禮來公司 (LLY) 2016 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Q4 2016 earnings call.

(Operator Instructions)

I would now turn the conference over to your host, Dave Ricks.

Please go ahead, sir.

Thank you and good morning.

Thanks for joining Eli Lilly and Company's fourth-quarter 2016 earnings call.

I'm Dave Ricks, Lilly's President and CEO.

Joining me on today's call are Derica Rice, our Chief Financial Officer; Dr. Jan Lundberg, President of Lilly Research Labs; Enrique Conterno, President of Lilly Diabetes and Lilly USA; Dr. Sue Mahony, President of Lilly Oncology; Chito Zulueta, President of International Business; Jeff Simmons, President of Elanco Animal Health; Dr. Tony Ware who is the Interim President of Lilly Bio Medicines; and, of course, Christina White, Chris Ogden and Phil Johnson of the Investor Relations 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.

It is not intended to be promotional and it is not sufficient for prescribing decisions.

Before discussing key events for the quarter, I'll start with a summary of our progress since the Q3 earnings call using our strategic objectives framework.

Starting with grow revenue, in Q4 we generated worldwide revenue growth of 7%, which was driven by 9% volume growth in our pharmaceutical business, led by our new products.

Prices declined 1% in Q4.

On our strategic objectives, expand margins, total operating expenses as a percent of revenue declined over 400 basis points compared to Q4 of 2015; while our non-GAAP gross margin percent, excluding the effect of FX on international inventories sold, was essentially flat.

Under the heading of sustaining the flow of innovation, here in the US in our collaboration with BI, the FDA approved, and we began promotion of, a new CV indication for Jardiance, and we launched our long-acting insulin Basaglar.

In Europe the European Commission approved Lartruvo for soft tissue sarcoma.

Finally, on deployed capital to create value, we completed the acquisition of Boehringer Ingelheim's US animal health vaccines business; we announced an agreement to acquire CoLucid Pharmaceuticals, which will add a promising molecule for acute migraine to our late-stage pipeline; and we announced an increase of 2% in our quarterly dividend and we repurchased $300 million of stock.

We expect to make continued progress in 2017 and we remain on track to achieve our mid-term goals for each of our strategic objectives.

Now let's move on to slide 5 for a more detailed review and key events that occurred since our last earnings call.

New product launches continued.

As I mentioned, in collaboration with Boehringer Ingelheim we saved FDA approval of the new CV indication for Jardiance in December and launched in January, right after the mid-December launch of Basaglar.

Our initial sales were largely due to stocking.

But we are pleased with initial feedback from customers.

We also launched Lartruvo for advanced soft tissue sarcoma in both the US and Europe, and the product is off to a strong start.

While in Japan we secured the price listing for Taltz in November, and launched the product for both psoriasis and psoriatic arthritis.

We are in the process of opening accounts and completing hospital formulary reviews.

While it's very early, initial feedback and IMS data are positive.

In the animal health space, along with Aratana, we announced that Galliprant, a first-in-class product for dogs for the management of pain and inflammation associated with osteoarthritis, is now available to veterinarians here in the US.

On the regulatory front we made significant progress.

We received conditional marketing authorization from the European Commission for Lartruvo to treat adults with advanced soft tissue sarcoma.

Also in Europe we received a positive opinion recommending approval of baricitinib for the treatment of moderate to severe active rheumatoid arthritis.

In collaboration with Boehringer Ingelheim, we received multiple regulatory actions on the Jardiance family of products.

A number of these actions were related to the EMPA-REG OUTCOME trial.

The US FDA approved of a new indication for Jardiance to reduce the risk of cardiovascular death in adults with type 2 diabetes and establish cardiovascular disease.

We were also pleased that the ADA issued updated diabetes treatment guidelines shortly after the FDA approval.

In Europe the European Commission approved an update to the Jardiance label, including data on reduction of the risk of CV death in patients with type 2 diabetes and established CV disease.

The US FDA also approved updates to the labels of Synjardy, Synjardy XR, and Glyxambi to include data on the reduction of the risk of CV death in patients with type 2 diabetes and established CV disease when treated with empagliflozin.

Similarly, Europe's CHMP recommended an update to the Synjardy label to include data on the reduction of risk of CV death in patients with type 2 diabetes and established CV disease when treated with empagliflozin.

Separate from actions related to EMPA-REG OUTCOME, the FDA approved Synjardy XR, a tablet containing empagliflozin and metformin extended release for the treatment of adults with type 2 diabetes.

The European Commission approved Glyxambi, a single pill combining Jardiance and Trajenta for the treatment of adults with type 2 diabetes.

Finally, here in the US the FDA extended the NDA review period for baricitinib, and we now expect regulatory action early in Q2.

Moving to slide 6, there was one significant data readout in Q4.

We were disappointed to announce that the EXPEDITION3 trial of solanezumab is patients with mild dementia due to Alzheimer's disease did not meet its primary endpoint.

Since the solanezumab update we provided on our guidance call, we made the decision to terminate the EXPEDITION PRO study of solanezumab in prodromal Alzheimer's disease.

After careful review of the data from the EXPEDITION3 study, and given the overlap of patient populations between EXPEDITION3 and EXPEDITION PRO, we did not find sufficient scientific evidence to support the hypotheses that solanezumab would demonstrate a meaningful benefit to patients with prodromal Alzheimer's disease.

In addition, the decision has been made to continue two ongoing public/private partnership studies in earlier stages of AD, the A4 study in preclinical AD and the DIAN-TU study in dominantly inherited AD.

In other news, the US Court of Appeals for the federal circuit upheld the district court's decision that the Alimta vitamin regimen patent is valid and would be infringed by the generic challenger's proposed products.

If the patent is ultimately upheld through all remaining challenges, including intellectual property review proceedings, Alimta would maintain US exclusivity until May 2022.

We announced completion of the acquisition of BI Vetmedica, Inc.'s US feline, canine, and rabies vaccines portfolio, which also brings a fully integrated manufacturing and R&D site and several pipeline assets.

The acquisition diversifies Elanco's US companion animal portfolio by adding vaccines for a range of common conditions.

We also announced an agreement to acquire CoLucid Pharmaceuticals for $960 million.

When closed, this will add lasmiditan, a potential first-in-class noninvasive constructive migraine treatment to our pain management pipeline.

We believe this potential treatment for acute migraine complements our growing pain portfolio, specifically galcanezumab, which is in development for migraine prevention.

Along with AstraZeneca we announced a worldwide agreement to codevelop MEDI1814, an antibody selective for the a-beta 42, which is currently in phase 1 trials as a potential disease modifying treatment for Alzheimer's disease.

In oncology announced an expansion of our existing immuno-oncology collaboration with Merck to add a new study to our Lartruvo with Merck's Keytruda in patients with previously treated advanced or metastatic soft tissue sarcoma.

We also announced a partnership with Express Scripts to allow people who use Lilly insulin, in particular those who have no insurance or those who are in the deductible phase of their high deductible insurance plans, to purchase product at a 40% discount using mobile and web platforms hosted by Blink Health.

Finally, in December we announced a 2% dividend increase, bringing our quarterly dividend to $0.52 per share.

And during the fourth quarter we distributed over $500 million to shareholders via the dividend.

And we paid $300 million for share repurchases.

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

Slide 7 summarizes our presentation of GAAP results and non-GAAP measures, while slide 8 presents 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 in our fourth-quarter and full-year GAAP results.

Looking at the non-GAAP measures on slide 9 you can see that Q4 2016 revenue increased 7% compared to Q4 2015, reaching $5.8 billion.

Gross margin as a percent of revenue was essentially flat at 77.4%.

The effect of foreign exchange rate on international inventory sold was a benefit to both this year's and last year's quarter, with the benefit being slightly larger this year.

Excluding this FX effect, our gross margin percent increase by 20 basis points, going from 75.7% in last year's quarter to 75.5% this quarter.

Total operating expense was unchanged Q4 of 2015.

Each of the component parts of total operating expense -- marketing, selling, administrative expenses -- and R&D expense were also unchanged.

In market, selling and administrative expenses, higher spending to support new products was offset by lower spending on late life cycle products.

In R&D expense, recall that in Q4 2015 we had about $135 million in late-stage termination charges for basal insulin peglispro and evacetrapib; while in Q4 this year we had about $75 million in charges related to the EXPEDITION3 study.

Excluding these charges, R&D expense grew 5% due to higher late-stage clinical development costs.

Other income and expense was income of $16 million this quarter compared to the $45 million reported in last year's quarter.

Our tax rate was 17.9%, an increase of 4.4 percentage points compared with the same quarter last year.

This increase was primarily due to the inclusion in Q4 last year of the full-year 2015 benefit for certain US tax provisions, including the R&D tax credit.

This was partially offset by higher net discrete tax benefit in this year's Q4, which included a tax benefit of approximately $40 million related to the early adoption of the new accounting standard for stock-based compensation.

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

We achieved the significant earnings growth by delivering high single-digit volume-based revenue growth while keeping OpEx flat.

Slide 10 contains non-GAAP adjusted information for all of 2016; while slide 11 provides a reconciliation between reported and non-GAAP EPS.

You'll find additional details on these adjustments on slides 25 and 26.

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

On slide 12, in the gray highlighted row at the bottom of the table, you'll see the 7% revenue growth I mentioned earlier.

The effect of foreign exchange on revenue growth is minimal this quarter, and world-wide revenue growth on a performance basis also rounded to 7% and was driven entirely by volume.

By geography, you'll notice the US pharma revenue increased to 16% driven almost entirely by volume, as well.

Trulicity was the main driver of US volume growth, with meaningful contributions also coming from Humalog, Taltz and Jardiance.

As cited in our press release issued earlier this morning, we benefited this quarter from a $130 million favorable adjustment related to changes in estimates for rebates and discounts, primarily related to Humalog.

From a growth rate perspective, this was partially offset by the gross net benefit we experienced in Q4 2015.

The decline in EUCAN revenue of 9% was driven by the negative effect of price and, to a lesser extent, unfavorable foreign exchange movements and lower volume.

On a constant currency or performance basis EUCAN revenue decreased 7%.

This decrease was driven primarily by lower volume and price for Cymbalta and Alimta, partially offset by the uptake of new product, including Trulicity, Cyramza, Basaglar and Jardiance.

In Japan, pharma revenue increased 9% in total, driven by a 13% benefit from the stronger yen and, to a lesser extent, increased volume, partially offset by a 7% negative price effect from the latest bi-annual price cut.

On a constant currency basis, Japan's pharma revenue decreased 4%.

This performance decline was attributable to the entry of generic olanzapine this past June.

Excluding Zyprexa, Japan's pharma revenue in Q4 grew 9% on a constant currency basis, led by Cyramza with meaningful contribution from Cymbalta and Trulicity.

Turning to emerging markets, revenue this quarter was unchanged as the negative effect of FX was offset by higher volume.

On a performance basis emerging markets revenue increased 3% as growth in Cialis, Humalog, Trulicity, Cyramza, Progenta and Jardiance was partially offset by lower sales of Alimta and Humulin.

Also, this quarter our pharma revenue in China decreased 4% due to FX; while revenue increased 1% on a constant currency basis.

Turning to animal health, this quarter worldwide revenue increased 3%.

While excluding the effect of foreign exchange, the increase was slightly higher at 4%, with US revenue growing 2% and OUS revenue growing 5%.

The US increase was driven by new companion animal product launches, while the OUS increase was primarily driven by higher food animal revenue.

On slide 13 you'll find the same price, rate and volume analysis but for the full year.

As we have done in recent quarters, let's now take a look at the drivers of our worldwide volume growth on slide 14.

As I mentioned earlier, excluding FX our worldwide revenue grew 7% this quarter, driven by an 8% increase in volume.

In total, our new products, Trulicity, Cyramza, Jardiance, Taltz, Basaglar, Lartruvo, and Portrazza were again the engine of our worldwide volume growth.

You can see that these products drove 8.9 percentage points of volume growth.

Our meal-time insulins, and Humalog and Humulin, in total contributed nearly 2 percentage point of volume growth, while our animal health products contributed 40 basis points to our volume growth.

Due primarily to declines outside of the US resulting from a loss of exclusivity, Alimta trimmed 1.5% from volume growth, while loss of exclusivity for Zyprexa, Cymbalta and Evista provided a drag of just over 2 percentage points.

Now let's turn the call over to Derica.

Thanks, Phil.

As in prior quarters I'll start by sharing some color on our new product launches.

As you can see on the graph on slide 15, our new products generated over $700 million in revenue this quarter, led by Trulicity and Cyramza.

This represents over 12% of our total worldwide revenue, up from 10% last quarter.

And, as Phil mentioned earlier, these products drove 8.9 percentage points of our worldwide volume growth this quarter.

Trulicity performance continues to be strong.

Here in the US we are excited that our new-to-brand share with endocrinologists, which we view as a leading indicator, is now comparable to Victoza.

In addition to our strong performance, we are also benefiting from growth of the class, 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 Japan where we're seeing early strong and early adoption in gastric cancer, and more recently have begun to see uptake in lung and colorectal cancer.

OUS markets now account for nearly two-thirds of our worldwide Cyramza sales, and we look forward to continued growth in these markets; US Cyramza sales declined this quarter.

Moving to Jardiance, we continue to see strong uptake, with our new-to-therapy share with endocrinologists at 35%, exceeding Invokana.

As mentioned earlier, in December we received FDA approval of the CV indication.

And the ADA also updated its diabetes treatment guidelines.

As we've stated in the past, we expect these two milestones to be catalysts for the growth of Jardiance and the SGLT-2 class.

We continue to see rapid uptake of Taltz, which launched in the US in April last year, and has served as a catalyst for continued growth of the IL-17A class in psoriasis.

We are pleased that our new-to-brand share with dermatologists, a proxy for use in psoriasis, already exceeds that of Enbrel and Cosentyx.

On Basaglar, we launched here in the US in mid-December.

The $16 million in US sales we booked were largely due to initial stocking.

Physician feedback has been positive so far and we look forward to providing a more detailed uptake on our next earnings call.

In the fourth quarter we also launched Lartruvo for soft tissue sarcoma, with product becoming available in the US in late October.

Our Q4 US sales of $11 million were largely driven by demand.

In Europe, Lartruvo was approved in mid November, and we booked initial sales during December in Germany and Austria.

Finally, we continue to see strong uptake of I/O agents in first-line squamous non small-cell lung cancer affecting use of Portrazza.

Now moving to slide 16, you'll see the changes in foreign-exchange rates had minimal effect on our Q4 2016 results.

Growth in non-GAAP EPS was 22% including the effect of FX and 19% in constant currency terms.

For the full year FX provided a slight drag on our financial results.

Specifically, revenue grew 6% with FX and 7% in constant currency terms, while not GAAP EPS grew 3% with FX and 7% in constant currency terms.

Moving on to our pipeline update, slide 17 shows our NME pipeline as of January 18.

For the past three months, most of the movement has been in phase 1. You'll see the phase 3 attrition of solanezumab for mild Alzheimer's disease, with the A4 study in preclinical AD now reflected as the lead indication for solanezumab.

You'll also see a red symbol in phase 1 reflecting our decision to stop development of A-beta Fab PEG.

Several assets entered phase 1 including the addition of the A-beta 1 to 42 specific antibody from our expanded collaboration with AstraZeneca, and the entry of a base inhibitor for Alzheimer's disease, two diabetes molecules and one molecule in both cancer and immunology.

One other update -- you may have seen ADOCIA's press release last Friday announcing that we decided to return to ultra-rapid insulin we have been developing together.

We have an alternative ultra-rapid insulin in development that could begin phase 3 testing before the end of 2017, consistent with the information on our 2017 key events log.

In our NILEX pipeline, on slide 18, you will see two US approvals in the Jardiance family, the CV indication for Jardiance as well as the once-daily combination of Jardiance and Metformin.

And, as mentioned earlier, you will see attrition of the solanezumab EXPEDITION PRO study in patients with prodromal AD.

Turning to slide 19, let's recap the recent progress we have made on the key events we projected for 2016.

Since our last call, we added checkmarks for the European approval of Lartruvo for soft tissue sarcoma, and in collaboration with Boehringer Ingelheim the US approval of the CV indication for Jardiance, the European update of the Jardiance label to reflect the EMPA-REG OUTCOME data, and the European approval of Glyxambi for type 2 diabetes.

Finally, you'll see a checkmark to reflect the EXPEDITION3 readout.

Slide 20 shows potential key events for 2017.

And even though we are only a few weeks into the year we have had a number or a few key events occur already.

Importantly, as Dave mentioned earlier, the US Court of Appeals for the federal circuit, upheld the district court ruling that the Alimta vitamin regimen patent is valid and would be infringed by the generic challenger's proposed product.

And early this month we closed the acquisition of BI's US feline, canine and rabies vaccines portfolio.

You'll also see that we have added an entry for the CoLucid acquisition, which we hope to close this quarter, as well as an entry to reflect Merck's recent announcement that the US FDA granted priority review, with an action date in May, for Merck's SBLA submission for Keytruda in combination with Alimta and carboplatin in first-line metastatic, nonsquamous, non small-cell lung cancer based on the KEYNOTE 021G data.

Turning to our 2017 financial guidance on slide 21, our expectations for 2017 are largely unchanged from when we originally issued our financial guidance in mid December.

You will see that our non-GAAP line item guidance remains the same.

We have adjusted our GAAP financial guidance, specifically the tax rate and EPS, primarily to reflect the estimated charge related to the pending acquisition of CoLucid Pharmaceuticals.

As usual we've listed the FX rate assumed in our guidance for the euro, the Japanese yen, and the British pound.

In aggregate, current spot rates are modestly worse.

However, FX rates have not moved enough to cause us to change our 2017 guidance.

We're just one month into the year and we will monitor rates going forward, as well as underlying business trends to determine what changes, if any, are appropriate to our 2017 guidance when we provide our quarterly update.

Before we go to the Q&A session, let me briefly sum up.

As we exit 2016, our growth prospects are coming into sharper focus.

We have significant opportunities to drive growth over the balance of this decade from the product launches currently underway, with three more new product launches possible before the end of 2018.

This should allow us to deliver innovation to patients that fundamentally changes expectation for the outcomes they can achieve, and to deliver value to the healthcare system and to create value for our shareholders and other stakeholders.

Our Management team will be focused on execution to realize the potential of these opportunities.

We will be focused on launching new products with excellence, reloading our late-stage pipeline from inside and outside our walls with assets of equal or greater value than our graduating class, driving increased productivity across our enterprise to expand our operating margin and create investment capacity, and investing in the core drivers of our business, talent, scientific capability and technology platforms, to ensure our future growth prospects.

While policy and environmental uncertainty are high, we see our innovation strategy to drive volume growth through new brands as both valuable and durable.

In my 26 years with the Company I can't remember a more exciting time.

This concludes our prepared remarks.

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

Phil?

Thanks, Derica.

We would like to take as many callers as possible, so we do ask that you limit your questions to two or a single question with two parts.

Thank you in advance for your collaboration with this request.

Kevin, can you please provide the instructions for the Q&A session and then we are ready for the first caller.

(Operator Instructions)

John Boris, SunTrust.

Thanks for taking the questions.

Dave, a lot of science there this morning on CNBC regarding your meeting with Donald Trump.

He obviously highlighted tearing down regulation, improving the tax outlook, and also obviously a focus was on price.

After this meeting does President Trump understand the level of discount that is going on within DOD, VA, that Medicaid is getting products for free, Medicare Part D has not broken the budget?

And what would happen under ACA if it goes away, greater than $100 billion that the industry is contributing out of its SG&A line as a tax, would that go away?

And then, second question, you did put out a release early on reorganization.

Obviously cut one head to streamline decision-making.

But there seemed to be a greater emphasis on China, especially in light of you having run the operations there.

Will you be changing any of your reporting going forward?

Sure.

Thank you, John.

We had a good meeting with the President this morning.

It was a broad-ranging discussion.

You touched on several of the issues there in your question in terms of innovation.

The President was very interested in understanding how our business works and what the opportunities are to further grow the American innovative engine in the bio-pharmaceutical industry.

Of course we talked about taxes and how that could be a positive catalyst for more investment and growth in the US industry.

We talked about regulation.

I think he made some comments on camera about that.

He is interested in finding ways to reduce and streamline regulation, both at the FDA side but also in healthcare markets that the government plays a role in.

And then, of course, we did speak about pricing.

On that last point, I think we all understand the concern he is raising, and of course others are, that consumer out-of-pocket costs seem to be growing, and growing faster than other payers in the system, and how we can do a better job as an industry of getting discounts through to consumers, particularly those in high deductible plans and government programs.

We did not get into elaborate policy detail in terms of the US pricing environment but I think there will be time for that later.

And I left the meeting with some confidence that the people who we'll be working with closely as legislation moves forward have a good grasp of those facts.

Your second question was repeal of ACA and the taxes that the industry pays.

Of course we have not seen any specific legislation here.

I think the industry said it was basically $100 billion over 10 years that would have been paid in to cover ACA.

That is both in terms of the unspecified fee and other concessions in the original 2009 package.

I would be reluctant here to get into specifics on that because we have not seen specifics on the repeal or, for that matter, any pay-fors in the replace.

But we are preparing for all those scenarios and working closely with policymakers, as well as other parts of the industry, on good policy that can promote consumer-driven choice and more broadly available medications in these uncovered populations or in the current ACA populations.

The final question, I think, was on the reorganization.

And, of course, we did announce a reorganization which removed actually several senior management jobs, really to flatten the organization and make sure our executives are as close to the markets that matter and the launches that matter as we go ahead.

That was a primary goal, was really to emphasize the importance of these new product uptakes and having our business unit presidents squarely focused on those and making sure that there is a clear line of sight to the customer for them.

We also want to improve our proximity to China, as you mentioned, particularly for drug development where we can do more, I think, to speed up our innovation into that market, which has an undeniable long-term opportunity for the sector.

We also asked Enrique to take on a broader scope of responsibilities, including payer and so forth, hosting responsibilities for the major markets.

So, that is already announced and rolling out and I think aligns clearly with our stated priorities.

Mark Schoenebaum, Evercore.

Hi, guys.

Thank you for taking my question.

And first thanks to Phil and the whole organization for helping out my team while I was gone.

I really appreciate that.

I would like to ask one business question and one science question, I suppose.

The business question is, Sanofi's biosimilar Humira, can you just give us an idea of your expectations for market entry, timing of market entry, and what your plans are to mitigate that?

I thought that would be helpful as that gets a little closer.

And then, number two, I noticed you said on the call, I think, if I heard you right, you are halting the prodromal trials on solanezumab.

That was interesting to me because I would be curious, given that you guys are one of the smarter Alzheimer's companies, to know what your current thoughts are on the A-beta hypothesis Was the failure of solanezumab a failure of the molecule?

And/or was it a failure of the A-beta hypothesis?

Is A-beta behind Alzheimer's?

And with the halting of the prodromal trial, I assume you don't believe it was simply the patient population enrolled.

Therefore that leaves molecule-specific issues and the hypothesis in general.

I would love to hear you talk on that.

Thank you so much.

Dave, if you would like to take the first one.

And then, Jan, if you like to lead off answering the second question and our view of the failure of solanezumab Alzheimer's population.

Then Tony feel free to complement his answer, as well.

Over to you, Dave.

I think the question related to biosimilar, I think Mark said, Humira from Sanofi.

But I am not aware of a biosimilar Humira program at Sanofi.

Humalog, yes.

Maybe Enrique can handle that one.

We, of course, are prepared for that event.

We have, in a certain way, the fortune of launching a biosimilar, largely in Europe and now a follow on insulin, glargine, in the US.

That is a great preparation in itself because now we are going to be on the other side of that.

We are thinking how to best ensure that Humalog can continue to be an extremely strong franchise for Lilly.

I won't discuss our specific plans but I would say that we are very well prepared.

The amyloid beta hypothesis and the connection to Alzheimer's disease has a strong evidence from genetics where, if you have too much amyloid in your brain you get early Alzheimer's disease.

And also the opposite -- if you have less amyloid beta production the by mutations in the APP, in the base one cleavage side, you also seems to be protected from dementia.

The key question is how do you translate, then, these genetics into realities of pharmacological treatment in an aged patient.

And here there are a variety of approaches that have been used.

It is also a key one here to think about -- if you have an antibiotic with access to brain 0.1% through the blood-brain barrier, how can you compare that result, then, to, for instance, an oral base inhibitor, which some of them go 100% into the brain and are, I think, more likely to have a marked effect then on the free amyloid beta.

And the second question is clearly then, how early do you have to treat.

I think we should recognize that even if you have mild Alzheimer's disease, your brain has been accumulating amyloids for decades, and you almost have maximum amyloid in your brain already.

So, I think there could be two components here, like I say.

Did solanezumab really enter the brain enough to affect amyloid beta?

I think our biomarkers, like amyloid PET did not really change very much by solanezumab, nor did the actually [TAL] changes, which are more related to neuro-degeneration change.

From that standpoint, we did not see any objective measures, I think, that we changed the amyloid content in the brain nor neuro-degeneration.

Is this against or does this prove that the amyloid hypotheses is wrong?

My view is it is too early to say.

We need to wait for even more powerful agents.

And the next in turn are the oral-based inhibitors which are more likely, I think, to have an even stronger effect on the amyloid beta in the brain.

In addition, then, we need to look at the earlier stages of Alzheimer's.

Yes, Mark, I think our view on the prodromal trial is that when we saw the results of EXPEDITION3 in the patients with mild Alzheimer's disease, which, of course, were disappointing, when we look at the prodromal, the patients with prodromal, these are not as distinct clinical divisions as you might think.

There's a great deal of overlap between these two populations.

And we felt within any given visit a patient could be on one side of that or another.

We felt as if that hypothesis had been tested, that those patients were close enough that the prodromal trial would be unlikely to be successful.

As you point out, and as per John's remarks, there are three potential variables here.

There is the clinical stage we just talked about, there is the overall A-beta hypothesis itself, and then there are molecule-specific aspects, as well.

So, those are the three sliders on the equation that we need to try to figure out.

Tony Butler, Guggenheim.

Thanks very much.

A single question for Derica and it relates to gross margins, Derica.

Certainly as the seven newer products that you call out have made an increasing contribution -- as you noted 12% in the quarter -- to overall revenue, one might expect gross margins to be able to move higher.

And I would love for you to comment on the pushes and pulls there and, more importantly, how you think about that as that contribution exceeds 12% certainly for the calendar year even beyond 2017.

Thanks very much.

Sure.

The good news is there is no substitute for top-line growth.

Having the 7% revenue growth are in the quarter, the new products driving almost 9 percentage points of volume driven growth is tremendous.

And, really, the kudos goes to the team and pulling that off.

When you get to the gross margin percent, you did not see the improvement you may have been expecting.

That is really driven more by mix.

So, in the quarter you did see, for example, in our insulin business where you will see as it gets more weight and we have negative pricing in that regime, that becomes a drag on our gross margin percent.

And for now insulin is still our largest product until the other new products catch up.

So, what you really saw in the quarter was more a mix effect.

Chris Schott, JPMorgan.

Great, thanks very much.

Just two questions here.

Maybe, first, can you talk about business development priorities?

You recently announced an interesting but relatively small deal.

But bigger picture -- maybe a question for Dave -- when you think about how Lilly has historically approached business development, should we think about a similar approach under your leadership, or are there any differences in how you are thinking about business development maybe relative to your predecessor?

The second question was coming back to Alzheimer's and base.

How are you thinking about your base program and your molecule relative to Merck's program?

Are there any important similarities or differences we should keep in mind as we consider potential re-across from the Merck phase 3 data later this year?

Thanks so much.

Dave, if you'll answer the question on BD priority.

Feel free, since you are obviously very well of the space, to make an initial comment on the AstraZeneca base program we have and the other bases we're developing and relative to the Merck program.

And then Jan or Tony feel free to chime in, as well.

Dave?

Thanks, Chris.

In terms of business development, I don't see a change in our general approach, which is what we have said for a while, which is we see value in deploying capital on business development where we can really complement our core therapeutic areas where we are looking at acquisitions or licensing transactions that can bring products into the portfolio to drive growth for the future, and to do that with a lot of discipline on value.

So, that is what I think we have been saying for years.

I do think, as we enter this phase coming up, where in our therapeutics areas there appear to be attractive alternatives for investment outside the Company as well as inside.

We've got to [keep Harry] to make decisions on advancing assets into phase 3 over the next year and a half or so, as Derica mentioned.

We need to look at both sources of innovation, and will do that.

The CoLucid transaction, which is one we just announced, I think is a good example of that.

I think the rate may be different based on our circumstances as we are growing the Company and have, perhaps, more opportunities to move assets into phase 2 and phase 3, but the criteria really is not different from how we've thought about this in the past.

On the Alzheimer's base inhibitors, I think we've talked about this for a while but the Merck program has two distinct studies.

The first one is a classic first-generation type design in the sense that they have a mixed mild and moderate population and no requirements to have amyloid present to be in the study.

And we know from prior studies like this, whether it be Lilly or other sponsors, you can end up with 20%, 30% of the patients who actually don't have Alzheimer's disease, in addition, for the reasons Jan mentioned earlier, later probably not better in terms of effect size.

So, the Lilly program with AstraZeneca and the later Merck program have those features built in, with two studies with AstraZeneca.

If Merck, I think, has a positive signal of any sort, I think we would feel good about that in terms of base inhibitors as a target.

If there is no signal, I think we will have to do some thinking.

That is how we are looking at that upcoming readout.

Maybe Tony or Jan could add to that.

No.

I don't have anything additional.

I think you highlighted the differences between them.

We have two studies.

The lead study has both patients with MCI and prodromal and mild Alzheimer's disease, the earlier phases in them.

And then the second study that we entered a phase 3 on are patients with mild Alzheimer's disease.

And in every case we have verified the amyloid going forward.

We have a single endpoint, which is a cognition endpoint, which also differs from the Merck program.

They have more of a classic, as Dave says, dual or co-primary endpoint for the first study, and then they've announced that the primary, the CVR sum of boxes for the second study.

And if I may add, then, both the Merck and the AstraZeneca base are not selective for the base 1 versus the base 2 enzyme.

We have two other base compounds also in clinical development.

And in phase 2 we have are so-called base 4 inhibitor which is low dose.

Its a highly potent 100% brain penetration, which means that you have less peripheral overexposure, in a way, to get the brain effect and potentially functionally less active on base 2. And we recently, then, also entered, for the first time, I think, now, a selective base 1 inhibitor into clinical development.

And that agent then avoids the pigmentation, which you see in experimental animals during talk studies.

Andrew Baum, Citigroup.

A couple questions, please.

Would you care to characterize the magnitudes of financial impact from potential dual-eligible reform, or alternatively provide us the delta in percentage terms between net prices Medicare and Medicaid?

And then, second, you recently recruited Levi Garraway and Christi Shaw within R&D and SG&A, respectively.

Could you outline what their mandates are, particularly in relation to building your immuno-oncology franchise, which obviously is not where ideally you would like it?

Many thanks.

Andrew, thank you for the questions.

Dave, would you like to take that second one first?

And then do want us to answer here in the room the question on the dual-eligibles?

Yes, that makes sense.

Andrew, thanks for the question.

We have brought in two senior executives recently.

We are excited by both their willingness and excitement to join the Company but also what they can add probably in the very short term.

Levi is joining Sue Mahony's team, really taking the role that Richard Gaynor had.

He's got all the clinical phase oncology portfolio and obviously brings a great skill set to do that.

I think in terms of immuno-oncology he's got expertise in that field, among other fields of oncology.

It is probably difficult to say too much about what we hope he will do.

But I think, clearly, it's a competitive field, and having a new look at what we are doing, how we combine products, how we could potentially accelerate our efforts in certain areas, is something that we are hoping Levi can help us with.

Christi is a commercial person.

She started her career at Lilly, most recently ran Novartis' US business.

She's coming into the job I was in, which is a got-to-market and drug development job running biomedicines.

I think she is a strong diverse talent that I think is really an industry veteran who understands the US market extremely well.

So, when that opportunity came to pull her onto the team, we made that move and I think it is going to be great to have her.

She starts April 1, so you will start to see her on the road there in Q2.

Thank you Dave.

Derica?

In regards to your question regarding the dual-eligibles, the best way that I could probably characterize that is that the impact of that would be of the order of magnitude on the industry of the Affordable Care Act, is how you should be thinking about it.

It has been a few years, Andrew, but probably four or so years ago, I think the Congressional budget office had estimated the cost of moving dual-eligible and low-income subsidy folks from the Medicare price into Medicaid, and they had estimated that about $110 billion, $115 billion cost to the industry over a 10-year period, very similar to what the expected cost is of the ACA.

We have not said at the Lilly exposure to that kind of a proposal would be greater or lesser than what the ACA cost is.

But we have said in the past that the ACA 2011 through 2015 was running on the order of magnitude of $500 million to $550 million a year on average as far as the cost to Lilly through greater rebates as well as the pharma fee.

That helps to at least give you some order of magnitude.

Gregg Gilbert, Deutsche Bank.

Thanks.

First for Enrique, in the past, Enrique, you've flagged the concern about SGLT2 new patient starts slowing.

What are your latest thoughts on that subject now that you have the label and the updated guidelines?

Perhaps you can give some color beyond just scripts.

And then my second question is for Jeff.

Can you give us some flavor around your outlook for the key parts of your business for 2017 and what some of the pros and cons were in the fourth quarter?

Thanks.

We are clearly very excited about the new label for Jardiance in that US and the new treatment guidelines published for type 2 diabetes published by the ADA.

We have launched now this new indication in early January and we are thinking, I'll be honest, pretty big, about the opportunity that we have in front of us, given the indication that we have.

Clearly, for us to be successful the class has to grow or, more specifically, Jardiance has to grow.

And we think of that not just as we think about what is the Jardiance share in the SGLT2 class but what is the overall share that Jardiance could get when we think about people with type 2 diabetes, and in particular in the segment where Jardiance is indicated for cardiovascular risk reduction, which is in with people with type 2 diabetes and established cardiovascular disease.

You can imagine that is as much as 30% of people with type 2 diabetes.

So, a very significant opportunity.

It is too early to comment given that we have basically the first week of scripts, which is the first week that basically we launched the product.

But I expect that we will see the uptick, and we will see this in terms of new patient starts right away.

Gregg, on the animal health business, as you know, in Q4 Elanco revenue increased 4%, so we saw the growth start to come back.

This was driven by companion animal growth from new product launches primarily, and also, I think some expanded partnerships and distributors around the globe as we continued to increase our footprint.

Operating margins, also, I would state, expanded to 24% in Q4.

That is in comparison to 19% a year ago.

So, we continue to make progress on integrating our recent acquisitions and we anticipate further improvements as we go into 2017.

If you look at our strategic agenda, I think a few key things in 2017.

First, the completion of the BI acquisition.

That is integrated, we are taking orders, the teams have all been trained.

We'll see 6% growth come from that in 2017.

As Dave mentioned, we launched Galliprant in the US in coordination with Aratana.

This will expand our portfolio in companion animal therapeutics.

We will continue to see our base business expand through innovation, even on the food animal side, as well as just execution and bringing the value of the capabilities that we have gotten from the acquisitions through.

And some of the external factors we see moderating and stabilizing as you look at Latin America and dairy.

In summary, I would say our margin improvement will expand to that mid 20s, as we have mentioned, and look to see our growth will return to grow in our base business to the mid-single digits, mostly in the second half of the year and then again have the BI acquisition growth come through, as well.

David Risinger, Morgan Stanley.

Thanks.

I have two questions.

First, Dave, if you could comment on how the meeting with President Trump concluded and next steps we should expect from the Administration.

And then, second, I was hoping a member of the team could comment on the abemaciclib phase 3 readout timings ahead.

Thank you.

Thank you for the question.

Dave Ricks, if you'll answer the first question of Dave Risinger's question, and ask -- we have Sue Mahony here who can address your second question, Dave.

Thanks, Dave.

As I said earlier, we had a positive and broad-ranging discussion, and I was impressed with the President's appreciation for what our industry is, which is really a crown jewel of America enterprise in the sense we invent things, we can change lives in terms of healthcare outcomes, but also are a great employer and source of economic growth, jobs and exports.

We touched on lots of things -- tax, regulation, as well as the healthcare repeal/replace discussion.

There is a number of follow-ups that were cited.

They will be happening through staff and then on the Hill with key members of Congress.

The specifics on timing and so forth, I am not at liberty to share here.

But I was encouraged overall by the sense, A, that there will be changes made, likely rapidly.

Most of those will involve the legislative branch.

And that there will be follow up with the White House to make sure we are making progress as we go along.

But there is not too many specifics I can share in terms of exact timing.

Just overall I think it was productive to engage the President, educational for both sides, and I think we can go forward and really look at enacting policies that can both help the industry but also healthcare in the United States.

With regards to abemaciclib readout, readout we are anticipating getting the MONARCH2 data and having that readout the first half of this year.

And that's the fulvestrant study.

The MONARCH 3, phase 3, we should have an interim the first half of this year.

Our base plan, as we've said previously, is that we would continue through to the final, which we could see the end of this year.

Jami Rubin, Goldman Sachs.

Thank you.

A question for you, Dave.

Do you see the opportunity to improve the Company's operating margin goals?

I think that, if memory serves me right, three or four years ago you really set out a goal to achieve SG&A and R&D at 50% or lower.

Again, that was set up three or four years ago, maybe even longer.

I am just wondering if you see opportunities to either update that goal you set for 2018, or where do you see it going?

And the reason I bring it is, yes, you had a real high-quality quarter, but you could have massively beat as expenses came in line even at the midpoint of your guidance.

Both SG&A and R&D were at the very top of your guidance.

And for the full year your operating margins were 21.7%.

I think that is the absolute bottom of the industry.

Can you talk about, driven by your new pipeline, the magnitude of potential improvement that you see for operating margins?

Are there structural impediments such as mix effects that will keep margins below industry average?

How should we think about over the next three to five years.

Thanks.

Sure.

Thanks, Jami.

A great question and one we're spending a lot of time on, as well.

Of course, right now we are working against the prior goal you cited, which is to get our SG&A and R&D total operating expenses as a percent of sales to 50% or less in 2018.

That's the near-term goal we are very focused on.

We have reiterated that again in December.

And that is obviously an improvement over where we are today reporting for 2016.

I would not highlight, although we are at the high ranges in terms of our guidance for the quarter on expenses for R&D and SG&A, year over year good progress in Q4.

And we did have some one-time items in Q4, which adversely affected that.

That said, I think my overall perspective on this question is that we have multiple ways to improve the operating margins of the Company.

And as we launch new brands and grow the top line that is clearly one.

I think if we can really repurpose investment behind those priorities and maintain lower growth rate, in some cases much lower growth rate, in the middle of the income statement, we can deliver tremendous leverage on the bottom line.

You can see that in Q4, putting aside the Street estimates, what kind of leverage is available in the business.

And we are aware of where we stand in the industry.

I think we are not a single product company or close to it, like some of the comparables, even approaching our size.

So that breadth, I think, does have inefficiency built into it.

It has other advantages.

We run a global operation.

We want to be a global company not just a multi-market company.

That has an implication.

But, by and large I think your question is can we improve beyond what we said on 2018?

And I am personally focused on delivering on the 2018 commitment and then we will likely set a goal beyond that for improved operating margins towards the balance of the decade.

Jami, this is Derica.

Just to maybe add a little bit of color to Dave's comments, recall that the guidance that we provided, that we got to 50% by 2018.

We also, on that same guidance, going back to last summer, in our July earnings call we said that we would improve our growth margins between then and the end of this decade.

And our starting point was around the mid-70s for gross margin.

So, that implies that at least at a minimum by 2018 our operating margins will be at least 25% or greater.

So if OpEx is 50% of our revenue line, today our gross margin is around 75%, our comps is around 25%, so if we get to 50% we maintain or improve on the 25%.

That implies that the floor and operating margin you should be looking at in 2018 is a minimum of 25%.

So, to Dave's point, that is what we said we will get to by 2018.

We have never said that we will end there, that that was the end goal.

That was the intermediate goal.

There is still progress to be made.

Tim Anderson, Bernstein.

Thank you.

A couple questions.

One is a higher level payer question.

Do you think that the relationship between drug companies and PBMs will come under more government scrutiny as it relates to rebates?

And a thought exercise -- from your perspective would it be good or bad for drug companies to have that whole rebate process potentially go away?

A second question is on Alimta.

You noted that is the chemotherapy drugs being used in KEYNOTE-189.

How does the trajectory of Alimta change from where it is today if that trial is positive or if the Merck regimen gets early approval in May on the phase 2 data they filed on?

What does your 2017 guidance assume?

And could there be upside in 2017 and also beyond 2017?

Thank you for the question.

Dave, if you would like to take the first question that we received on scrutiny of the relationship and the business relationships with PBMs and pharma companies.

And then over to Sue for the question on Alimta in combination with Keytruda.

Sure.

Thanks, Tim.

I think a lot is written about that question.

To be honest, we have good relationships with all the major PBMs.

Of course it is a business transaction and we're on opposite sides of the tables.

They doe their job very well.

They negotiate hard for rebates and discounts for their customers, most of which are large commercial plans or Part D, and we do our job which is to sell the value and try to maintain the formulary position.

There's always tugs and pulls in that, and products are listed and de listed.

But overall I would say we have a good relationship with the PBMs.

Of course there is only one major pure-play PBM at this point, but Express Scripts and Lilly have a good relationship.

We announced this Blink Health partnership as an example of that, innovating together to try to solve some of the payment problems.

I think, hypothetically, if we did not have rebates, would I worry long term about our future.

My answer is no.

I think we are in the business of making innovative products that help patients.

We need to do that in a way that creates value in the healthcare system.

How we get paid for that value, there is probably lots of ways.

As you know, in international markets, many places where we have productive and profitable businesses, we do not have PBMs or anything like it, and we don't have rebates, and we do just fine.

I think because of the breadth of our portfolio, because of our new product mix, because of the Company's focus on volume growth across several key markets, I think as Derica said in his comments we have a durable strategy going forward should there be some big disruption, which I'm not sure I see right now.

But I think on either side of that our model would work well.

Enrique, can add anything to that?

And maybe the Alimta question to Sue.

Add, Enrique?

No, nothing.

He said it well.

Tim, let me answer the Alimta question.

Clearly, we can't give guidance with regards to a product.

That said, we are very pleased to see the data from KEYNOTE-021G, and also the fact that the FDA have accepted this for filing with a PDUFA, as you know, in May.

We're also looking forward to the phase 3 data, which, again, we should see that in September time.

I think with regards to what this means for Alimta, Alimta has been under pressure, particularly in the second-line setting, with the bios coming through in the first-line setting very little at this point.

This data is the first data that shows that adding an I/O agent to Alimta carbo combination shows not only a good overall response rate, which I think we saw a doubling response rate PFS of that 30 month, but also, although the survival data was not different between the two arms we saw pretty good survival both at the 12-month and that 24-month mark, which I think was 72% versus 75% of patients survive at that point.

So, I think we are excited by the data.

And it is the first chemo combo and, I would say, the only chemo combo, with Keytruda or any I/O agent.

We await to see what the other data shows this year with the other trials that are ongoing, and maybe next year, too, with the I/O - I/O combos and the chemo combos.

But clearly this, in my view, can do no harm to how people see Alimta.

It is the standard of care in first-line setting and we continue to see that this is additional data that adds to the multiple trials that we've seen with improved overall survival with Alimta.

Steve Scala, Cowen.

Thank you.

I have two questions.

Can you provide any perspective on the reasons for the delay in the baricitinib PDUFA?

That's the first question.

And the second question is, what should we conclude about Lilly's 2017 guidance in light of the fact that I believe Lilly has exceeded the top end of the initial EPS guidance range in each of the last six years.

All right, Steve, than you for your questions.

We will go to Tony Ware for the first question on the baricitinib NDA review here in the US.

And then over to Derica for your second question on guidance.

Tony?

Thanks, Steve.

In any regulatory review, the FDA submits various information requests and then we respond to those as well as we can.

The FDA makes a determination once they receive any of these information requests as to whether the additional analyses that we have provided -- and that is what they are, is new analyses of the data that they already have -- are sufficiently complicated so that it would extend the time that they would require to review the application.

And that determination is made entirely by them.

We don't have much insight into the rationale for that.

I want to point out that they did not ask us to do more studies, which is an important point.

That's about, really, all I can say definitively.

I would point out, of course, that this application in the wide world of applications that we send to them, it would be on the more complex side.

It is five phase 3 studies.

There are different endpoints, different patient populations, different comparators, and different doses, in some cases, about that.

So, the fact that it would take them a little longer to take a look at this medicine than some of the other applications, I think, should not be too surprising.

But I am optimistic that we will get to a good point with the FDA and that we will be able to meet the new date in April.

Regarding your question pertaining to guidance, having been in this job for a while, it has been a wonderful ride.

If you look at the last few years, we have exceeded our guidance in some of those years.

However, in 2016 we actually came in on the lower end of our guidance, if you think about the range that we provided.

So, it is not always true that we have exceeded.

But when I think about 2016 performance, what we are really encouraged by, and I am, is the way we ended the year with very strong revenue performance.

Driving 8 or almost 9 full percentage points of growth from our new product launches is very much living up to the expectation that we had set when we provided our outlook for the YZ period.

Having achieved that, then it does give us opportunities, as Jami was saying in her earlier question, to work on the middle of the income statement to improve our margin.

Given the way that we finished the year, I am highly encouraged about our prospects for 2017.

I think our guidance is very reasonable.

I think our ability to achieve the range of $4.05 to $4.15 in EPS is very much within our grasp.

And it implies that we're going to take those top-line trends and we're going to translate that into about 300 basis points of OpEx through sales improvement.

That is what we are going to be focused on.

I think Dave summed it up well when we were all out at the JPMorgan conference together -- launch with excellence, improve our margins through productivity, and you will continue to hear us talking about in 2017, as well, as to how we are advancing our pipeline.

That is something I want to make sure we don't lose sight of because that is what, long term, continues to make this engine grow.

Seamus Fernandez, Leerink.

Thanks for the questions.

Just a couple here.

For Enrique, can you talk a little bit about the opportunity to continue to expand your margins within the diabetes business, particularly in the wake of, or in the midst of the arms race pullback that you are seeing from competitors with regard to the field force?

I think on your update conference call on the promotional efficiency of the business, you stated that no additional sales reps had been added despite the significant increase in the number of products in the portfolio.

So, just wondering if you see more opportunity as you continue to grow that business for additional leverage.

The second question is more broadly, for Dave, and maybe, to some degree, Enrique, given your new role.

Can you guys talk a little bit about the willingness to utilize your relationships with managed care, particularly in areas like IL-17 and with the Taltz portfolio?

Is now the right time to start to work those relationships or accelerate them?

And do you see similar opportunities for those types of interactions on the oncology side of the business?

And then just one final question -- Dave, can you just give us a general sense of how you are thinking about business development on a go-forward basis?

Do you see it more as partnerships or do you see it more as outright acquisitions?

I ask that question more in the wake of the decision to walk away from the partnership with Adocia, which, again, certainly was a surprise to that company who was a partner.

We have seen some questions raised with regard to how the partnerships have been executed in the past.

So, it would be nice to know how you guys are thinking about the business development strategy going forward.

Thanks.

I am not sure we understood exactly, Seamus, the middle question you had about leveraging the relationships with payers on Taltz for oncology.

Can you be a little more specific what you're looking for there?

Just a willingness to basically -- whether you would be willing to go to exclusive formulary access or utilize more aggressive discounting despite what are areas of strong potential growth for the industry and for the Company in order to participate in that growth earlier.

Okay, thank you for the clarification.

Enrique will lead off with the ability to expand margins in diabetes.

Dave, then, if you'd like to comment on the second question on leveraging the relationship and how that might evolve with the payer group, and your priorities.

And then we'll come back into the room, so if there's anything you want to add to that middle question on the oncology front, please do so.

Enrique?

We are, indeed, seeing very significant opportunity to continue to leverage the income statement when it comes to diabetes.

We have very strong sales growth which is driven by volume.

As we have mentioned in the past, we are getting some of the benefits from our technical agenda when it comes to diabetes on the manufacturing side.

And, as we said, for us it is several percentage points worth of benefit that we are getting.

Those benefits continue to accrue and gross margins continue to improve.

Finally, when it comes to SG&A we're basically able to, with the commercial footprint that we have, support the broad range of products, including all of the products that we have recently launched.

We do believe we have the right infrastructure to support continuous growth without us having to add additional commercial infrastructure.

We are, when we look at the number of people out there, we are a little bit below some of our competitors when it comes to diabetes, even post some of the reductions that we've seen from them.

But at the end of the day we have to do what works for us.

And I think the numbers speak by themselves -- not only very good revenue growth but we're basically getting share across all of our products in all of the key geographies.

So it is a pretty good run that we are having right now.

Hi, Seamus.

First of all, in terms of specialty markets and leveraging our US managed care presence, we have a great team.

We've got strong relationships not just with PBMs but with other managed care entities.

And I think, as a broad-based pharmaceutical company, it is an advantage when we are entering new spaces because we already have that payer connection, both for immunology and oral oncology.

That base will serve us well -- maybe Sue can add -- about abema should we have positive data and be able to submit.

I think that is a strength of the Company.

Maybe what you are really asking is, would we leverage the portfolio to drive more exclusive formulary coverage and I would just say in general that is not our aim.

I think we want to compete with as much open access as possible in as many classes as we can because, as someone launching new products, that is a policy position that makes sense for us.

Of course we have incumbent products, too, but all things equal we would prefer patients have access to as many brands as possible.

And we compete based on the differentiation of our products.

That is more or less what we try to do across the whole of the portfolio.

On BD, I'm not exactly sure what you're getting at there.

As I said earlier, it will be an important part of what we need to do going ahead to build out the portfolio and keep upgrading value within the portfolio, whether that be through licensing or M&A.

We have a number of very successful licensing arrangements ongoing and in the past.

To name a few, of course the Boehringer Ingelheim arrangement, Pfizer on tanezumab, AstraZeneca on base, even the partnering we have done with major oncology firms in terms of combination development with some of our assets.

I think, are all examples of Lilly's open for business on partnerships.

There are some specifics around the ultra-rapid insulin, which I won't go into here.

But I think all partnerships require a shared sense of what the future needs to look, as well as a compelling profile of a product.

And when we have those things, we have done very well.

If you have information to the contrary, I'd love to hear from you about it.

But partnering will be a key part of what we do, along with that smaller M&A space, as I discussed.

And I think it is actually a strength of the Company.

I would just say the same as what Dave said.

We will compete based on the differentiation of the product.

And, clearly, what the data tells us will help us to better understand we pull across the whole of the marketing mix.

Marc Goodman, UBS.

The first question is, you had mentioned that there was a $130 million adjustment, mostly Humalog.

Can you just tell us what was the number for Humalog and what were the other products that were impacted?

And then, second, help us understand just the way that the revenues -- I understand the partnership with BI but Jardiance and Trajenta, and I am just looking at the way that the US numbers have progressed throughout the year and they seem to be bouncing around.

Just give us a sense, in the fourth quarter versus the third quarter was there anything unusual going on?

Was there any stock and Jardiance really ramped up a lot, Trajenta coming down probably much more than what trends would tell you on script trends.

Maybe you can just help us understand some of the dynamics there.

Thanks.

Thanks for the questions, Marc.

We'll go to Derica for your first question and then over to Enrique.

Derica?

Hi, Marc.

You're correct.

We did have a $130 million growth net benefit in the fourth quarter.

What we said is that a sizable portion of that is attributable to Humalog, but we have not provided the absolute numbers behind it or any of the other products affected.

When it comes to Jardiance and Trajenta revenue in the US, we do see numbers in the diabetes category move a bit based on the estimates for rebates and discounts.

This is not just an item for Lilly's, an item for any company in the diabetes space given the sizeable rebates that are paid to payers.

In this particular case it is Boehringer Ingelheim that basically [thus] the contracting and the estimation.

In the case of Jardiance we saw a slight benefit in the fourth quarter.

And in the case of Trajenta we basically saw a negative impact in the fourth quarter, the negative impact probably closer in terms of Lilly revenue nearly probably $20 million.

We expect to see that type of volatility when it comes to the base product.

What we try to look at is really longer term what are some of the trends that we basically see from a volume perspective, also from a pricing perspective.

Geoff Meacham, Barclays.

Afternoon, everyone.

Thanks for the question.

For Dave another policy question.

Was there any discussion today in your meeting with President Trump on the role of PBMs and the role they play in the pricing equation?

Do you feel like this could be a bigger part of the drug pricing conversation going forward?

And then on the galcanezumab phase 3, some data from your competitors, namely Amgen, when you look at that, what would you think is the line for a clinically meaningful benefit?

And then, finally, with the CoLucid deal, you will have a range of products.

What do you think in this space is, more broadly, still fertile ground for innovation?

Thank you.

Jeff, thank you for the questions.

Dave, obviously the first one we'll pass over to you.

And feel free if you want to comment on either of the following two.

And then both Tony probably and Jan may be able to add some color here in the room, as well.

Dave?

Thanks, Jeff.

In terms of PBM specifically, that was not a centerpiece of the discussion with the President.

Of course, [pharma's] recently put out some work just to put some facts into the picture in terms of what the total drug spend is in the nation, and how much of that is innovative, generic, or going into the channel, if you will.

I think that is available on their website, if you want to look at it.

That was referenced in the meeting.

And I think it always does surprise people that only one-third of spending in the US is not going to manufacturers but going to other entities.

I think the President was interested in that.

Mostly we discussed how to get value to consumers who, particularly in the ACA plans and in high deductible plans, have limited formularies.

They think they bought insurance and they have limited coverage, that were paying a lot of out-of-pocket costs and how to address that situation.

So, PBMs themselves were not mentioned specifically and we did discuss channel partners broadly but more as an educational point.

In terms of CoLucid, I will start there, obviously that fits in well with our existing interest in pain and migraine specifically.

It is a board of treatment.

Some people take that when they are experiencing or about to experience a headache.

I think it has the key benefits of potentially being labeled for use in patients who have cardiovascular risk factors, which is a major issue with triptans, the major class in that setting, and will fit hand in glove with our promotional, commercial and medical efforts, even future clinical efforts with our potential antibody galcanezumab for preventing migraine.

The question on effect size I can defer to Tony on that in terms of what we hope to see vis-a-vis Amgen.

Hello.

Regarding CoLucid or the lasmitidan, we are encouraged by this as a novel mechanism.

There has not been a new mechanism to really stop a migraine that is ongoing for many years now.

Nearly 7 million people in the United States take prescription medicine for that, and a lot of them don't get better.

And, as David points out, a lot of them could potentially benefit if they did not have cardiovascular disease.

In fact, there was a recent survey by the American Neurological Association, said 22% of the patients currently taking triptan actually have what would be considered a cardiovascular contra-indication.

And I'm sure these aren't bad doctors.

I'm sure it is sick patients that really are so desperate that they are willing to take the chance.

So, we think that there is a lot of room for innovation for that.

And, of course, with the novel mechanism, the phase 3 study that was carried out by CoLucid showed that many of those patients had already had a poor response to triptan but nonetheless responded well when they received lasmitidan.

So, we are encouraged and we think that this is significant innovation for this.

For galcanezumab, if we look at our data for phase 2, we are encouraged by the data that we have seen.

And we hope to see the same thing for phase 3. And there we saw 70% of the patients had at least a 50% reduction of migraine days.

We had nearly one-third of the patient had no migraine days whatsoever.

These are patients, of course, that have, in some cases, dozens of migraines a month.

This is a big difference in terms of whether people can go to work or can take care of their kids, and a lot of meaningful benefits for this.

So, if we end up in the range we saw in phase 2, we will be very pleased.

Richard Purkiss, Piper Jaffray.

Thanks for taking my question.

Just given Trulicity's really strong performance, could Enrique and maybe Jan just run through thoughts on how they see the upcoming competition from semaglutide?

Also how they view its retinopathy data.

And just hopes for the REWIND study.

Thanks for the question.

Enrique, if you want to lead off.

Sure.

We are very excited about the growth of Trulicity.

We are having a great sequential growth, both driven by the overall strength and the health of the GLP1 class, but also because of the shared growth with Trulicity.

I was just reviewing our latest data and Trulicity nearly has a 33% new-to-brand share in the GLP-1 class as of last week.

So, it is a really outstanding performance by the team.

Overall, for us, continued class growth is probably the most important factor.

We are excited.

Maybe I can provide some color because we recently started reaching additional prescribers as of late last year, basically in the last quarter, and we have seen significant continuous adoption by new prescribers.

So, that basically speaks to continued growth as we look ahead for this product.

We do look at the competitive environment and we do look at the semaglutide as a potential competitor in the near future.

They do have good efficacy data and a number of trials, including a head-to-head against Trulicity.

But they also have reported an increase in retinopathy that was significant as part of one of their trials.

So, we need to see, at the end of the day, what their full label will be.

And we are, of course, very prepared but we really like our chances.

And then thoughts on the REWIND study, and timing for that.

REWIND, we recently had an interim readout.

We were basically told that it was decided it would continue as planned, which basically means that we are looking at 2019 for the readout of the cardiovascular outcome data for that study.

Thank you, Enrique.

We are almost at the top of the hour, so, Dave, we'll turn it over to you to close out today's call.

Thanks, Phil.

We appreciate your participation in today's earnings call and your interest in Eli Lilly and Company.

Driven by new product launches, Lilly is entering a new growth period.

The combination of top-line growth and margin expansion over the balance of the decade provides a compelling thesis for investors.

I look forward to keeping you informed of our progress.

And please follow up with our IR team if you have questions we've not been able to address on today's call.

Have a great day.

Thank you.

Ladies and gentlemen, that does conclude your conference.

We do thank you for joining.

You may now disconnect.

Have a good day.