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Executives

Philip Johnson – Vice President, Investor Relations

Travis Coy – Director, Investor Relations

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

John C. Lechleiter, Ph.D. – Chairman, President, and Chief Executive Officer

Jan M. Lundberg, Ph.D – Executive Vice President, Science and Technology, and President

Jeff Simmons – President of Elanco Animal Health

Analysts

Mark Schoenebaum – ISI Group

Gregg Gilbert – Bank of America Merrill Lynch

Chris Schott – JPMorgan

Steve Scala – Cowen and Company

David Risinger – Morgan Stanley

Jami Rubin – Goldman Sachs

Seamus Fernandez – Leerink Swann

Marc Goodman – UBS

Damien Conover – Morningstar

Eli Lilly and Company (LLY) Q1 2013 Earnings Call April 24, 2013 9:00 AM ET

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 being given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

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

Philip Johnson

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, Dr. 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 the 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 three 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 as growth in key products and regions replaced the lost revenue in earnings due to the Zyprexa patent expirations. Lilly employees remain focused on advancing the pipeline and on increasing productivity while delivering results that 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 events that have taken place, since our last earnings call. From a regulatory perspective, the first two items that I’d like to highlight were achieved in collaboration with Boehringer Ingelheim. We received approval in Japan for Tradjenta, as add-on therapeutic insulin and we submitted the SGLT2 inhibitor empagliflozin to both the U.S. Food and Drug Administration and the European Medicines Agency for 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 the complication 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 investigational GLP-1 receptor agonist being studied as a once-weekly treatment for type 2 diabetes. We announced that the primary end points related to reduction in HbA1c were met in the Phase 3 AWARD-2 and AWARD-4 studies. Furthermore, the 1.5 milligram dose demonstrated statistically superior reduction in HbA1c from base line compared to insulin glargine in both trials. We also announced that we have discontinued the Phase 3 Rheumatoid Arthritis program for Tabalumab, due to lack of efficacy. The Phase 3 program for lupus is continuing as planned.

On the business development front, Elanco announced the investment of approximately $100 million to purchase a 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 the goal of providing innovative, safety enhancing food production solutions to help meet the growing food demands, 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 the evolution of the U.S. healthcare environment, we initiated a restructuring of our U.S. sales force.

The main component is restructuring it is 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 announced that we will close our packaging and distribution side in Eastern Germany during 2014.

Now let’s move on to discuss our financial performance, as we’ve 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 will exclude 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 the total revenue was flat at $5.6 billion as growth in key products and regions offset lower revenue, following a 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 $60 million related to the discontinuation of the Phase 3 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. The 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 eight shows our reported income statement while slide nine 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

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 1% unfavorable impact from foreign exchange rate. You will 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 3% decline due to the Q1, 2012 by annual price decreases were partially offset by strong double-digit volume growth of 11%.

As for emerging market, which is embedded in rest of the world, revenue grew 3% this quarter or 6% excluding the impact of foreign exchange. Within emerging market China continued to register double-digit revenue growth up a 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 continued 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 rather 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 and other revenue is due to the transfer of exenatide rights to Amylin. Excluding exenatide, collaboration and other revenue grew 12% this quarter, driven by Tradjenta. Foreign exchange had a relatively small impact upon our financial performance this quarter. Consequently, we have moved the slide 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 arrow showing progression and red arrow showing attrition. As Phil mentioned in collaboration with Boehringer Ingelheim, we’ve submitted empagliflozin to the U.S. and European Regulatory Agencies. We are excited by the potential of the SGLT-2 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 resistant could offer 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 2 testing of three potential medicines, a biologic for chronic kidney disease and two small molecules for cancer (inaudible) inhibitor and EGFR inhibitor and we began Phase 1 testing of a small molecule for chronic kidney disease. In addition, we terminated development of four molecules, two in Phase 2 and two in Phase 1. In addition to empagliflozin and ramucirumab, we have the potential to complete filings for three more Phase 3 assets this year and believe this pipeline positioned 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

Thanks, Travis. I’ll begin my remarks with slide 12, now as we mentioned previously, 2013 is an exciting year Eli Lilly and Company. Let me give you a quick reminder of the potential key events for remainder of this year, and we continue to advance our pipeline and generating 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 3 program for dulaglutide and in collaboration with Boehringer Ingelheim for multiple Phase 3 trials for empagliflozin, both potential treatments for type 2 diabetes.

On June 24 we’ll host an Investor event to discuss these data. In oncology we could have presentation of data from the Phase 3 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 Ingelheim overall survival data. And finally. presentation of data for the Phase 3 trial of enzastaurin as maintenance therapy for patients with diffuse large B-cell lymphoma.

There are also several Phase 3 trials that may produce data in 2013 although presentation of detailed data and medical meetings would likely occur in 2014. These include the initial Phase 3 trials of our novel basal insulin analogue for both type 1 and type 2 diabetes.

The pivotal trials for our new insulin glargine product ramucirumab as combination therapy for second line gastric cancer. Our Phase 3 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 3 data readout or detailed data presentations on 8th of our 13 Phase III assets. As Travis mentioned, in 2013, we could have up to five regulatory filings, 3 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 on to 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’re not changing our EPS guidance for the full year. However, we are updating a couple of line items. Effective July 1st, 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. Giving the dollar amount of gross margin, our gross 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 rates 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 $100 million increase to other income. This change is due to the impact of empagliflozin submission milestones that hit R&D expense, not OID, as our original guidance assumed.

While all other line items, including EPS guidance are unchanged, I do want to mention two factors affecting our business. First, we received updated information showing higher-than-expected utilization of our products and Medicare Part D, thus increasing the impact of the donut hole coverage gap to Lilly.

Second, significant devaluation of the yen is reducing the U.S. dollar value of sales from our Japanese affiliates. We anticipate that the headwinds from increased cost associated with the Affordable Care Act and those Japanese yen devaluation 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’ll continue to focus relentlessly executing our strategy; to replenish and advance our pipeline; to drive growth in our on-pattern brands and in key growth areas of Elanco, Japan and emerging markets; and to drive productivity grains across all areas of our value chain. We’ve designed this strategy to observe the effect of our pattern 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’ve 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.

And we continue to generate and disseminate important data that will help investors and analysts to better gauge our longer term growth potential, with much more data to come over the course of 2013 and 2014. We believe this pipeline with drive strong growth post YZ. We’re 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. Now, we’ll take your questions. Operator, first caller please?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Tim Anderson of Sanford Bernstein. Please go ahead

Unidentified Analyst

This is Bruce (inaudible) in 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 the mid 20% in the 2012 to 2014 timeframe because of patent expiries. Is that mid 20% tax rate guidance to relevant for 2014? And my second question is you mention that you expect to have Phase 3 data for enzastaurin this year. Can you give us your overall thoughts on the product?

Philip Johnson

Great, Bruce, thank you for the questions. We’ll have Derica to take your first question, Jan just go into the second one then. Derica?

Derica W. Rice

Hi, Bruce. 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 of that’s the maximal we 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, and we’d be able to stay in that low 20s. As you see here in the first quarter, we’re 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’re also at the same time well able to bring back sufficient cash to the U.S. to fund that U.S. operations.

Philip Johnson

Great, thanks Derica. Jan?

Jan M. Lundberg

Right, so w are evaluating and the story in the Phase 3 trial for the diffused large B-cell lymphoma and the inherited test for the potential to present relapse in patients following standard of care which is called R-CHOP for this particular form of new format. We have completed the enrollment and are expecting data very soon and the primary end point is disease free survival. If positive, we could potentially have an NDA submission later this year.

Philip Johnson

Great thanks, Jan. Paul, we have the next caller please.

Operator

Next from ISI Group, Mark Schoenebaum. Your line is open.

Mark Schoenebaum – ISI Group

Hey guys. Thanks a lot for taking my question. I really appreciate it. I think Animal Health is in the room correct?

Philip Johnson

Absolutely, we’ve got Jeff Simmons here with us. We’ve got the expert.

Mark Schoenebaum – ISI Group

Okay, fantastic. So maybe I will ask you an animal health question if I may.

John C. Lechleiter

Absolutely.

Mark Schoenebaum – ISI Group

I saw in the press release, it looks like your ex-U.S. growth were slowed down considerably this quarter and as you said it was consistent with industry trends out of the 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 whether or not you think we should kind of be rethinking ex-U.S. growth rates in general. I mean the second part of the question is a little bit off the beaten path but obviously in China what’s going on with the bird flu? Do you anticipate this ever, do you anticipate this having any impact on the animal health business over the near-term or over the long-term? I thank you very much.

Jeff Simmons

Okay, thank you Mark. Thanks for the questions. I would say overall, if you look at our business and the animal health business, especially the food animal side OUS, we are operating in the business that is cyclical in nature. Meat, [noggin] eggs cycle relative to demand. Those cycles have now become a lot more global as there is more global companies connected to this supply and demand. And you see this every three to five years you see a cycle happen and you see that with the public meat companies as well.

Today currently meat supply is exceeding demand in certain parts of the world and that’s creating, 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 merge relative to Q1 2013 versus Q1 of 2012. I will speak on behalf of Elanco and say that even despite this, we continue to see our strategy that built on diversity that’s built on animal, food animal therapy and productivity on the food animal side. We continue to expect that Elanco will deliver robust growth for 2013 and in the coming years and exceed industry growth rate 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 that do anything to soften the demand of key protein groups like poultry and pork in the 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

And the impact this quarter, Mark, would have been nil to our business.

Jeff Simmons

No impact on bird flus.

Philip Johnson

Paul, next caller please.

Operator

Next, we’ll go to the line of Gregg Gilbert of Bank of America

Gregg Gilbert – Bank of America Merrill Lynch

Thanks, good morning. Jan, I was hoping if you could walk us through the specific mechanics for the ramucirumab rolling submission and gastric and why that path was decide upon. And 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 new inflection point or this in specific sort of one-time things there? And 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 for…

Philip Johnson

Gregg, you still there?

Operator

Apologies, your line is open.

Philip Johnson

Can you here me?

Gregg Gilbert – Bank of America Merrill Lynch

Yeah.

Philip Johnson

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.

Gregg Gilbert – Bank of America Merrill Lynch

Great, thanks.

Jan M. Lundberg

All right. So as you know we have completed regard trial for ramucirumab and monotherapy for second line gastric cancer where we showed 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 ram.

Jan M. Lundberg

Okay. 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 what would be. We did see in the first quarter an adjustment for the transfer of exenatide rights outside the U.S. And then if you’re 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 Merrill Lynch

And then the question on, if what this action yields that the commercial footprints right sized going forward?

Jan M. Lundberg

Clearly, we believe we’re right sized great 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 3 pipeline and depending upon what emerges, I think in the primary care will find, what you may find is that we may have to build some presence as some new therapeutic areas where we haven’t competed previously such as autoimmune great in the neurologist. 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’re properly positioned. And Travis you’ve got an add on maybe to complement Jan’s response?

Travis Coy

Yeah, Gregg, I’ll just give you one more detail on 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.

Gregg Gilbert – Bank of America Merrill Lynch

Great, thank you.

Philip Johnson

Paul, next caller please.

Operator

From JPMorgan, we’ll go to the line of Chris Schott. Please go ahead.

Chris Schott – JPMorgan

All right, great, thanks very much. Just a two questions, first, going back to Elanco, you said, you mentioned these kind of three to five year cycles. Can you just give us a sense of – typically, when we see one of these, how long until growth normalizes? Is this something that’s going to take a couple quarters to play out or something longer than that? And maybe when you’re talking about, I wonder if you are bit interested in giving us your kind of best guess at what industry growth might look like in 2013 versus where you’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 category, just any thoughts you might have there, appreciate it.

Philip Johnson

Okay. Great, thanks, 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.

Jeff Simmons

Thanks, Chris. It’s hard to predict on length of cycles and severity. I think you’re 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 are 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. And then, I would say it’s going to be a challenge this year to predict growth rates again, where we’re 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

Jan?

Jan M. Lundberg

Right. So the question about pancreas effects of DPP-4s and GLP-1s have been debated for sometime and we should remember first here that diabetes patients, in general, has the higher risk for pancreatitis, and also then in the label for DPP-4s. There is an increased risk of pancreatitis dimension.

The – 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 quarter link between the dulaglutide and pancreatitis nor pancreas cancer. We are carefully watching this area and as you know safety is very high on our agenda.

Philip Johnson

Thank you. Paul, if you can go to the next caller please.

Operator

From Cowen, we’ll go to the line of Steve Scala. Please go ahead.

Steve Scala – Cowen and Company

Well, thank you, just a few questions. First, just to be clear just a rolling filing of ramucirumab and gastric and provide that’s a head to head study versus chemo will be part of the filing. Second, the ramucirumab breast cancer trial I believe has done, will you top line the data in the first half of this year. And then second, then lastly that the 10-K had stated at the Alimta 2022 patent has now referred to as a vitamin dosage regimen patent as opposed to a concomitant nutrition supplement use patent to confirm to legal strategy. What should we gleam on legal strategy from this change and why was it made so late in the process? Thank you.

John C. Lechleiter

Okay, Steve thanks for the questions. I will go ahead and handle these, 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 monotheraphy without waiting for the data in that second line trial and they’ll get the regulators determined as the data that we have is sufficient for them to go ahead in the time. As we 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 of the two different ways we’ve described it. Appreciate the question. I am trying to nail down a little bit more closely when that might occur. We’ll have to monitor receive the actually occurrence of the event that are necessary to get the final PFS, as well as the interim OS.

I would indicate 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 of the Street would be our intention. And then there is really nothing I think to read into the change in our SEC filing in terms of the way that the method of use path and the concomitant use of vitamin B12 and folic acid with pemetrexed as described. I think it was just some shoring up of the other language based on reviews with internal counsel. So Paul, if we can go to the next caller please.

Operator

From Goldman Sachs, we’ll go to the line of Jami Rubin. Please go ahead.

Philip Johnson

Jami, are you there?

Operator

If your line is muted Jami, please un-mute, hearing nothing. We’ll go to the next caller.

Philip Johnson

Okay, Paul, if you could make sure you pull Jami in as soon as he can then we should be able to reconnect that would be great.

Operator

Very good. From Morgan Stanley, we’ll go to David Risinger. Please go ahead.

David Risinger – Morgan Stanley

Thanks very much. So I was particularly impressed with the SG&A controls this quarter. It seems like you made the 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? And then just one quick financial question for the China Animal Health deal how much incremental annual revenue does that add and how much of that move the needle for your overall global animal health business, please?

John C. Lechleiter

Great. Thanks for the questions David and we have Derica will handle both of those.

Derica W. Rice

Okay, David in regards to SG&A, just to remind 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 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 that has there, you would expect that in terms of as we progressed through the year and if we march closer towards December [11], when we lose Cymbalta that you will see us further, pull back on some of our promotional activities behind Cymbalta, such as DTC, but until that, when exactly that will happen, we will not disclose. And we will constantly going to monitor the effect that is having, and obviously as we also get into the fourth quarter, you will see us beginning to have to deal with either both by returns reserve for Cymbalta and you could see, wholesale is beginning to the stock, so these are the kinds of things we will be monitoring as we process through the year to understand what are our promotional mix should be behind that brand.

John C. Lechleiter

And Dave in terms of the revenues that we’d be bringing in from the investment and the Chinese healthcare company, Animal Healthcare company we don’t anticipated this time based on the structure and the minority stake that we have taken, but 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 than the SG&A for Q1, you will see that we still do in total expect 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 will have to monitor our progress both on rightsizing our detailing and marketing activities, as well progress you make on cost controls and update guidance appropriately as we go through the year. But currently we still are expecting that $7.1 billion and $7.4 billion in SG&A for the full year. So, Paul I think we can go to the next caller, please.

Operator

Yes. We got Jami Rubin back from Goldman Sachs. Please go ahead.

Jami Rubin – Goldman Sachs

Hey, I’ll try that again, thank you. Just, I may have missed it, but did you update us on the solanezumab trial design, your new Phase 3 trial in moderate patients and if you haven’t when might you update us? And then secondly a question for Derica, I was wondering if you anticipate any impact from sequestration, (inaudible) is obviously a very big drug that’s reimbursed to Medicare Part B, and as you know the 2% price cut has been applied across the Board, and 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 are expecting any sort of impact at all? Thanks very much

Philip Johnson

Great, Jami. And thanks for getting back in queue and thanks for the questions.

Jan, if you want to go ahead and take the first question on update for the sola trial and then we’ll obviously have Travis comments as you close to that. And then Derica, you’re [if you just chime] and if you’d like on the second.

Jan M. Lundberg

Okay. 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 than from EXPEDITION I and II, where it was the tool mild patient population that’s actually had a significant benefit, particularly on commission and the slight effect those on function. What we are 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.

Derica W. Rice

Yeah. Actually before going to that 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 and in the investment community that are instead more details. Travis?

Travis Coy

Hey, Jami. We do understand that sequestration has introduced some challenges for oncologist with regards to treating patients that’s in Medicare system. At this time we are not seeing a significant impact to our Alimta sales, but obviously we are going to continue to monitor that situation and – we’ll continue to work towards making sure our patients have access to into. Thanks.

Philip Johnson

Paul. We can go to the next caller, please.

Operator

Yes. From Leerink, we’ll go the line of Seamus Fernandez. Please go ahead

Seamus Fernandez – Leerink Swann

Oh, thanks very much. So, as I look at the P&L overall, I’m just wondering if you guys could talk a little bit about comparisons as you know versus some of 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 is see is wider spread between your operating cash flow and your adjusted earnings versus some of your peers. So may be you can just kind of give us little color on that, Derica. And then separately, can you just update us on any of the Phase 2 products that you sort of see rolling through the back half of this year or going forward that we should be particularly focused on. Thanks very much.

Philip Johnson

Great, Seamus thanks for the question. Derica has actually had, actually has the team looking at some of those P&L comp, so I’ll take the first part of your question and Jan if you would like to do the second. So increasingly over the last few years, we’ve seen this situation changed, prior you have the minority of the companies that would be excluding from their non-GAAP results, things like amortization, expenses 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 the information so the analyst 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’re 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 with our Q to see the exact number, $150 million I think was the number here. Jan?

Jan M. Lundberg

Okay, here is an update on some of the programs in Phase 2 and let me start with glucagon receptor antagonist, which is an oral agent in type 2 diabetes where we have Phase 2b data showing them glucose lowering et cetera, so that’s next generation agent but potentially in for that 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 tabalumab, a monoclonal antibody against Sclerostin which have been shown to be a very potent anabolic agent and we will present some data in May for this agents, it has unique anabolic than building properties also compare 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 at Phase III with those 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 active protective against Alzheimer's disease dementia and we hope to mimic this by this all other regions.

And 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.

Philip Johnson

Okay. Thanks, John. Paul if you can go to the next caller.

Operator

The last caller in the queue is Marc Goodman of UBS.

Marc Goodman – UBS

Yes, good morning. So, Derica can you help us quantify the impact of the donut hole and the ND valuation that you had mentioned earlier. And second, with respect to following up to Dave’s question around 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. And then third question is can you talk about the (inaudible) market it seems to be a slowdown in prescription spare over the past couple of months, wondering how you view that market and how you view that market and how you think about the SGLT2’s positioning in the diabetes space? Thanks.

Philip Johnson

Okay. Mark, thanks for the question. Derica?

Derica W. Rice

I’ll take the first two, Mark. In regards to the impact of the yen, as well as the Affordable Care Act of the doughnut hole, the yen as you saw, if you look at our Japanese growth, the devaluation cost was 13 percentage points in growth. And 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 he 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. And 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

And, Mark, regards to, I guess, two more questions, so I think you’ve got a total of five in there, so that’s good work. Once where the DPP-4 market, yeah, we’re (inaudible) with regards to TRX. We are, as you mentioned, beginning to see a slowdown in the overall market. But we’re very encouraged by the progress we’ve made with regards to Tradjenta. We’re now seeing around 20% need of brand, which is comparing favorably and we’ll continue to work towards increasing access for that product.

With regards to the positioning of empagliflozin within the diabetes, 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 SGLT-2 class will have or isn’t encouraging class as we filed in both U.S. and European regulatory agency. So we believe that will have a very strong positioning and in particularly due to the mechanism and potentially the combination with other products.

Jan M. Lundberg

Great. Just to be clear, Ilissa have mentioned to me, when Derica was talking about the additional $100 million to $150 million impact from the Medicare part, you don’t know holders to be for that for the full year as we talk about sort of changes to we’ve had in our previous guidance. We would have obviously a much smaller impact on that in this particular quarter. And okay, are there any other callers? Okay, by the way we – regards to Mark, you would 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

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

Operator

Yes from Morningstar, Damien Conover. Please go ahead.

Damien Conover – Morningstar

Great thanks for taking the question. I just wanted to ask question about some of the recent announcements of expanding the insulin manufacturing facilities. As you 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 potentially build out for these next launches? And then secondly, I think you just talked about having a bio similar version of its own Lantus. I just want to see your comments on, if they were to come through just how that might change the context of the market. Thanks you.

Philip Johnson

Great, Damien, we’ll have John to take your first question, I’ll go ahead and take the second. John?

John C. Lechleiter

Damien, we talked in recent months and years about manufacturing investment from two aspects, 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 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 the 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 our new plan 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, we will be manufacturing them both in the U.S. and in Europe. And 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 are going to see us continue to make those kinds of investments, but those are relatively smaller capital investments than investing and a plan to make new [API].

Philip Johnson

Great, thanks John. And Damien in terms of Sanofi being involved and doing their own biosimilar version of Lantus, I can’t say that we are aware of specific plans that they talked about to do that, but we are aware of we maybe referring to as if they are developing a more concentrated formula at Lantus and they’ve stated publicly I think that could have a different PKPD profile, time action profile and they’ve highlighted that as one of their later stage development program.

In the past we have said and we continue to believe that overall glargine molecule will continue to be widely used throughout this decade and 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 forms that would get to market we’ll probably have roughly half of that overall glargine market would be our best estimate. We’ve been expect to compete very well in the novel insulin space hopefully, if we get approval of our novel basal insulin analog the name is actually improve upon the characteristics and the benefits provided to patients from the current [basals] that are available.

Paul, we have any other callers on the line up.

Operator

There is a follow up from David Risinger of Morgan Stanley. Please go ahead.

David Risinger – Morgan Stanley

Yeah, thanks very much. So just going back to the SG&A question and you provided a lot of clarity for 2013, so that’s much appreciated, I am just trying to understand going forward for 2014, directionally whether the SG&A is likely go down in 2014 or be flattish? So that’s what I’m after to understand what the incremental SG&A reductions are for 2014 to offset the revenue decline for Cymbalta and Evista. So any color on flat or down in 2014 would be much appreciated.

Derica W. Rice

Hi, David this is Derica again, we are really not in a position to give specific guidance for 2014 at this stage, I still believe the biggest determine of that is still going to be what emerges from our pipeline clearly…

David Risinger – Morgan Stanley

Okay.

Derica W. Rice

We will 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 state. What I can’t 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 medium term guidance that we have 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 would be at this stage.

Philip Johnson

Thanks, Derica. Paul, next caller?

Operator

No one currently in the queue.

Philip Johnson

Okay, fantastic. With that we will go ahead and conclude the call. I would like to thank all of you for dialing in and to participate and I appreciate your interest in Eli Lilly. We’re very pleased with our performance in the first quarter and the progress we’re marking with the pipeline. To that point, I want to remind you that coming up at the ADA on June 24, we’ll have a Investor meeting to discuss results, we’ll be presented at ADA for both dulaglutide and empagliflozin and then also to put on your calendar a reminder that on October 3, 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 addition to your regular scheduled earnings call, please put those on your calendars, we hope you can join us and we’ll keep it praises with our continued progress as we move forward during the year, have a great day.

Operator

Thank you and this call will be available for replay after 11 am Eastern today through May 1st at midnight. You may access the AT&T Executive Replay system by dialing 1-800-475-6701 or international 1-320-365-3844 and entering the access code 287572. 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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