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Executives

Philip Johnson – Vice President-Investor Relations

Derica W. Rice – Executive Vice President, Global Services, and Chief Financial Officer

Jan M. Lundberg – Executive Vice President-Science and Technology and President-Lilly Research Laboratories

Sue Mahony – Senior Vice President and President-Lilly Oncology

Ilissa Rassner – Investor Relations

Travis Coy – Investor Relations

Analysts

Catherine J. Arnold – Credit Suisse Securities

Tim Anderson – Sanford C. Bernstein & Co., LLC

Andrew S. Baum – Citigroup Inc.

Tony Butler – Barclays Capital, Inc.

Gregory B. Gilbert – Bank of America/Merrill Lynch

Seamus Fernandez – Leerink Swann LLC

Steve M. Scala – Cowen & Co. LLC

Jay Olson – Goldman Sachs & Co.

Christopher Schott – JPMorgan Chase & Co.

David Risinger – Morgan Stanley

Marc Goodman – UBS Investment Bank

Mark J. Schoenebaum – ISI Group Inc.

Michael K. Tong – Wells Fargo Advisors LLC

Damien Conover – Morningstar Research

Eli Lilly & Co. (LLY) Q4 2012 Earnings Call January 29, 2013 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q4 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session with instructions given at that time. (Operator Instructions) And as a reminder, this conference is being recorded.

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

Philip Johnson

Good morning and thank you for joining us for Eli Lilly & Company’s Fourth Quarter 2012 Earnings Conference Call. I’m Phil Johnson, Vice President of Investor Relations. Joining me this morning are Derica Rice, our Chief Financial Officer; Dr. Jan Lundberg, President of Lilly Research Laboratories; Sue Mahony, President of our Oncology business and Ilissa Rassner and Travis Coy from the Investor Relations team. John Lechleiter, our Chairman, President and CEO is traveling overseas and is unable to join us today.

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.

Since our last earnings call, we had a number of significant events. Here are some of the highlights. On the regulatory front, we had three approvals by the European Commission including Cialis, for once-daily use for the treatment of the signs and symptoms of BPH; Amyvid, is a diagnostic radiopharmaceutical for the PET imaging of beta-amyloid neuritic plaque density in the brains of adult patients with cognitive impairment who are being evaluated for Alzheimer’s Disease and other causes of cognitive impairment; and along with our partner Boehringer Ingelheim, Trajenta for use in combination with insulin in adults with type 2 diabetes.

Erbitux received two approvals. In Japan, we along with our partners Merck Serono, and Bristol-Myers Squibb received approval for Erbitux for the treatment of patients who had neck cancers. And in Canada, along with our partner Bristol-Myers Squibb, we received approval for Erbitux in combination with a chemotherapy regimen as an initial treatment of patients with EGFR-expressing metastatic colorectal cancer.

Turning to clinical moves, the Alzheimer’s disease cooperative study presented additional data from the solanezumab EXPEDITION studies at CTAD. We also announced that we plan to conduct an additional Phase III study of solanezumab in patients with mild Alzheimer's disease.

At the American College of Rheumatology Annual Meeting, we presented Phase II RA data for two of our autoimmune assays, baricitinib, the oral JAK1/JAK2 inhibitor in partnership with Incyte; and tabalumab, our anti-BAFF monoclonal antibody.

For tabalumab, we also announced the discontinuation of one of the three Phase III RA registration studies due to insufficient efficacy.

Timely, with our partner, Boehringer Ingelheim, we announced top-line results for four Phase III trials of empagliflozin and SGLT-2 inhibitor being studied for the treatment of patients with type 2 diabetes. In all four studies, the primary efficacy endpoint was met.

In business development news, Lilly along with our partner Boehringer Ingelheim announced an adjustment to the scope of our diabetes alliance with Lilly reassuming sole worldwide development and commercialization rights to our investigational novel basal insulin analog. And we received notice from Bristol-Myers Squibb to terminate the collaboration for necitumumab in North America and Japan, which will result in Lilly assuming sole worldwide development and commercialization rights.

There were three other noteworthy events since the Q3 earnings call. We reached an agreement with the U.S. Securities and Exchange Commission, to settle the issues regarding compliance with the U.S. Foreign Corrupt Practices Act.

As part of our efforts to align global manufacturing with long-term business needs, we announced we will discontinue manufacturing operations in Mexico by mid-2015. And our Board of Directors authorized the initiation of the new 1.5 billion share repurchase program, which we anticipate completing in 2013. In the fourth quarter of 2012, we repurchased $400 million worth of shares under this program and also completed the $490 million remaining in our previously authorized share repurchase program.

Now let’s discuss our financial performance for the quarter and the full year of 2012. As we have done on previous calls, we will focus our comments on the non-GAAP results, which we believe provide insights into the underlying trends in our business. This view excludes certain item such as restructuring charges, asset impairments and other special charges.

On slide seven, you can see that revenue in Q4 2012 was nearly $6 billion which is 1% below Q4 2011. This decrease in revenue was due to the loss of patent exclusivity for Zyprexa in most major markets outside of Japan, nearly entirely offset by growth from several other products, including double-digit growth in the US for Cymbalta, Alimta, and our animal health products, in international markets for Forteo, Humalog and Strattera and in both US and international markets for Effient.

In Q4 2012, excluding Zyprexa outside of Japan, the rest of our worldwide revenue grew 5%. Gross margin as a percent of revenue increased 90 basis points from 78.1% to 79.0%. This increase was driven by the impact of foreign exchange rates on international inventory sold, which increased cost of sales in Q4 2011 but reduced cost of sales in Q4 2012. Excluding these FX effect from both 2011 and 2012, gross margin as a percent of revenue declined by 0.3 percentage points, from 78.8% in Q4 2011 to 78.5% in Q4 2012.

Moving down the income statement, Q4 2012 total operating expense defined as the sum of R&D and SG&A declined 1%. This reflects continued discipline in managing our operating expenses, while investing in our pipeline to drive future growth. Specifically this 1% decline is comprised of a 7% reduction in marketing, selling and administrative expenses, and 8% growth in R&D expenses. The reduction in marketing, selling and administrative expenses was driven by lower marketing expenses and to a lesser extent by lower selling expenses.

The growth in R&D expenses was largely driven by higher late stage clinical trial costs, including a $50 million milestone payment to Incyte based on initiation of RA Phase III program for baricitinib and a $30 million charge related to the decision to stop one of the Phase III trials for tabalumab in rheumatoid arthritis.

Other income and deductions was the net expense of $52 million in Q4 2012, compared to net expense of $27 million in the fourth quarter 2011.

Our tax rate was 22.3%, an increase of 2.4 percentage points from Q4 2011 primarily due to the lapse of R&D tax credit in 2012. Since the American Taxpayer Relief Act was passed in January of this year, the full-year 2012 R&D tax credit we recognized as a discrete tax benefit in Q1 2013.

At the bottom line net income and earnings per share each decreased 2% resulting in non-GAAP EPS of $0.85 for the quarter. For the full year, revenue decreased 7% driven by the loss of patent exclusivity for Zyprexa in most markets outside of Japan. Excluding Zyprexa outside of Japan, the rest of our worldwide revenue grew 6% for the full year.

Operating expenses in 2012 decreased 1%, driven primarily by lower marketing expenses, partially offset by increases in R&D due to late stage clinical trial costs. Finally, net income and EPS each declined 23% driven by lower sales from the Zyprexa patent expiration.

In summary, our full-year 2012 financial results clearly reflect the impact of Zyprexa patent expirations outside of Japan. However, 2012 results also demonstrate continued growth in a number of products and businesses not experiencing patent expiration. Our fourth quarter results show that we’re emerging from the Zyprexa patent expiration period, and with continued growth in the rest of our business along with Prudent Expense Management, we are on track to return to growth in 2013. We remain committed to meet or exceed our minimum financial targets through 2014 and are positioned to return to growth post-2014.

Slide eight shows our reported income statement while slide nine provides a reconciliation between reported and non-GAAP EPS. Additional details about our reported earnings are available in today’s earnings press release.

Now, I’ll turn the call over to Illisa.

Ilissa Rassner

Thanks, Phil. As we can see on slide 10, the total revenue decline of 1% in Q4 2012 shown in the yellow bar on the middle of the page was driven by a negative volume impact of 3%, and a negative foreign exchange impact of 1%, partially offset by a favorable price impact of 2%.

By geography, you’ll notice that U.S. volume decreased 10% and Europe’s volume decreased 3%. both of these decreases were due to Zyprexa. excluding olanzapine from both 2011 and 2012, volume in the rest of our U.S. business is flat, and was up 3% in Europe.

In Europe, you’ll see a positive 1% impact from price. Normally, price in Europe was negative. The increase in Q4 was driven by new information that led to accrual adjustments related to prior quarters of 2012. Excluding these adjustments, European price would have been down about 2%.

Turning to Japan, we had another quarter of robust volume growth of 16%, driven primarily by Forteo, Alimta, Zyprexa, Strattera, Cialis and Cymbalta. This was partially offset by a negative 10% price impact due to the biannual price decreases, primarily affecting Alimta and Gemzar.

In our ROW Line, China was a significant growth driver in Q4, delivering 22% total growth almost entirely from volume. Elanco Animal Health also delivered robust growth of 19% driven by strong organic growth in both the food and companion animal businesses. Elanco continues to outperform the broader animal health market, and is poised for double-digit income growth during the YZ years and beyond.

Finally, the 17% decrease in collaboration and other revenue was due to the transfer of U.S. exenatide rights to Amylin. Excluding exenatide collaboration and other revenue grew 24% in the quarter.

Slide 11 shows the year-on-year growth of select line items of our non-GAAP income statement, with and without the effect of changes in foreign exchange rates. For both the quarter and the full year, FX contributed positively to EPS growth, despite weaker foreign currencies that had a negative effect on revenue. This was more than offset by the positive effect of FX on international inventory sold, which was through cost of sales. As a result at the bottom line, you can see that Q4 EPS declined 2% including FX, and 6% excluding FX. For the full year, EPS declined 23% including FX and 29% excluding FX.

For your information on slide 12, we've provided the year-on-year growth of select line items our reported income statement with and without the effect of foreign exchange rates.

Slide 13, shows our pipeline as of January 21. Changes since our last earnings call are highlighted with green arrows showing progression, and red arrow showing attrition. You will see that we began Phase III testing of the oral JAK1/JAK2 inhibitor baricitinib, which we are developing in partnership with Incyte. In addition, we began Phase II testing of the small molecule for depression and a cancer biologics. And we started Phase I testing of four assets, three for diabetes and one for cancer.

We also terminated development of three Phase I molecules. I’d also highlight that we initiated a Phase III trial of our Anti-IL-17 Monoclonal Antibody ixekizumab in psoriatic arthritis. With the addition of baricitinib, we now have 13 assets in Phase III and we continue to believe that our robust pipeline spanning oncology, diabetes, cardiovascular, neuroscience, and autoimmune diseases positions us for growth post 2014.

We had a number of encouraging data readouts in 2012 that reinforce our confidence in the potential of our pipeline. As we discussed in our dial-ins call earlier this month, we expect a lot of pipeline activity in 2013, including our oncology molecule. We are pleased to have Sue Mahony, President of our Oncology business with us this morning to provide an update on the oncology pipeline. Sue?

Sue Mahony

Thanks Ilissa. We are excited about the progress that we made in advancing our late-stage oncology pipeline in 2012, and we expect to continue this progress in 2013, with a number of data disclosures and potential submissions.

I will start with an update on ramucirumab. Last week, at ASCO GI we disclosed the first Phase III data of fully human monoclonal antibody, which is a key late-stage pipeline assets similarly. Ramucirumab selectively targets and blocks the VEGF receptor-2 into changes in blood vessel formation in humans. The data was from the REGARD trial evaluating ramucirumab as a single agent compared to placebo, and best supportive care in the second line treatment setting for patients with metastatic gastric cancer. The trial met its primary endpoint of improved overall survival and also showed prolonged progression free survival.

Currently, there are no agents specifically approved for second-line gastric cancer treatment in the U.S. and Europe. We believe that the overall efficacy and safety data from the REGARD trial demonstrated that ramucirumab has a promising treatment profile in the difficult to treat patient population. We have been meeting with regulators to discuss our filing strategies, and we intend to submit the regulatory approval in the U.S. and Europe in 2013. We also intend to have additional data presented and published from REGARD later this year.

Aside from REGARD, three of the Phase III ramucirumab trials have completed patient enrollment, ROW, the first line metastatic breast cancer trial, RAINBOW, the gastric combo trial unravel our study in second-line non-small cell lung cancer. Completion of patient enrollment for the other two Phase III trials in liver and colorectal cancers is expected to be achieved this year. We also expect topline data from ROWs and RAINBOW later this year.

Moving on to necitumumab, Lilly will be assuming sole worldwide development and commercialization rights from the termination of our agreement in North America and Japan, from our partner Bristol-Myers Squibb. We're fully committed to the development of necitumumab for which a Phase III study in squamous first-line metastatic non-small cell lung cancer, SQUIRE is ongoing, and fully enrolled. We expect to have data readout from the SQUIRE trial later this year or early next year. If the lung cancer trial necitumumab and ramucirumab are positive, we will be positioned off a comprehensive treatment strategy for non-small cell lung cancer patient.

For Alimta, the standard of care the first line of nonsquamous non-small cell lung cancer. With necitumumab, the first-line squamous non-small cell lung cancer, and with ramucirumab, the second-line treatment.

Our third Phase III molecule Enzastaurin is being studied as maintenance therapy in patients with diffuse large B-cell lymphoma at high risk of relapse after heart shock induction therapy.

The prognosis for high risk patients through disease recurred is poor and there are no approved treatment in this clinical setting. We expect to have the required number of events in the 12 new trial in the first half of 2013 and plan to submit later this year, if the results are positive.

In addition to the three late stage molecules, we have a robust early and mid-stage pipeline with novel mechanisms of action, tailoring potential and early data in areas of significant unmet need. We believe that Lilly’s large and diverse oncology pipelines, positions us to success in the coming years, and provide the basis for continued future growth.

And now, Derica will summarize key events across our entire corporate portfolio for 2012 and ‘13 and discuss our updated 2013 financial guidance, Derica?

Derica W. Rice

Thanks Sue. When we rolled out our 2012 guidance, we've provided you with the list of key events for the year. Now we updated that list quarterly so that you can keep track of our progress. As those rated by the green checkmarks on slide 14, you can see that we made significant advances with our pipeline in 2012. Now as Ilissa mentioned, there is a lot to look forward to in 2013 as well.

Specifically as shown on slide 15, we anticipate a number of potential external data disclosures at scientific meetings. These include presentation of detailed data from some of the Phase III trials for dulaglutide and in collaboration with Bullinger Ingelheim for empagliflozin. Both potential treatment for type II diabetes. And presentation of data from the Phase III trial of ramucirumab in first-line breast cancer. Note that the data we expect to receive in 2013 from this trial will be the final progression free survival data and the interim overall survival data.

And 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 a number of Phase III trials that may produce data in 2013 although presentation of detailed data at medical meetings would likely occur later. These include the initial Phase III trials of our novel basal insulin analog for both type 1 and type 2 diabetes, the pivotal trials for our new insulin glargine product. The Phase III study of ramucirumab as combination therapy in second-line gastric cancer, the initial trials of edivoxetine as adjunctive therapy for major depressive disorder. Also, we’ll conduct additional analyses of Phase III trials of tabalumab for rheumatoid arthritis.

In total, we’ll have Phase III data read outs or detailed data presentation on 8 of our 13 Phase III assets. in 2013, we could see up to five regulatory filings. these include three diabetes assets, dulaglutide, empagliflozin and our new insulin glargine product and two oncology assets, ramucirumab as monotherapy for second-line gastric cancer as well as enzastaurin for diffuse large B-cell lymphoma.

As for other key events to watchful 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. We’re excited about 2013 and the opportunities we have to continue to advance our pipeline and to share data that will help investors better judge our growth potential post-2014.

Slide 16 shows the 2013 financial guidance that we discussed in detail on our call on January 4. We have now incorporated the one-time benefit of the 2012 R&D tax credit that will be recorded as a discrete item in Q1 of 2013. You can see that the estimated full-year GAAP and non-GAAP tax rates have been lowered by 1.5 percentage point. We've also raised our GAAP and non-GAAP EPS ranges by $0.07. We now expect full year 2013 earnings per share to be in the range of $4.10 to $4.25 on a GAAP basis or $3.82 to $3.97 cents on a non-GAAP basis. All other line items of our previously issued guidance remain unchanged. If you are looking for additional color commentary on our 2013 guidance please refer to today's press release as well as the investor section at lilly.com, where you will find the slides and audio from our January 4 call.

Slide 17, provides a reconciliation between reported and non-GAAP EPS for 2012 and the associated growth rate from these numbers to our 2013 guidance.

To sum up, we made steady progress in 2012 implementing our three strategic priorities; replenishing and advancing our pipeline, driving strong performance on our marketed brands in key growth areas; and increasing productivity, and reducing our cost structure. Our financial results for Q4 2012 and the full year show our progress with China, Japan, Elanco, and several key brands all producing double-digit volume growth for the quarter and the full year. This strong performance combined with our disciplined and managing costs generated $5 billion of operating cash flow, covering capital expenditures of about $900 million and our dividend are roughly $2.2 billion, and enabling us to complete our prior share repurchase program, and to initiate the new $1.5 billion share repurchase program.

Our continued strong operating performance gives us confidence that we will successfully navigate through IV with the capacity to drive future growth. We continue to be on track to meet or exceed our mid-term financial projections. Minimum annual revenue of at least $20 billion, net income of at least $3 billion, and operating cash flow of at least $4 billion.

Looking at the pipeline, we made significant progress over the past 12 months. We advanced 12 molecules into Phase 1, eight molecules into Phase II, two molecules into Phase III and launched Amyvid in the U.S. We now have 13 assets in Phase III and 23 assets in Phase II with a good mix of small molecules and biologics across all basis of our portfolio. We generated a significant amount of data in 2012 and we anticipate data readout or detailed presentations on each of our 13 Phase III assets this year. This is the most robust mid to late stage pipeline in our history, and it positions us to drive growth post 2014. We continue to believe that our innovation strategy is the right one to benefit patients and create value for shareholders. We look forward to providing more update as we continue to execute this strategy.

Now this concludes our prepared remarks and we will take your questions.

Julie, first caller please?

Question-And-Answer Session

Operator

Thank you. (Operator Instructions) And with that we’ll go to the line of Catherine Arnold with Credit Suisse. Please go ahead.

Catherine J. Arnold – Credit Suisse Securities

Thank you very much and good morning. I had a question for Sue; I was wondering, if you could comment on if there is a scenario in the cancer area, where a drug hit PFS and OS and wasn’t approved or didn’t get priority review. And whether if you could just comment on Eli’s data is out what was most surprising to HER as far as total dataset released, thanks?

Sue Mahony

Thank you Catherine. With regards to your first question about whether there’s has been agents in the cancer market, that has overall survival on PFS data without approval of priority review. I am not aware of any molecule in the cancer market that has had overall survival, and PFS data that hasn’t been approved or indeed have priority review.

With regard to your question about the data for REGARD, for Ramucirumab, obviously we were very pleased to see the data, and we were pleased by the reaction that we had from investigators, and thought leaders in prescribing physicians, ASCO GI last week. I think specifically this is the first study to show both an overall survival and progression free survival advantage in a difficult to treat patient population, in a high unmet need. As a single agent and this was a single agent study for Ramucirumab. And in addition to that we saw a safety and side effect profile with again we we’re pleased to see with just 10.5% of patients coming off therapy because of the side effects in the ram arm, 6% in the placebo arm. So I think it is a balance between the efficacy that we saw and the safety that we saw in that trial, that we were presently pleased to see.

Philip Johnson

Catherine, thanks for the questions. Julie, if we have the next caller please.

Operator

The next question is from Tim Anderson with Sanford Bernstein. Please go ahead.

Tim Anderson – Sanford C. Bernstein & Co., LLC

Thank you. Couple of pipeline questions. Your pipeline charges that you have a CDK4/6 inhibitors in Phase II that’s similar to the Pfizer compound. I am wondering when we might see that efficacy data from that Phase II trial. And then on solanezumab, just a regulatory update in the ex-U.S. markets, if I understand it correctly that you could potentially file the drug for approval in certain ex-U.S. markets without the need for the additional trial that you described on December 12, and if there is a possibility when what might we hear more from you on this matter?

Derica W. Rice

Okay, great. Tim, thanks for the question. Sue, do you want to answer the question on the CDK4/6 timing?

Sue Mahony

Sure, yeah.

Derica W. Rice

You have to give update on the – okay.

Sue Mahony

Yes, you are correct, we do have a CDK4/6 inhibitor in Phase II study. It’s currently being developed for relapsed and refractory (inaudible). And we expect this trial to conclude in 2014 and we are also planning on future trials with this molecule.

Tim Anderson – Sanford C. Bernstein & Co., LLC., Research Division

Okay.

Derica W. Rice

Jan.

Jan M. Lundberg

In relation to our plans with solanezumab outside U.S., we are in preliminary discussions with a number of regulators, but it’s too early to comment it, there could be different actions being taken in different geographies, but the systems are somewhat different compared to the FDA.

Tim Anderson – Sanford C. Bernstein & Co., LLC., Research Division

Great.

Philip Johnson

Tim, thank you for the questions. Julie, can we have our next caller please.

Operator

That comes from Andrew Baum with Citi, please go ahead.

Andrew S. Baum – Citigroup Inc.

Yeah. Just one follow-up on the CDK4\6, the Phase II trial you’ve had ongoing out fragmental has been running for three, four years or so. Is this a function of focus of Lilly or could you just comment on the competitive specificity of both the Asian competitor and Pfizer component?

Derica W. Rice

Okay, Sue?

Sue Mahony

Yeah, we obviously don’t have comparative data both despite (inaudible). I can tell you that we are very excited by our CDK4\6 inhibitor and as I mentioned we have on going plans to have further studies of this molecule going forward. So you should be seeing more and hearing more about this molecule going forward?

Philip Johnson

Okay, thanks Sue. Julie next caller please.

Operator

Thank you. And that goes to Tony Butler with Barclays Capital. Please go ahead.

Tony Butler – Barclays Capital, Inc.

Thanks very much. Also one for Sue Mahony, Sue I understand that, and then respectful of the comments, with Ramucirumab and the REGARD trial, and filing in the second line monotherapy indication, but I’m curious just simply based on the six week benefit if that’s truly sufficient that you do not need RAINBOW in order to support that filing and you could add RAINBOW or provide that to the FDA in the subsequent time. Thanks very much.

Sue Mahony

Thank your for the question. With regard to the data from the monotherapy study REGARD, just to – we emphasized why we believe that this is a study that we plan to submit to the authority this year. Again there is no approved agent in the second line setting in gastric cancer, and this is the first non-chemotherapy agent that will have shown both an overall survival and a progression free survival improvement.

Now you mentioned the 1.4 months, we put that into perspective. The patients in the control arm with the medium of 3.8 months and that compared to 5.2 months for the Ramucirumab, with a hazard ratio that shows a reduced risk of death of 22% and this corresponds to increase in medium survival of 37%. Again with a safety profile were 10.5% of patients discontinued therapy due to adverse events in the random arm compared to 6% in the placebo arm and the most frequent grade three or moderate adverse event being hypertension 7.6% grade three in the random arm versus 2.6% grade in the placebo arm with no grade four severe hypertension.

So we believe again with that, the balance of efficacy and safety in this very high unmet need with this no approved therapies, but this is a chart that we believe that we should submit, and plan to submit as quickly as possible.

now obviously we cannot comment on how the regulatory authorities will view this data and we will continue to work with the regulatory authorities to ensure that we have a robust data packages possible to ensure approve this molecule as quickly as possible for patients.

Philip Johnson

Okay. Thank you, Sue. thanks Tony. Julie, next caller please.

Operator

Thank you. Greg Gilbert from Bank of America, please go ahead.

Gregory B. Gilbert – Bank of America/Merrill Lynch

Sure. A couple of more on ramucirumab 2, you guys have had the data for some time and you’ve been talking to the regulators for some time. so can you share with us what piece of info or conversation guidance that you would actually submit? And secondly, Sue, how quickly could the organization be ready to launch and can you put some context around that organization and how nimble it is, and what would we like to launch a new product in the current configuration? Thanks.

Sue Mahony

All right, yeah. Thank you. We have initiated conversations with regulatory authorities, but I really can’t comment at this point on what those conversations have been or really anticipate or make any predictions about what the regulatory authorities will do with this data. And we made the decision to submit based on what we believe is the robustness of both this data and the stipulating activity that we’ve seen.

With regard to preparation for launch, we have a history of oncology with deep oncology experience at Lilly and our objectives and plan will be to get this agent approved as quickly as possible and we will see to PET to launch accordingly.

Philip Johnson

Greg, thanks for the questions. Julie, next caller please.

Operator

That’s from Seamus Fernandez with Leerink Swann LLC. Please go ahead.

Seamus Fernandez – Leerink Swann LLC

Hi, thanks very much for the questions. So quickly, Sue, can you give us an idea of how we should think about the commercial opportunity in the second line of setting for Ramucirumab particularly in gastric cancer, first off. What’s the number of patients that we would expect to see, whether it would be in the US or internationally with gastric cancer for this indication?

And then second question, as it relates to Ramucirumab specifically in the other cancers, what do you think that you are learning about Ramucirumab at this point that’s new and different from Avastin? Is it differentiating itself more on the efficacy in your opinion or the safety or both? Thanks.

Sue Mahony

Okay. With regards to your first question about the opportunity in gastric cancer, if we look globally, gastric cancer is the forth most common cancer in the world with nearly a million patient being diagnosed each year with gastric cancer, and about 700,000 deaths each year. Now it is more prevalent in Asian countries than it is in the Western world. And in the US, the incidence is about 20,000 Americans who we diagnosed with gastric cancer and about 10,000 death. So the larger population is in the Asia world, however again as I mentioned, the unmet need is great and there are no approved medicines in the US and there is no agreed standard of care in the US.

With regards to the second….

Seamus Fernandez – Leerink Swann LLC

What are you learning with the possibility for ram in terms of how it may or may not compare with the last month safety and efficacy.

Sue Mahony

Yeah, Ramucirumab is an anti-angiogenic, but it works very differently to Avatin. Ramucirumab is selective to the VEGF 2 receptor and we see this as being a different mechanism of action. So we will continue to see data going forward. The hypothesis when we developed Ramucirumab would be – well that selectivity would generate both efficacy, and potentially both efficacy and safety benefit. Obviously we’ll continue to see more data over the next 12 months to 18 months with our trials, but we’re pleased to see the third trial lead out in monotherapy which is different and with the safety profile that we’ve see again looks very promising.

Philip Johnson

Okay, thanks Sue. Thanks Seamus. Julie, next caller please.

Operator

Thank you. Steve Scala with Cowen, please go ahead.

Steve M. Scala – Cowen & Co. LLC

Thanks. Two questions. First, on the last call you stated that you are in a process of reviewing glargine biosimiliar data and that it was encouraging relative to comparability. I am wondering if you have any further thoughts on the data and how is this data different than the data Derica referred to on Page 15. So that’s the first question.

Then second question is for Dr. Lundberg, does Lilly believe 18 months is sufficiently long to test the base inhibitor in Phase III and does Lilly believe monomers are inherently toxic or are they devoid of biologic activity. Thank you.

Michael J. Harrington

All right, great. Thanks Steve, I’ll go ahead and answer your first question on glargine before turning it over to Jan. So the data that and Rick, I think mentioned on our last call that Derica also mentioned on this call is essentially the same. There are number of studies to support registration that we’re in the process of concluding or we’ll conclude here in the first part of 2013. That we expect to support a submission later this year. Jan?

Jan M. Lundberg

The duration of Alzheimer trials, it’s the key topic for our future discussions here regarding various agents. Currently solanezumab was tested for 18 months are there we were actually able to see reduction in cognitive decline. So I think that tells that 18 month could be enough providing that we chose the population of mild Alzheimer's disease. The specific PRO-based needs to be determined after we have the full Phase 2 data and discussions that regulates this.

The toxicity of monomers for Ab1-42 is there and sola data suggests that if you influence the free monomers you actually have a beneficial effect on cognition in the Alzheimer’s disease patients.

Philip Johnson

Great. Thanks Jan. Thanks Steve. Julie next caller please.

Operator

Thank you. Jami Rubin with Goldman Sachs. Please go ahead.

Jay Olson – Goldman Sachs & Co.

Hi, this is Jay Olson on behalf of Jami Rubin. Couple of questions, first off on Alimta, could you please update on the status of your method of use patent in Europe, and when we should expect to hear more in that? And secondly, one of your competitors are about to spin-off their animal health business, and if that transaction goes well, would you consider a similar approach with your animal health business? Thank you.

Philip Johnson

Great, thanks Jay. Sue, for the Alimta question, then Derica for the question on animal health.

Sue Mahony

Sure, the Alimta question was around the method of use. Let me just comment on the fact to remind people that the court affirmed the validity of the compound patent last year, so we have Alimta patent in Europe through to 2017 and sorry – U.S. through 2017 and Europe through 2015. And with regard to the method of use patent which is the administration of (inaudible) and bitumen B trials. The court hearing will be held in the U.S. here in August. In Europe, the patent or a similar patent was challenged by the European Patent Office and a ruling was issued in Lilly’s favor in the first instant; this is being appealed, but we do not have any update on the timing of that appeal.

Philip Johnson

Great. Derica?

Derica W. Rice

In regards to our animal health business, obviously we know that there is a lot of interest in Pfizer spin out there but in regards to Lilly, we have no intention to divesting of our animal health business. We’ve been quiet pleased with it.

As you heard earlier, in the fourth quarter, our animal health business grew about 18% and for the year, it grew about 21% and this is the business that we actually anticipate will double over this period, we call it YZ. And so we have got great returns from that business and great benefit for Lilly.

We also have received significant synergies between our animal health business as well as with our human pharma business, both in terms of innovation. Most of our human, before testing a human we run our molecules through animal model. And so that provide you a lot of leverage to our animal health. And then in addition to that, we also give leverage through and synergies through our manufacturing and corporate overhead base.

So for now, we are very pleased with our animal health business and we see this being a long main stay in terms of our portfolio mix.

Sue Mahony

Yeah, one thing Jim I would add as well is in the animal health business, in large part due to the entry into and substantial success that we’ve had in the companion animal market, but also due to continuing productivity efforts within our food animal business, we’ve seen a substantial margin expansion over the last few years out of Elanco Animal Health. We have been running with margins on a pre-tax basis of roughly sort of high-teens and that’s now into the mid-20s with the factors that I just mentioned. We are very pleased with the performance that unit has generated and is poised to generate going forward.

Philip Johnson

Julie, next caller please.

Operator

Thank you. We’ll go to Chris Schott with JPMorgan. Please go ahead.

Christopher Schott – JPMorgan Chase & Co.

Great. Thanks very much. Just had two questions, first was on diabetes, I know it’s early. But in this scenario where you have a basal insulin but it’s just biosimilar glargine, how meaningful opportunity is that for Lilly and is that a more instinct product in the emerging markets or the dealt markets.

And the second question was has the failure of Merck’s productive changed, how you’re thinking of CTP in your program there? Thank you.

Derica W. Rice

Okay, great. I think I’ll go ahead Chris, and take your question on diabetes and then maybe have Jan comment on the cardiovascular space. In a scenario where we would just have the biosimiliar if you will, insulin glargine product. We do view that as an opportunity not just for emerging markets but also for developed markets. We do think we’re probably one of the very small number of the companies that’s well positioned to compete effectively in this space, given the current insulin manufacturing infrastructure that we have. The commercial infrastructure that we’ll continue to have, as well as the device presence as well. It’s hard to predict going forward but in large numbers we said that we could certainly see significant continued views of the glargine molecule through this decade, roughly maybe a third of it still being branded Lantus and another third roughly being the other forms or other companies insulin glargine products that which we know were as far long as anyone if not the furthest along in that development path.

So there still would be I think a very substantial market opportunity in both developed as well as developing markets for this kind of a product. Jan?

Jan M. Lundberg

See the key mechanism is very different compared to the recently reported Merck data and with our CETP inhibitor, we can really maximize the elevation of HDL more than 100% and in addition we have a LDL lowering. And genetic data also support that if you have certain mutations of the CETP, you can actually have a protection of cardiovascular risk.

Philip Johnson

Okay. Thank you Jan. Thanks Chris. Julie, next caller.

Operator

Thank you. David Risinger with Morgan Stanley. Please go ahead. Mr. Risinger?

David Risinger – Morgan Stanley

Yeah, thanks very much. I have two questions, first with respect to your CETP inhibitor; I was just hoping that you could explain the trial rationale. So Lilly's outcomes trial is 11,000 patients and is shorter in duration than Merck’s, and Merck’s is 30,000 patients. So, just trying to understand the rationale for a much smaller and shorter trial than Merck’s. And then second with respect to the sola publication timing, could you just give us an update on that when that data will be published? Thank you.

Philip Johnson

Okay, thanks Dave for the questions. We’ll have Ilissa comments. Jan, feel free to join if you like. Ilissa?

Ilissa Rassner

Thanks David. For the CETP inhibitor, we believe we've designed an appropriately powered study to test the study hypostasis. One thing you'll notice if you look in ct.gov you'll see that the populations of the two trials are different as are the primary endpoints. And we’re currently in the process of evaluating on the possibility of publishing a paper to talk more about the specifics of the trial.

In regards to solanezumab and the publication strategy, actually it’s the ADCS that will be publishing, so it's really up to their timeline. I think it's possible that you could potentially see something later this year and again it's in their hands and we'll have to see what they come up with.

Philip Johnson

Great. Thanks Dave. Thanks Ilissa. Julie, next caller.

Operator

Thank you. We’ll go Marc Goodman with UBS. Please go ahead.

Marc Goodman – UBS Investment Bank

Yes, Sue, maybe you can talk about the many oncology drugs in Phase II. can you pick a couple of them and can you talk about what you’re most excited about and why? And then second question, just on the insulin franchise, can you give us a sense of any major changes going on and just trends and things like that, just both in the U.S. and overseas, any managed care contracts and changes that we should be aware of for 2013 in the U.S.? Thanks.

Derica W. Rice

Great, thanks Marc. Sue, and then I’ll take the question on the insulin.

Sue Mahony

Yeah. We have a number of products staying in Phase II into the oncology and patent. If we look across our pipeline, we’ve got a pretty robust and diverse pipeline of those small and large molecules. And I never like to pick some of the babies or preferred in any of these discussions, but as we indicate, what we’ve already mentioned and this is one that we intend to be pretty aggressive going forward on as a company and as a business unit. And we’re also excited by our JAK2 inhibitor and continue to progress that molecule.

c-Met antibody is another one that you should be hearing more about as it’s tedious data. So, there are a large number of them. I’d mention a few back, we should be seeing more data on in the coming months and years and that we continue to look at to aggressively develop those molecules.

Derica W. Rice

Great. Thanks, Sue. So Marc, in terms of trends that are happening in the insulin market, that’s going to start with the U.S. For 2013, we don’t expect significant changes in the payer environment, nothing to the extent that we would have seen these in our favor, as we went into 2011 or in the favor for novel in 2012. You have seen stabilization in terms of share market within the mealtime insulin segment, on the NRx basis, where we basically had the trough in sort of the June-July period of last year, have been creeping backup slightly since then, and on TRx basis, we have pretty much leveled out around that 39.5% from the last three or four months. So I think relatively stable picture in terms of share market, which should mean that in a growing market, we could return to have some volume growth here in the U.S.

Pricing will continue, I think to be pressured from some of the payor actions that we’re taking in 2012. I think you will continue to see that as we head through, in particular the first half of 2013, until that begins to annualize and then with some of the adjustments that were made in some of our accruals, for rebates and discounts, the detriment of our result in Q4 of 2012 actually by the time get to Q4 of 2013, you will have a pretty favorable comparing you could see a much different dynamic on the year-on-year changes.

Only U.S. we have seen pretty stable to slightly increasing market shares. We have continued to be talked about in the past to gain share in China, for example. So I think we are very pleased with the performance in holding our own to slightly increasing share overall outside the U.S.

Julie, next caller please?

Operator

Thank you. Next is Mark Schoenebaum with ISI Group. Please go ahead.

Mark J. Schoenebaum – ISI Group Inc.

Hey guys, thanks a lot for taking my question. I apologize if I repeat a question, my line dropped few times, if I do just don’t answer it, but maybe apologies for that. But maybe I can ask some oncology stuff. For Ramucirumab in breast cancer, if you are unable to show an overall survival benefit in breast cancer, I think most people understand, you could still file on that, but I think the question becomes, what do you think of the clinically significant improvement in PFS, if no OS benefit is shown. I thin when we look at the vast and experience, we are all trying to figure out, what the FDA might consider to be a clinically significant PFS change without an OS benefit?

And then can you just quickly on necitumumab, without a new disclosure that Bristol, you’re no longer working with Bristol on that program, and if so, are you able to provide any color. Thank you.

Philip Johnson

Great, thanks Mark. Sue, you want to take the two questions.

Sue Mahony

With regard to the breast cancer study, we should get data on the breast cancer study later this year. And we’re anticipating that we will see both progression free survival and hopefully a trend overall survival as well, we’ll be looking at both of those. We will make a decision to submit based on the overall data. I don’t think there is one point either on PFS or OS or, has the ratio that we will be looking for. We will be looking at the total efficacy and safety of this molecule to make a decision with regard to submission in the likelihood of approval. And we’re no more in that later this year.

With regard to necitumumab, yes this is a new disclosure, BMS have exercised there right to terminate the agreement on the necitumumab. It’s a strategic decision that they’ve made. We remain very committed to necitumumab, in fact we see necitumumab as a key part of our lung cancer strategy with Alimta being those standard of care, and first line nonsquamous non-small cell lung cancer with necitumumab being studied in squamous non-small cell lung cancer and ramucirumab being studied in second line lung cancer. So we see this as an important asset for strategically.

Mark J. Schoenebaum – ISI Group Inc.

Great, thanks.

Philip Johnson

Thanks Mark. Julie, next caller please.

Operator

Thank you. We will go to Michael Tong with Wells Fargo Securities. Please go ahead.

Michael K. Tong – Wells Fargo Advisors LLC

Thanks. Just a follow-up on the CETP outcome study. Do you have any color as to what the base line HDL of the patient that you’ve been bold or are in the ranges of less than 30 or in the mid-40s. And then secondly, Derica, I noticed in Europe pricing has improved a little bit in the fourth quarter. Is that something of a trend that you can call out, or was there something special in that quarter?

Philip Johnson

Thank you, Michael. this is Phil, so on the CETP, I need to follow-up since in the room here we don’t have the specific answer to your question, and then Derica and or Travis you want to comment on the European price that would be great.

Derica W. Rice

Sure, Michael in terms of the EU, you did see that we had showed a 1% price increase in the fourth quarter of 2012 that is not the typical pricing pattern that we would see. We did have some adjustments made through prior accruals in the fourth quarter, if you were to exclude those you would see the usual 1% to 2% price decline, which is more typical what we would see in Europe.

Philip Johnson

Thanks Derica. Julie, next caller please.

Operator

Thank you. Damien Conover with Morningstar. Please go ahead.

Damien Conover – Morningstar Research

Great. Good morning thanks for taking the questions. Just two questions, one on Boehringer Ingelheim’s decision to move away from the novel insulin, just want to see if we should look at any sort of red flags being raised with that sort of strategic decision, and kind of your enthusiasm still behind that product. And then secondly, I know it’s still several quarters away, but as we look to the exchange is being set up for 2014 in the U.S. I was wondering, if you could talk about your pricing power for those particular markets. Thanks.

Philip Johnson

All right thanks Damien. With regard to the BI decision to no longer participate in the novel basal insulin analog, this I don’t think you should read any particular red flag, so particularly from a clinical perspective on, we are in the process of running the Phase III trial, and those produced data beginning later this year, we continue to be as we outline the ADA meeting, we had our investor events there, last year in 2012, very interested in this molecule. I think that particular set of data that was discussed ADA, gave people a better feeling for why it is that we were talking about the potential to show not just differences and rates of hyperglycaemia, but also to see a potential different weight profile compared to the current alternative as well as potential tighter control of HbA1c.

I’d also remind you that we saw a pretty significant reduction as well in the utilization of mealtime insulin as well, that could be another benefit from both the patient as well the payor perspective for this molecule. So we remain very excited about this opportunity and look forward to the data that will come from the Phase III trial starting later this year. Derica?

Derica W. Rice

In regards to the U.S. exchange is that, just given that at early stages of development, it’s very difficult to speculate at this time, what the pricing environment will be as a result of those. I think once if and when they come online, and we get more insights, will be more than willing to share that. But at this stage, we’re really not in a position to speculate.

Philip Johnson

Okay. Thanks, Derica. Thanks, Damian. Julie, next caller please.

Operator

Thank you, and we have one final question, a follow-up from Seamus Fernandez with Leerink Swann. Please go ahead.

Seamus Fernandez – Leerink Swann LLC

Thanks for the follow-up question. Just have a very quick question, maybe this is more for Derica. We’re actually hearing from physicians here and there, some concerns about I would say it’s a follow-up to Damian’s question on exchanges more than anything. but can you just give us your general thoughts on the impact of accountable care organizations, as it relates to potential prescribing going forward, particularly of new molecules that would be priced at a premium? Thanks.

Derica W. Rice

Again, many of those organizations are still under development. If you were to talk to our managed care group in our U.S. business, what they would tell you that one of the changes we are seeing is that innovation has become more important than ever. And your ability or our ability to clinically differentiate our molecules is going to be the biggest determinant of us achieving both formulary access as well as pricing flexibility especially if you’re pursuing or speaking anything similar, to what we’ve experienced previously. In the absence of that, then you’re more likely to experience more commodity like behavior and we’ve seen a little bit of that on the insulin side here recently.

so, when we look at our portfolio of late stage product, those 13 assets that we have in Phase III development, we feel very good about the clinical differentiation that we’ve seen in that data that we’ve shared externally, and what we’ve seen internally, and that’s’ why when we talked about ram here today. The fact that there is no agent currently approved in the U.S. or the EU, no single-agent approved for second-line gastric. So if we’re able to, with that data like that, we feel very good about not only getting through the regulatory hurdle, but also achieving formulary access and refill pricing environment.

Philip Johnson

Julie, has there anyone else joined the queue?

Operator

We do have one more in queue, Greg Gilbert with Bank of America. Please go ahead.

Gregory B. Gilbert – Bank of America/Merrill Lynch

One last quick one, Derica, what was that change in Europe that led to the revenue tweak in the fourth quarter? I just want to make sure it’s not, something with important read through going forward in Europe? Thanks.

Derica W. Rice

There was nothing in particular other than just of looking at prior period accruals, and having to adjust those along the way based upon new information.

Gregory B. Gilbert – Bank of America/Merrill Lynch

Thanks.

Philip Johnson

Greg, if you want little more detail on that. I mean as Derica mentioned, just third-party and government rebate accruals.

Gregory B. Gilbert – Bank of America/Merrill Lynch

Thank you.

Derica W. Rice

Very good, well, thank you very much for dialing in and listening to the call today and the participation in the Q&A session. Obviously, I had a very strong finish to 2012, that positions us well heading into ‘13 and ‘14, and definitely a lot on our plate in terms of data readouts this year that should provide you quite a bit of information on how to return to growth in that post ‘14 period. We look forward to the future interactions and keeping up to date on our progress. Hope you have a great day. Take care.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 11 a.m. today through midnight February 5, 2013. You may access the AT&T Executive Replay system at any time by dialing 1800-475-6701 and entering and the access code 277-664. International participants dial, 320-365-3844, those numbers again are 1800-475-6701 and 320-365-3844 with the access code 277664. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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