Eli Lilly and Co LLY
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/24/2013

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Q1 Earnings Call 2013. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions given at that time. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Vice President of Investor Relations, Phil Johnson. Please go ahead.

Philip Johnson - VP, IR: Good morning. Thank you for joining us for Eli Lilly and Company's first quarter 2013 earnings conference call. I'm Phil Johnson, Vice President of Investor Relations. Joining me today are our Chairman and CEO, John Lechleiter; our Chief Financial Officer, Derica Rice; our President of Lilly Research Laboratories, Dr. Jan Lundberg; our President of Elanco Animal Health, Jeff Simmons; and Ilissa Rassner and Travis Coy from Investor Relations.

During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 3 and those outlined in our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions.

We're pleased with our performance in the first quarter of 2013, of growth in key products and regions, replaced lost revenue and earnings due to Zyprexa's patent exploration. Lilly employees remain focused on advancing the pipeline and on increasing productivity, while delivering results to put us on track to meet our 2013 financial guidance and to meet or exceed our mid-term financial minimum goals.

Let's start with a quick review of events that have taken place since our last earnings call. From a regulatory perspective the first two items I'd like to highlight were achieved in collaboration with Boehringer Ingelheim. We received approval in Japan for Trazenta as add-on therapy insulin and we submitted the SGLT2 inhibitor, empagliflozin for both the U.S. Food and Drug Administration and the Europe Medicines Agency, for a review as a treatment for type 2 diabetes.

We also submitted insulin lispro U-200 in the U.S. for type 1 and type 2 diabetes patients and we're pleased to announce that after consultation with the FDA we received fast track designation and have initiated a rolling BLA submission for ramucirumab as monotherapy treatment for second-line gastric cancer. The first module was recently submitted, and we anticipate that the final module will be submitted before the end of the year. Based on the overall efficacy and safety data from the REGARD trial, we believe that ramucirumab has a promising treatment profile in this difficult to treat patient population and we look forward to completing the rolling submission.

In clinical news, for dulaglutide, our investigation of GLP-1 receptor agonist being studied at a once-weekly treatment for type 2 diabetes, we announced that the primary endpoints related to reduction in HbA1c were met in the Phase III AWARD-2 and AWARD-4 studies.

Furthermore, the 1.5 milligram dose demonstrated statistically superior reduction in HbA1c from baseline compared to insulin glargine in both trials. We also announced that we have discontinued the Phase III rheumatoid arthritis program for Tabalumab due to lack of efficacy. The Phase III program for lupus is continuing as planned.

On the business development front, Elanco announced the investment of approximately $100 million to purchase some minority equity stake in China Animal Healthcare, one of the leading players in the animal health industry in the People's Republic of China. The investment expands Elanco's commitment to China with a goal of providing innovative, safety enhancing food production solutions to help meet the growing food demands and nutritional needs of the Chinese people, and we completed the transfer of OUS commercial rights for exenatide to Amylin, Bristol-Myers Squibb and AstraZeneca.

In other news, we completed the $1.5 billion share repurchase program that we announced late last year. To prepare for the upcoming loss of exclusivity for Cymbalta and Evista, adapt to changing customer needs and to the evolution of the U.S. healthcare environment, we initiated a restructuring of our U.S. sales force. The main component of this restructuring is a significant reduction to our U.S. biomedicine sales force, with the reductions focused on our primary care sales force. In addition, the restructuring takes into account, termination of our U.S. promotion of Livalo and transfer of the rights back to Kowa Pharmaceuticals, as well as a small expansion of our diabetes sales force.

Finally, as part of our continued efforts to align global manufacturing capacity with long-term business needs, we announce that we will close our packaging and distribution side in Giessen, Germany during 2014.

Now, let's move on to discuss our financial performance. As we've done on previous calls, we'll focus our comments on the non-GAAP results which we believe provide insights into the underlying trends in our business. This view excludes certain items such as restructuring charges, asset impairments and other special charges. I should point out that our non-GAAP results include ongoing costs such as amortization and stock-based compensation.

Turning to the income statement on Slide 7, you can see that total revenue was flat at $5.6 billion as growth in key products and regions offset lower revenue following the loss of patent exclusivity for Zyprexa in most major markets outside of Japan. Excluding Zyprexa outside of Japan, the rest of our revenue grew 5%. Gross margin as a percent of revenue increased 70 basis points from 78.6% to 79.3%. The increase in gross margin percent was due to higher production volumes and higher prices, partially offset by higher manufacturing expenses.

This quarter's total operating expense defined as the sum of R&D and SG&A was also flat. Within operating expenses marketing, selling and administrative expenses declined 11% as a result of the Company's cost containment efforts. R&D expenses increased 17%, largely driven by higher late stage clinical trial costs, including roughly $90 million of milestone payments to Boehringer Ingelheim for the U.S. and European regulatory submissions for empagliflozin and about $50 million related to the discontinuation of the Phase III tabalumab RA program.

Excluding these items, R&D expenses grew only 4%. Other income and deductions was a net income of $34 million in Q1 2013 compared to a net expense of $46 million in the first quarter of 2012. Our tax rate was 15.5% this quarter, a decrease of nearly 9 percentage points from Q1 2012. This decrease reflects the reinstatement of U.S. R&D tax credit for 2013 as well as the one-time impact associated with R&D tax credit for 2012 that was recorded this quarter. At the bottom line, our non-GAAP EPS increased 24% to $1.14. This includes a benefit of $0.07, due to the 2012 R&D tax credit.

Slide 8 shows our reported income statement, while Slide 9 provides a reconciliation between reported and non-GAAP EPS. As expected, this quarter we recognized approximately $495 million of income or $0.29 of EPS, due to the transfer of exenatide commercialized Amylin, Bristol-Myers Squibb and AstraZeneca in all markets outside the U.S.

Additional details about our reported earnings are available in today's earnings press release.

Now, I'll turn the call over to Travis.

Travis Coy - Director, Investor Relations: Thanks Phil. As you can see on Slide 10, our revenue was flat as the result of a 4% increase in higher prices offset by a 3% decline in volume and a 1% unfavorable impact from foreign exchange rates. You'll notice that U.S. pharma sales increased 3%, driven by increased price that was partially offset by lower volume. The volume decline was primarily due to the loss of patent exclusivity for Zyprexa.

This quarter, our revenues in Japan were significantly impacted by the weakening of the yen. The 13% decline from foreign exchange and the 3% decline due to the Q1 2012 bi-annual price decreases were partially offset by strong double digit volume growth of 11%.

As for emerging markets, which is embedded in rest of world, revenue grew 3% this quarter, or 6% excluding the impact of foreign exchange. Within emerging markets, China continued to register double-digit revenue growth, up 11%, driven by strong volume growth of 18%. Elanco Animal Health sales grew 2% this quarter. In the U.S., sales grew 9%, as increased demand for companion animal products offset lower volume for food animal products. Outside the U.S., sales decreased 8%, driven by lower volume for food animal products. The volume decrease in food animal products outside the U.S. was due to transition stocking in 2012, associated with the Janssen acquisition as well as weakness in demand in many emerging markets that was consistent with broader industry trends. Despite the slowing of growth this quarter, we continue to expect that Elanco will deliver robust growth in 2013 and in the coming years.

Finally, the 18% decrease in collaboration in other revenue is due to the transfer of exenatide rights to Amylin. Excluding exenatide, collaboration and other revenue grew 12% this quarter, driven by Trajenta.

Foreign exchange had a relatively small impact upon our financial performance this quarter. Consequently, we have moved the slides showing the impact of FX upon line items in our P&L to the supplementary section in the back of the deck.

Next, I'll provide a brief pipeline update before turning the call over to Derica.

Slide 11, shows our pipeline as of April 17. Changes since our last earnings call are highlighted, with green arrows showing and red arrows showing attrition. As Phil mentioned, in collaboration with Boehringer Ingelheim, we submitted empagliflozin to the U.S. and European regulatory agencies. We are excited by the potential of the SGLT2 class for the treatment of patients with type 2 diabetes. We believe empagliflozin's ability to lower blood glucose via a mechanism of action that is independent of beta cell function or insulin resistance could also benefit for people managing their diabetes. As noted by the double asterisks, we also initiated a rolling BLA submission for ramucirumab.

With respect to earlier stages of the pipeline, you'll see that we began Phase II testing of three potential medicines. A biologic for chronic kidney disease and two small molecules for cancer, a cMET inhibitor and an FGFR inhibitor, and we began Phase I testing of a small molecule for chronic kidney disease. In addition we terminated development of four molecules, two in Phase II and two in Phase I. In addition to empagliflozin and ramucirumab, we have the potential to complete filings for three more Phase III assets this year and believe this pipeline positions us well for growth post 2014.

Now, I'll turn the call over to Derica to cover some of the key events for 2013, to review our financial guidance and to provide closing comments before we open the call for Q&A. Derica?

Derica W. Rice - EVP, Global Services and CFO: Thanks, Travis. I'll begin my remarks with Slide 12. Now as we have mentioned previously 2013 is an exciting year for Eli Lilly and Company. Let me give you a quick reminder of the potential key events for the remainder of this year as we continue to advance our pipeline and (generally and share) clinical data that will help you better gauge our growth potential post 2014.

A number of potential external data disclosures remain this year. These include; presentation of detailed data at the American Diabetes Association from the AWARD-1, AWARD-3 and AWARD-5 trials of the Phase III program for dulaglutide and in collaboration with Boehringer Ingelheim for more multiple Phase III trials for empagliflozin, both potential treatments for type 2 diabetes. On June 24th we will host an investor event to discuss these data.

In oncology, we could have presentation of data from the Phase III trial of ramucirumab in first-line breast cancer. Now recall that the data we expect to receive in 2013 will be the final progression free survival data and the interim overall survival data. Finally presentation of data for the Phase III trial of enzastaurin as maintenance therapy for patients with diffuse large B-cell lymphoma. There are also several Phase III trials that may produce data in 2013, although presentation of detailed data at medical meeting would likely occur in 2014.

These include; the initial Phase III trials of our novel basal insulin analog for both type 1 and type 2 diabetes; the pivotal trial for our new insulin glargine product; ramucirumab as combination therapy for second-line gastric cancer; our Phase III trial for necitumumab in combination with gemcitabine and cisplatin for first-line squamous non-small cell lung cancer; and the initial trials of edivoxetine as adjunctive therapy for major depressive disorder.

In total, we'll have Phase III data read-outs, our detailed data presentations on 8 of our 13 Phase III assets.

As Travis mentioned, in 2013, we could have up to five regulatory filings; three diabetes assets, empagliflozin which has been submitted in the U.S. and Europe, dulaglutide and our new insulin glargine product and two oncology assets, ramucirumab as monotherapy for second-line gastric cancer for which we've initiated a rolling submission, as well as enzastaurin for diffused large B-cell lymphoma.

Other key events to watch for in 2013; we plan to initiate another pivotal trial of solanezumab in patients with mild Alzheimer's disease. In August, we'll have the U.S. District Court trial for the Alimta method-of-use patent and in December we'll lose U.S. exclusivity for Cymbalta.

Now, moving onto guidance; we're pleased with our solid first quarter results and are encouraged that we've been able to offset the Zyprexa patent expiration through growth and other key products and regions. As mentioned in our press release, we are not changing our EPS guidance for the full year. However, we are updating a couple of line items. Effective July 1, we expect to see an increase in the Puerto Rico excise tax. This has the effect of increasing our cost of goods sold and decreasing our tax rate. Given the dollar amount of growth margin, our growth margin guidance of approximately 78% of revenue is unchanged. However, given the smaller dollar amount of pre-tax income, we've lowered our GAAP and non-GAAP tax rate by 50 basis points. We've also updated our R&D expense and OID guidance. The range of R&D expense increased $100 million, offset by a $100 million increase to other income. This change is due to the impact of all the submission milestones that hit R&D expense, not OID, as our regional guidance assumed.

While all other line items, including EPS guidance are unchanged, I do want to mention two factors affecting our business.

First, we've received updated information showing higher than expected utilization of our products in Medicare Part D, thus increasing the impact of the doughnut hole coverage gap to Lily.

Second, significant evaluation of the yen is reducing the U.S. dollar value of sales from our Japanese affiliates. We anticipate the headwinds from increased costs associated with the affordable care act and the Japanese yen's evaluation will be mitigated by our continued focus to drive growth in our marketed product portfolio and by our efforts to reduce expenses. As a result, we are not changing our revenue or EPS guidance for the year.

Slide 14, provides a reconciliation between reported and non-GAAP EPS for 2012 and the associated growth rates from these numbers to our 2013 guidance. You can see that our GAAP EPS has benefited substantially from income related to exenatide.

Now in closing we will continue to focus relentlessly executing our strategy. To replenish and advance our pipeline, to drive growth in our on patent brands and in key growth areas of Elanco, Japan and emerging markets and to drive productivity gains across all areas of our value chain. we have designed this strategy to absorb the effect of our patent losses while funding the dividend at least at its current level as well as the R&D that will drive our future growth. This has allowed us to return nearly $2 billion to shareholders in the last year on top of the dividend.

Our financial performance this quarter positions us well to continue to meet or exceed our mid-term financial projections of minimum annual revenue of at least $20 billion, net income of at least $3 billion and operating cash flow of at least $4 billion. We submitted empagliflozin in the U.S. and Europe, we have initiated a rolling submission for ramucirumab and we have the potential for up to three more submissions this year; two more in diabetes and one more in oncology. We continue to generate and disseminate important data that will help investors and analysts better gauge our longer term growth potential with much more data to come over the course of 2013 and 2014.

We believe this pipeline will drive strong growth post YZ. We are confident in our strategy and in our ability to successfully navigate our patent expirations and emerge with even greater strength and capacity to drive growth.

This concludes our prepared remarks and now we will take your questions. Operator, first caller please.

Transcript Call Date 04/24/2013

Operator: Tim Anderson, Sanford Bernstein.

Unidentified Analyst - Sanford C. Bernstein: This is (indiscernible) for Tim Anderson. I have two questions please. Your tax rate guidance for 2013 is now on 19%. Previously you have said that your tax rate would rise to a mid-20% in the 2012 to 2014 timeframe because of patent expiries? Is that mid 20% tax rate guidance still relevant for 2014? My second question is you mentioned that you expect to have Phase III data for enzastaurin this year. Can you give us your overall thoughts on the product?

Philip Johnson - VP, IR: We'll have Derica take your first question. Jan would like to go into the second one then. Derica?

Derica W. Rice - EVP, Global Services and CFO: In regard to our tax rate guidance, just a reminder we said that in our mid-term guidance that our tax rate would be no higher than the mid-20s, meaning that's the maximum we are expected to go. Fortunately, we've been very successful thus far and through the management of operations as well as where our cash has been generated, our income has been generated around the world, to be able to stay in that low 20s. As you see here in the first quarter, we are also benefiting from how the impact of the U.S. R&D tax credit both in terms of the full effect of '12 being recorded in the first quarter of '13 as well as the resumption of the R&D tax credit in the Q1 itself. So we still believe that we'll be able to say below that mid-20s at least and we are also at the same time well able to bring back sufficient cash to the U.S. to fund our U.S. operations.

Philip Johnson - VP, IR: Thanks, Derica, Jan?

Jan M. Lundberg, Ph.D - EVP, Science and Technology and President, Lilly Research Laboratories: Right. So, we are evaluating hence the story in the Phase III trial for diffuse large B-cell lymphoma, and the aim here is to test for the potential to revenant relapse in patients following standard of care, which is called R-CHOP for this particular form of lymphoma. We have completed enrollment and are expecting data very soon and primary endpoint is disease-free survival, if positive, we could potentially have an NDA submission later this year.

Operator: Mark Schoenebaum, ISI Group.

Mark Schoenebaum - ISI Group: I think animal health is in the room correct?

Philip Johnson - VP, IR: Absolutely. We've got Jeff Simmons here with us. We've got the expert.

Mark Schoenebaum - ISI Group: So, maybe I'll ask an animal health question, if I may. I saw in the press release, it looks like your ex-U.S. growth slowed down considerably this quarter and as you said, it was consistent with industry trends our of a couple of other companies. I was wondering if you could go into any detail specifically what's driving the ex-U.S. weakness, whether or not you think that's kind of one-time-ish or where or not you think we should kind of be rethinking ex-U.S. growth rates in general. Then, the second part of the question is, a little bit off the beaten path, but obviously in China, a lot going on with the bird flu. Do you anticipate this having any impact on the animal health business over the near term or over the long-term?

Jeffrey Simmons - SVP and President, Elanco Animal Health: I would say overall, if you look at our business – the animal health business, especially the food animal side, OUS, we are operating in a business that is cyclical in nature. Meat, milk and eggs cycle related to demand. Those cycles have now become a lot more global as there's more global companies connected to the supply and demand, and you see this every three to five years, you see a cycle happen and you see that with public meat companies as well. Today currently meat supply is exceeding demand in certain parts of the world and that's creating and we believe a driver in the slowing of this industry growth. I don't want to forecast the severity of it or the length of it but we do see this emerge relative to Q1 '13 versus Q1 of '12. I will speak on behalf of Elanco and say that even despite this we continue to see our strategy that's built on diversity, that’s built on (indiscernible) animal, food animal therapy and productivity on the food animal side. We continue to expect that Elanco will deliver robust growth for '13 and in the coming years and exceed industry growth rates as we have in the past five years. Now, if we look at bird flu, I would say that similar nature you see in these different flus, in different emerging diseases occur, we had bluetongue in Europe a few years, we had a bird flu occur in Mexico a few years ago, and this one in China. What we need to look for is does that do anything to soften the demand of key protein groups like poultry and pork in markets like China. So, this will be something that we will be watching and assessing. Our recent investment in China Animal Healthcare will bring us closer to that marketplace, which will help us understand that marketplace, which is a key marketplace. So, the big impact is – watching the impact that it has on overall consumer demand.

Philip Johnson - VP, IR: The impact this quarter Mark would have been nil to our business.

Jeffrey Simmons - SVP and President, Elanco Animal Health: No impact on bird flus.

Operator: Gregg Gilbert, Bank of America.

Gregg Gilbert - Bank of America: Jan, I was hoping if you could walk us through the specific mechanics for the ramucirumab rolling submission in gastric and why that path was decided upon? Then for Derica, it looks like pricing negativity in Europe was quite good this quarter compared to prior quarters. I don't want to get carried away but is this an inflection point or are there some specific sort of one-time-ish things there? Lastly, if Dave is on the call, U.S. Bio, the commercial footprint is it right sized for the foreseeable future given you current products as well as your expectations…

Philip Johnson - VP, IR: So, we don't have Dave with us on the call. So I think we'll go ahead and have Jan handle your first question with regards to ramucirumab and then Derica you can handle the last two.

Jan M. Lundberg, Ph.D - EVP, Science and Technology and President, Lilly Research Laboratories: So as you know we have completed REGARD trial for ramucirumab in monotherapy for second-line gastric cancer where we showed an improved overall survival. The fast track status has been granted and we have initiated a rolling submission starting with the preclinical module, and the plan is to have everything submitted before the end of the year for (ramucirumab).

Derica W. Rice - EVP, Global Services and CFO: Gregg, in regards to price as you saw in Europe, we were down 1% in the first quarter. Typically, we're somewhere in that minus 2% to 3%. That's about where we would be. We did see in the first quarter an adjustment for the transfer of exenatide rights outside the U.S. Then if you are looking back at the fourth quarter, you saw that we had more of a 7% reduction and that was really for the year and that was driven by the impact of the Zyprexa patent loss in Europe. But typically we're in that minus 2% to 3% pricing impact in the European region.

Gregg Gilbert - Bank of America: Then the question on, if with this action U.S. Biomeds, the commercial footprints right sized going forward?

Derica W. Rice - EVP, Global Services and CFO: Clearly, we believe we're right sized, Gregg for the moment, given the mix and the composition of the portfolio that we have in hand today. Now as we look at the Phase III pipeline and depending upon what emerges, I think in the primary care, we'll find, what you may find is that we may have to build some presence in some new therapeutic areas where we haven't competed previously such as autoimmune, (indiscernible) in neurology. Those are all possible areas of expansion as we think about our U.S. sales force footprint. But at the moment on the primary care side, we think we are properly positioned.

Philip Johnson - VP, IR: Travis you had an add-on maybe to complement Jan's response?

Travis Coy - Director, Investor Relations: Yeah, Gregg, just to give you one more detail on the rolling submission, we just need to complete some typical product stability work, and as Jan mentioned, we do anticipate being able to complete that work by the end of the year.

Operator: Chris Schott, JPMorgan.

Chris Schott - JPMorgan: Just two questions. First, going back to Elanco, you said – you mentioned there is kind of three to five years cycles, can you just give us sense of typically when we see one of these, how long until growth normalizes? Is this something that's going to take couple of quarters to play out or something longer than that? Maybe when you're talking about that, I wonder if you would be interested in just giving us your kind of best guess, at what industry growth might look like in '13 versus where we've been historically? Final question, just shifting gears, just some quick thoughts on the FDA's review of pancreatic abnormality seen with the DPP-4 and GLP-1 categories, just any thoughts you might have there?

Philip Johnson - VP, IR: Chris, we'll have Jeff obviously handle your first question and then either Travis or Jan I think will go ahead and handle the second one. Jeff?

Jeffrey Simmons - SVP and President, Elanco Animal Health: Thanks, Chris. Hard to predict on length of cycles and severity, I think you are seeing less severe swings and cycles being a little shorter given the way that companies are able to impact their supply chain of meat and swing to these demands much quicker. So I would say that I think you're going to see them last – in a probably shorter period of time and less severe, but it's hard to predict. Then, I would say it's going to be a challenge this year to predict growth rates, again where we are going to continue to look at robust growth rates and continue to exceed industry growth rates, but I think this year will be a challenging year to predict the exact growth rate number at this time.

Philip Johnson - VP, IR: Jan?

Jan M. Lundberg, Ph.D - EVP, Science and Technology and President, Lilly Research Laboratories: Right. So the question about pancreas effects of DPP-4s and GLP-1s have been debated for some time and we should remember first here that diabetes patients, in general, has a higher risk for pancreatitis, and also then in the label for DPP-4s there is an increased risk of pancreatitis being mentioned. In relation to dulaglutide, we are still analyzing the data which will be presented at the ADA in June. But so far we have not seen any established cause of link between dulaglutide and pancreatitis nor pancreas cancer. We are carefully watching this area and as you know safety is very high on our agenda.

Operator: Steve Scala, Cowen and Company.

Steve Scala - Cowen and Company: Just a few questions. First, just to be clear, does the rolling filing of ramucirumab in gastric imply that the head-to-head study versus chemo will be part of the filing? Second, the ramucirumab breast cancer trial I believe is done. Will you top line the data in the first half of this year? Then lastly, the 10-K had stated that the Alimta 2022 patent is now referred to as a vitamin dosage regimen patent as opposed to a concomitant nutrition supplement use patent to conform to legal strategy. What should we glean on legal strategy from this change and why was it made so late in the process? Thank you.

Philip Johnson - VP, IR: Steve thanks for the questions. I'll go ahead and handle these and feel free to chime in the table if you like. So as we mentioned earlier, you're seeing us not proceed with the submission of ramucirumab and second-line gastric monotherapy without waiting for the data in that second line trial. It'll be up to regulators determine if the data that we have is sufficient for them to go ahead and opine. As we've mentioned in the past, we're very encouraged by the data and it's typical to treat cancer and line of therapy where there are no approved agency yet in the U.S. and Europe. In terms of the ram breast cancer timing, we have talked about having something in mid-year or summer, the two different ways we've described it. Appreciate the question on trying to nail that a little bit more closely, when that might occur. We'll have to monitor, Steve, the actually occurrence of the event that are necessary to get the final PFS, as well as the interim OS. I would indicate it's probably not very likely that that would occur in time to lead to a topline in the first half, but clearly we stick with sort of this mid-year summer time type of guidance that we said we're having data internally and then very quickly getting some kind of communication out to the street would be our intention. Then there's really nothing I think to read into the change in our SEC filing, in terms of the way that the method-of-use patent and the concomitant use of vitamin B12 and folic acid with pemetrexed as described. I think it was just some shoring up of the language based on reviews with internal counsel. So Paul, if we can go to the next caller please.

Operator: David Risinger, Morgan Stanley.

David Risinger - Morgan Stanley: So, I was particularly impressed with the SG&A controls this quarter. It seems like, you may be rationalizing the sales force earlier than I expected with the main patent expiration pressures from Cymbalta and EVISTA next year. So, this quarter the expense level for SG&A was $1.65 billion. Should we assume that, that reflects the appropriate level of spending or do you plan to take the run rate of SG&A down in the near term Derica? Then, just one quick financial question, for the China Animal Health deal, how much incremental annual revenue does that add and how much does that move the needle for your overall global animal health business?

Jeffrey Simmons - SVP and President, Elanco Animal Health: Thanks for the questions David, and we're going to have Derica handle both of those.

Derica W. Rice - EVP, Global Services and CFO: David, in regards to SG&A, just to remind you, in the guidance that we provided at the beginning of the year, it included the actions that you've seen culminating in terms of us announcing here today, in terms of the U.S. restructuring of our sales force. So, all of these things have been contemplated in the forward-looking statements that we've made. In regards to kind of the future, we believe we have again the right sales force footprint to accommodate the portfolio mix that we have at the moment. The biggest key is going to see how the pipeline plays out and the future impact it has there, you would expect that in terms of as we progress through the year, we march closer towards December 11, when we lose Cymbalta, that you'll see a further pullback of some of our promotional activities behind Cymbalta, such as DTC, but until that, when exactly that will happen, we'll not disclose, and we've constantly got to monitor the effect that it's having. Obviously, as we also get into the fourth quarter, you will see us beginning to have to deal with either both our returns reserved for Cymbalta and you could see wholesalers beginning to destock. So these are the kinds of things we'll be monitoring as we progress through the year to understand what our promotional mix should be behind that brand.

Philip Johnson - VP, IR: Dave in terms of the revenues that we'd be bringing in for the investment in the Chinese healthcare company, animal healthcare company, we don't anticipate at this time based on the structure and the minority stake that we've taken that that would lead to equity accounting and therefore any particular impact on our financials. I also would say if you look historically on your first question, SG&A is typically significantly lower in the first quarter of the year than it is in the second, third or fourth quarters. If you force out our SG&A guidance for the full year, subtracting then the SG&A for Q1, you'll see that we still do in total expect that you are going to see higher levels of SG&A spend on average in these next three quarters than you saw in the first quarter of the year. Again, we'll go ahead and monitor our progress both on rightsizing our detailing and marketing activities as well as progress we make on cost controls and update guidance appropriately as we go through the year. But currently, we still are expecting that $7.1 billion to $7.4 billion in SG&A – excuse me, for the full year.

Operator: Jami Rubin, Goldman Sachs.

Jami Rubin - Goldman Sachs: Just, I may have missed it, but did you update us on the solanezumab trail design, your new Phase III trial in moderate patients? If you haven't, when might you update us? Then secondly, a question for Derica, I was wondering, if you anticipate any impact from sequestration, Alimta is obviously a very big drug that's reimbursed through Medicare Part B, and as you know the 2% price cut has been applied across the Board. I'm wondering what you plan to do to make sure that these hospitals are not diverting sales away from Medicare Part B to hospital based products, I mean if you plan to discount it et cetera. If you're expecting any sort of impact at all?

Philip Johnson - VP, IR: Thanks for getting back in queue and thanks for the questions. Jan, if you want to go ahead and take the first question on the update for the sola trial and then we'll also have Travis comment, since you're close to that and then Derica, feel free to chime in if you'd like on the second.

Jan M. Lundberg, Ph.D - EVP, Science and Technology and President, Lilly Research Laboratories: Let me just start by saying that we are going to test mild Alzheimer's disease, not moderate patients and that is based on the previous data, from EXPEDITION I and II, where it was mild patient population that actually had a significant benefit, particularly on cognition and a slight effect also on function, but what we're doing currently is that we have ongoing discussions with regulators globally to prepare them for EXPEDITION III, which we plan to start during Q3 and that is what we can say for the moment.

Philip Johnson - VP, IR: Yeah. Actually before going to the next part of Jami's question – so Jami, clearly at some point prior to the first patient visit, we'll be posting the study design to clinicaltrials.gov and I think we'll be looking for an appropriate way to either reactively or proactively depending on the timing of this, discuss that trial design with those of you in the investment community that are interested in more details. Travis?

Travis Coy - Director, Investor Relations: We do understand that sequestration has introduced some challenges for oncologists with regards to treating patients that sit in Medicare system. At this time, we are not seeing a significant impact to our Alimta sales, but obviously we're going to continue to monitor that situation and we'll continue to work towards making sure our patients have access to Alimta.

Operator: Seamus Fernandez, Leerink Swann.

Seamus Fernandez - Leerink Swann: So, as I look at the P&L overall, I'm just wondering if you guys could talk a little bit about comparisons versus some of your peers as it relates to the inclusion of amortization. If you've done any studies of how much is incorporated or included in Lilly's P&L versus others. There's obviously a pretty widespread and what I see is a wider spread between your operating cash flow and your adjusted earnings versus some of your peers. So maybe you can just kind of give us a little color on that, Derica. Then separately, can you just update us on any of the Phase II products that you sort of see rolling through the back half of this year or going forward that we should be particularly focused on?

Philip Johnson - VP, IR: Derica's actually had, the IR team here looking at some of those P&L comps, so I'll take the first stab at the first part of your question and if Jan, if you would like to do the second. So, increasingly over the last few years, we've seen the situation changed, prior you have a minority of the companies that would be excluding from their non-GAAP results, things like amortization, expense or stock-based compensation. I think as you're well aware of that list of companies has continued to grow and probably now constitutes the majority of our peers. We continue to believe that if analysts want to know the cash generation that we've accomplished in a given period has already financial statement that gives you those details, and then making those kinds of adjustments to non-GAAP EPS are not necessarily, what we would view as the right way to use non-GAAP, but again we're very cognizant that other companies are doing that. We try to make sure that in our SEC filings. We provide information so the analysts can see how much that amortization expense was for us in a given period, in the past I believe we've only been doing that in our annual filing. I think going forward. You'll see that we are doing that also in our quarterly filings, as well. I think this quarter it was probably somewhere in the $170 million or $180 million but I need to consult our Q to see the exact number, $150 million I think was the number, yes. Jan?

Jan M. Lundberg, Ph.D - EVP, Science and Technology and President, Lilly Research Laboratories: Here is an update on some of the programs in Phase II and let me start with glucagon receptor antagonist, which is an oral agent in type 2 diabetes where we have Phase 2b data showing glucose lowering, et cetera. So that’s next generation agent but potentially in – for the oral part and of type 2 diabetes and we will present some further data this year on this agent. Then the next one is blosozumab, a monoclonal antibody against sclerostin which has been shown to be a very potent anabolic agent and we will present some data in May for this agent. It has unique anabolic and building properties also compared to current products on the market like FORTEO. The next one is our oral base inhibitor, beta-secretase inhibitor which is in Phase II trials, actually then for carrying forward of Phase III with dose ranging and also looking at some safety aspects. This as you know the beta-secretase is an intriguing target which recently has been associated by genetics and to be protective against Alzheimer's disease, dementia and we hope to mimic this and by this oral agent. Finally in the oncology area we have a CDK 4/6 oral agent which has been tested in various tumors including mantle cell lymphoma where this mechanism has been particularly implied for driving the tumor growth.

Operator: Marc Goodmanm UBS.

Marc Goodmanm - UBS: So, Derica, can you help us quantify the impact of doughnut hole and the yen devaluation that you had mentioned earlier? Second, with respect to following up to Dave's question about the SG&A and what was kind of in the quarter, not in the quarter and the changes in the reps, I mean, was that impacted in the first quarter or should we assume that that's going to start in the second quarter, because you just announced it recently? Then third question is can you talk about DPP-4 market? There seems to be a slowdown in prescriptions there over the past couple of months, wondering how you view that market and how you think about the SGLT2's positioning in the diabetes space?

Philip Johnson - VP, IR: Okay, Marc, thanks for the question. Derica?

Derica W. Rice - EVP, Global Services and CFO: I'll take the first two, Marc. In regards to the impact of the yen, as well as the Affordable Care Act and the doughnut hole, the yen as you saw, if you look at our Japanese growth, the devaluation cost us 13 percentage points in growth. So, unless you see movement in yen to appreciate then you would expect that that's going to continue for the reminder of the year. In regards to the impact of the doughnut hole and really more holistically the Affordable Care Act, we're probably seeing an impact somewhere in the $100 million to $150 million higher than we had anticipated when we started the year. To your third question in regards to the U.S. restructuring, you should anticipate seeing the impact of that restructuring probably more likely in Q3 versus Q2. Travis?

Travis Coy - Director, Investor Relations: Marc, with regards to I guess two more questions, so I think you've got a total five in there, so that's good work. One for the DPP-4 market, yeah, we're tracking the same date you are with regards to TRX. We are, as you mentioned, beginning to see a slowdown in the overall market, but we are very encouraged by the progress we've made with regards to Tradjenta. We're now seeing around 20% new to brand, which is comparing favorably to Onglyza and we'll continue to work towards increasing access for that product. With regards to the positioning of empagliflozin within the diabetes human continuum, as I mentioned in my prepared remarks, we're encouraged by the independence of the both beta cell function and insulin resistance from that mechanism and believe that SGLT2 class is an encouraging class as we filed in both U.S. and European regulatory agencies. So we believe that we'll have a very strong positioning and particularly due to that mechanism and potentially with combination with other products.

Jan M. Lundberg, Ph.D - EVP, Science and Technology and President, Lilly Research Laboratories: Just to be clear, Ilissa had mentioned to me, when Derica was talking about the additional $100 million to $150 million impact from the Medicare Part D doughnut hole because as for the full year, we talk about sort of changes to we've had in our previous guidance. We would've had obviously a much smaller impact on that in this particular quarter. By the way we – regards to Mark, you'd also – for the restructuring of the U.S. sales force we actually accrued our provision for that in the fourth quarter of '12.

Philip Johnson - VP, IR: Yeah, and as you think about the yen impact recall that that particular geography contributes over $2 billion of revenue for us and the rates as Derica mentioned that are currently there. You're probably looking at a 15% to 20% devaluation sort of depending on where the yen has from here. So obviously, we're talking about a $300 million to $400 million headwind at the top line on revenue, again for the full year. Paul, do we have any more callers that have joined the queue?

Operator: Damien Conover, Morningstar.

Damien Conover - Morningstar: I just wanted to ask question about some of the recent announcements of expanding the insulin manufacturing facilities. As you are getting ready to launch your next generation of insulin products, I want to know, how much you can leverage your current manufacturing capacity, and how much you have to potentially build out, for these next launches. Then secondly, sanofi has talked about having a biosimilar version of its own Lantus. I just want, to feel your comments on, if they were to come through just how that might change the context of the market? Thanks you.

Philip Johnson - VP, IR: Great, Damien, we’ll have John take your first question, I'll go ahead and take the second one. John?

John C. Lechleiter, Ph.D. - Chairman, President and CEO: Damien, we have talked in recent months and years about manufacturing investments on two aspects of our insulin portfolio. One is the active ingredient manufacturing process, which is the biosynthetic piece. Investments that we've made and development strategies that we've began to put in place a number of years ago will enable us to essentially use the existing footprint that we currently have in place for manufacturing the active ingredient that goes with the Humulin and Humalog to not only continue to manufacture those medicines, but also our novel basal insulin and our insulin glargine product, without appreciable additional investment. There is some additional investment required, but it's far less than if we had to build a new plant and it enables to meet what we expect to be demand for those products through the decade. Now, we've recently, very recently announced a further expansion, in our drug product manufacturing part of the equation, which is essentially additional capacity for manufacturing cartridges that really reflects growth in demand. We now manufacture those cartridge products both in the – or we will be manufacturing them both in the U.S. and in Europe. Even as we drive productivity from those operations I think that's going to be more of a function of market demand as new products come to market and there is a greater demand in countries like China, for these products, you're going to see us continue to make those kinds of investments, but those are relatively smaller capital investments than investing in a plan to make new API.

Philip Johnson - VP, IR: Damien, in terms of sanofi being involved and doing their own biosimilar version of Lantus, I can't say that we're aware of specific plans they've talked about to do that, but we are aware of the – they maybe referring to as if they're developing a more concentrated form evidently of Lantus and they've stated publicly I think that could have a different PK-PD profile, time action profile and they've highlighted that as one of their later stage development programs. In the past we have said and we continue to believe that the overall glargine molecule will continue to be widely used throughout this decade. We would expect to be able to play quite competitively given our manufacturing expertise and capacity, our device expertise and capacity and then obviously our commercial presence, within that overall glargine space, but we would anticipate that branded Lantus whether it's the current formulation or potentially this more concentrated form, should it get to market will probably have roughly half of that overall glargine market, would be our best estimate. We then expect to compete very well in the novel insulin space hopefully, if we can get approval of our novel basal insulin analog, that aims to actually improve upon the characteristics and the benefits provided to patients from the current basals that are available. Paul, do we have any other callers on the line now?

Operator: David Risinger, Morgan Stanley.

David Risinger - Morgan Stanley: So, just going back to the SG&A question and you've provided a lot of clarity for 2013, so that's much appreciated, I'm just trying to understand going forward for '14, directionally whether the SG&A is likely to go down in 2014 or be flattish? So that's what I'm after to understand what the incremental SG&A reductions are for '14 to offset the revenue declines of Cymbalta and Evista. So any color on flat or down in '14 would be much appreciated.

Derica W. Rice - EVP, Global Services and CFO: David this is Derica again, we're really not in a position to give specific guidance for 2014 at this stage. I still believe the biggest determinant of that is still going to be what emerges from our pipeline. Clearly, we'll be in a position this year to potentially submit up to five products for regulatory approval. Depending upon the outcomes of those submissions, and when we see the approval, there could be incremental spend that would be behind some of those brands if we're successful, but until we know that it's very difficult to predict at this stage. What I can say is that today with the actions we've taken and that we've announced here most recently, we're very consistent and in line with both the near-term and the medium term guidance that we've put out here in terms of the actions that was necessary to make sure that we meet those minimum of $20 billion of revenue, $3 billion in income and $4 billion in cash flow and we see our actions very consistent with that and we're actually a little bit ahead of what we thought we'd be at this stage.

Philip Johnson - VP, IR: With that we'll go ahead and conclude the call. I would like to thank all of you for dialing in to participate and appreciate your interest in Eli Lilly. We're very pleased with our performance in the first quarter and the progress we're making with the pipeline. To that point, I want to remind you that coming up at the ADA on June 24th, we'll have Investor meeting to discuss results that will be presented at ADA for both dulaglutide and empagliflozin and then also to put on your calendar a reminder that on October 3rd, here in Indianapolis, we'll be hosting our investment community update, the last one of which we had in June of 2011 in New York City. For in addition to your regular scheduled earnings calls, please put those on your calendars, we hope you can join us and we'll keep you appraised of our continued progress as we move forward during the year, have a great day.

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