were counting on, and that remains true.

John, on the overall impact of the dual LIS proposals?

I think if the low-income subsidy patients and duals are moved out -- and that's been bandied around for quite a while and talked about -- the order of magnitude of the impact it would have on the industry is akin to the overall impact of the Affordable Care Act, so we are talking something around $110 billion, $120 billion over, I think, a 10-year period. So it's a significant hit, and it's, again, as I said earlier, it's not bad policy, it's bad medicine. And these folks are not going to enjoy near the care and access to modern therapy that they are able to benefit from under their Part D coverage. So you can bet we're going to fight any such proposal tooth and nail.

Any other comments from --

I'll let Enrique talk a little bit about the in-line business because we had very significant exposure, say, five years ago in Bio-Med with all the neuro-psych products, but that's pretty well diminished in the US.

I would just say from a policy perspective that I think two other bad things will happen if that goes through. One is it will create an incentive to actually price higher because you want to get the starting point above where it is today given the 23% from the beginning plus the accelerated rebate based on price increases. I think it will have a perverse effect, actually, on pharma pricing.

And then the second is I think it will take away an incentive long term to develop medicines for duel LIS beneficiaries, which is probably the last thing anyone in Congress would be wanting, but that will be the net effect of that change if it occurred. We're optimistic that we can fight that.

Enrique?

Clearly, when it comes to diabetes, this would be a very significant impact. As we look at Lilly relative to our competition, I think we're well-positioned. We have stronger access generally in commercial than in Part D, and we have continued to prioritize that because clearly it is a more profitable business, a more sustainable business, and we've done this across all of our products.

Mary Beth, if we can go to the next caller, please.

Alex Arfaei, BMO Capital.

My apologies if this was addressed. I was disconnected briefly. How should we think about pricing for Humalog. Obviously, a significant impact here. I'm just wondering if we could get your longer-term thoughts there.

And then on sola, have you had any updated conversations with regulators or just updated general thoughts regarding you changing your primary end points on EXPEDITION3?

Enrique, if you could touch briefly on Humalog pricing as you're seeing it, and then we'll go over to Dave for any discussions we've had with regulators related to the change in end point that we announced earlier.

I've commented on some of the dynamics of the quarter and some of the mix changes as we look at the increases in Medicare/Medicaid chargebacks as a percentage of the overall business. Clearly, we expect some of those dynamics to continue.

For the most part, now, as we look at the different formularies, they've -- all of the large formularies have gone exclusive, so whether it's on the Part D side or on the commercial side, as of 2017, I think we basically have a situation where Humalog will be exclusive in a certain number of formularies and our competitor in some others. Clearly, there could be switches back and forth that will deteriorate prices even further, but we have not seen that because there is a very high disruption cost at the patient level to be able to switch 100% of the business now for more incremental gains. It is difficult to say what the pricing dynamics would be, but net prices when it comes to Humalog are pretty low already.

Dave?

Alex, really no change. We announced in March, as you know the shift to the primary end point for cognition. Secondary will be function, a key secondary. At that time, we said we are in constant conversation with regulators around the world, but this is really a sponsor decision.

Really, nothing has changed with that. We are now, of course, past last patient visit, waiting for the data later this fall, and we'll just have to take a look at the data when it reads out here toward the end of the year, and again, maintain that we think in mild Alzheimer's, certainly in prodromal, and absolutely in pre-Alzheimer's conditions, measuring cognitive changes is a much more sensitive and much more appropriate way to measure disease impact and disease modification.

Of course, we will measure function in mild Alzheimer's, but I would point out that for the mild study we've started with AZ called DAYBREAK with a prodromal mild combination study on our BACE inhibitor with AZ, as well as our own prodromal program we just began with sola, all of those use cognition as the primary endpoint. This a bet we're making across the portfolio and we think is well-founded based on expert advice we have and the way science has evolved.

Mary Beth, next caller, please.

Colin Bristow, Bank of America.

Just on Jardiance itself, (inaudible) versus what's implied from script volumes. Can you give some color on what's driving this? I know you said last quarter it was a mix of gross to net adjustments and high use of co-pay cards. I'm just wondering, should we assume that the current net pricing is like a reasonable baseline, or is there a negative pricing dynamic that could dissipate?

Second, on animal health, just a follow-up. It seems like your comments suggest these are just one-time occurrences that are impacting performance. And so should we anticipate a rebound in sales strength in 4Q?

And then just lastly, on abema, can you confirm we should still expect the MONARCH-3 interim before year end? I'm sorry if I missed this.

We'll start with Enrique for the Jardiance question. Over to you, Jeff, then, for the animal health and what you see for the dynamics heading into the next quarter. And then Sue, on the timing for MONARCH-3, which we did actually update back in August, but we're happy to go ahead and provide you that updated language so everyone on that call has got that. So we start out with Enrique.

In my view, the most relative factor to look at when we think about Jardiance overall is class growth. And if we look at class growth, we have shared and we have been concerned with the overall growth that we are seeing in the SGLT2 class in the US. The class, as we look at the last four weeks related to the same four weeks of last year, is only growing about 20%. That's significantly below our expectations. We are hopeful that the inclusion of the EMPA-REG OUTCOME data on the label will be a catalyst for the overall growth, and we feel confident if we get the right language, that we will be able to make a huge value proposition for this product in the eyes of our customers.

As we look at SGLT2 class growth, it is a little bit different outside of the US. In Europe, the class is expected to double. Same case in Japan -- more than double in Japan in 2016. Yes, from a smaller base, but the growth dynamics I think are very encouraging.

We are doing fairly well when it comes to share. We now have a 30% new-to-brand share in the US. Our overall share in Germany is nearly 40% and above 40% in Italy, and basically growing in Spain, UK, Canada. So I feel very good about the position that we have within the class itself.

Now, on the pricing question and rebates, I did comment on some of the co-pay cards and some of the impact of those. I also mentioned that the impact of the co-pay cards is going to lessen over time because there is a duration of these co-pay cards. So while we have implemented some of those changes, we have [a number of] patients on these co-pay cards already, and some of them are also on the market, so we expect this to be a long-term phenomenon, and we will see this decreasing over time.

On the animal health business, I think overall at a high level, as we noted last December in our investor conference, we are going through a transition period. What I would note is yes, the SAP cutover is complete, and that volatility is completed, so we do see less volatility going forward.

I think we're keeping our eyes on a few things that are absolutely critical for animal health business. One, our companimal competitiveness. As I've shared, we feel very good about that.

Some of our growth engines like our vaccine business and expansion of that. And then we noted seven big products that were critical for innovation, which you know drives animal health just like pharma. We've put five of those seven products into the market, and they'll be foundational to our growth going forward.

And then on the margin side, we continue to stay focused on the margins where we are moving to that low to mid 20%s, and we see that happening in 2016. So overall, Elanco, our animal health business, is well-positioned in the top tier to remain competitive in this competitive consolidated industry.

Sue?

With regard to abemaciclib, so the MONARCH-2 data, we should have final data in first half of next year. With regards to MONARCH-3, again, these are event-driven trials, so they could change, but our projection is that the MONARCH-3 will have the final data towards the end of next year.

We do have an interim that we would see in the first half of next year. It has a high bar. Our base plan is that we will continue through to the final data.

We are reaching the end of the call. I'm going to try and put a little pressure on the next caller as well as whoever responds. If we could, Mary Beth, go to the last caller for a single question and a prompt response to the question, please, and then we'll Dave wrap up the call.

Andrew Baum, Citi.

Feeling the pressure. (Laughter) Could you talk to the CDK4/6 category, firstly in relation to the competitive adverse event profiles of the particular drugs? I am interested, obviously, in the clinician feedback about the low-grade diarrhea versus the monitoring requirements that Novartis is going to face.

And then second, should we expect that formularies are going to exercise pressure in this segment as well given there'll be three drugs with very similar profiles in the way that pulled Tasigna off the formulary that CVS has in CML [Chronic Myelogenous Leukemia] as well as other small molecule drugs such as Xtandi? Is this the way the world will work within small molecule oncology drugs going forward?

Sue?

So with regards to abemaciclib, I can't comment on the safety profiles of the other products, but if we look at abemaciclib, I think we've seen that we've got a very tolerable drug that we continuously does. With regards to the diarrhea, if you, again, saw the neoMONARCH data, if you could give over-the-counter loperamide, we saw very little diarrhea and very manageable and feel good about the safety profile there.

Again, I think formularies, it would depend on what the data shows and how they differentiated as to what happens with regards to payers and formularies.

Great. Thank you very much, Sue, for the quick response. Now we'll now go over to Dave Ricks to close out our call this morning.

Thanks, Phil. For those of you listening live or over the replay, we appreciate your interest in our Company and your participation in today's call. Should you have any questions we didn't address, please contact our IR Team, and they'd be happy to help as usual.

This is Brad Robling's last earnings call, and we thank him for his support of our investors and wish him all the best in his new business development assignment. Thanks, Brad.

And finally, I'd like to take the opportunity to thank John for his steady leadership during one of the most difficult periods of our Company's 140-year history. Spurred on by John's vision and his commitment to innovation, Lilly is today in the midst of one of our most productive periods of new product launches, and we've achieved great progress building an R&D engine that has the potential to launch 20 new products in 10 years, beginning in 2014.

John, many analysts and portfolio managers I've met with in recent weeks in expressed their sincere appreciation for your contributions to the Company and to the sector. You've earned their praise, and we all owe you a debt of gratitude, and we wish you all the best in the next chapter of your life.

Thanks, everyone, and look forward to talking to you in the near future.

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