Phil Johnson - VP, IR
John Lechleiter - CEO
Derica Rice - CFO
Nick Lemen - Director, IR
Ronika Pletcher - Director, IR
Steven Paul - President, Lilly Research Laboratories
John Boris - Citi
Catherine Arnold - Credit Suisse
Steve Scala - Cowen & Company
Tim Anderson - Sanford C. Bernstein
Charles Butler - Barclays Capital
Robert Hazlett - BMO Capital Markets
Eric Lo - Banc of America-Merrill Lynch
Jami Rubin – Goldman Sachs
Chris Schott - J.P. Morgan
Eli Lilly and Company (LLY) Q4 2009 Earnings Call January 28, 2010 9:00 AM ET
Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2009 earnings call. (Operator Instructions) As a reminder, today’s conference is being recorded. And I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Phil Johnson. Please go ahead sir.
Good morning and thanks for joining us for Eli Lilly & Company's fourth quarter 2009 Earnings Call. I am Phil Johnson, Vice President of Investor Relations. Joining me are our President, CEO, and Chairman, John Lechleiter; our Chief Financial Officer, Derica Rice; our President of Lilly Research Laboratories, Dr. Steve Paul; and Ronika Pletcher and Nick Lemen from Investor Relations.
During this conference call we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 3 and those outlined in our latest 10-K and 10-Q filed with the Securities and Exchange Commission. The information we provide about our products and our pipeline is for the benefit of the investment community; it is not intended to be promotional and is not sufficient for prescribing decisions.
You can access the earnings press release, supporting materials, a live webcast, and Internet-based replay and a podcast of this conference call at lilly.com. The supporting materials, the replay, and the podcast will be available on our website through February 26, 2010.
We accomplished review in 2009 by once again delivering strong financial performance in a tough environment. As well as by implementing a series of actions in the speeding innovation to patients and delivering greater value to our customers. Just as we have done in the past three quarters in the fourth quarter we generated strong volume driven revenue growth. Excluding the effect of changes in foreign exchange rates we also generated and increasing gross margins as a percent of revenue and leverage between revenue growth and operating income growth, robust EPS growth and strong operating cash flow.
Our Q4 results cap-to-year of strong operating financial performance. This financial performance gives us the resources we need to strengthen and progress our pipeline, to invest in our transformation allowing us to speed development and improve our competitiveness in key therapeutic areas and geographies.
To streamline our cost base to deal with the patent expirations coming later this decade, the interest bond to challenging healthcare environment. We will face on major patent expiration as a linear and more agile company. A company focused on innovation with the strong pipeline. Operating more efficiently and effectively. And well positioned to resume sustained and sustainable growth.
Now I’ll turn the call over to John to review key events since our last earnings call.
Thanks, Phil. Since our last earnings call we continued our efforts to strengthen our operations and effectively utilize our resources simplified by the following. Lilly signed a co promotion agreement with Kowa Pharmaceuticals America to commercialize Livalo the U.S. In addition, we entered into a licensing agreement with Kowa Company Ltd to market Livalo in Latin America. Livalo is a statin approved by the FDA in August 2009, for the treatment of primary hyperlipidemia and mixed dyslipidemia.
On January 1, 2010 the company completed the sale of its Tippecanoe manufacturing facility in Lafayette, Indiana to Evonik Industries. Lilly and Bristol-Myers Squibb restructured our existing collaboration agreements to allow for the co-development and co commercialization of necitumumab or IMC-11F8 in the U.S., Canada and Japan. Lilly also continued its effort to strengthen and advance our pipeline with the announcement of an exclusive worldwide license and collaboration agreement with Insight Corporation for the development and commercialization of insights oral, JAK1, JAK2 inhibitors for inflammatory and autoimmune diseases. On the regulatory front Lilly received a number of regulatory approvals including FDA approval of Zyprexa Relprevv Long Acting Injection for the treatment of schizophrenia in adults.
Byetta, has modern therapy along with diet exercise to improve glycemic control in adults with Type II diabetes. And Zyprexa in tablet form as an auction for the treatment of schizophrenia in manic or mixed episode associated with bipolar one disorder in adolescents.
The European Commission approved at CIRCA as a daily treatment option to improve exercise capacity for patients with idiopathic pulmonary arterial hypertension or IPAH. And PAH associated with connected tissue to be this in WHO functional classes II and III. The product also received regulatory approval in Canada and Japan. And finally, (inaudible) received approval from Japanese Regulatory Authorities of Cymbalta for the treatment of depression.
Before passing the call over to Derica, I would like to take a moment to once again recognize the efforts of Steve Paul, who is participating today in his last earnings call for Lilly. Steve will retire at the end of February after 17 years of service to Lilly. Under Steve’s leadership we built the most robust pipeline in Lilly’s history with more than 16 molecules in the clinic including 29 in Phase II and III.
Steve also helped recruit many of LRLs top scientific leaders during his 17 years here at the company. And he’s played a key role in transforming Lilly’s R&D to position us for the future. Steve’s successor will be Dr. Young Weinberger former Executive Vice President and Head of Global Discovery Research at Astrazeneca. Over the past decade you had a hand in delivering some 150 drug candidates to Astrazeneca’s pipeline. Dr. Weinberger received his training at Sweden's Karolinska Institute where he spend 18 years involved in academic research before joining the industry.
Now Derica will discuss our fourth quarter financial results.
Thanks, John. As I’ve done on previous calls, I’ll focus my comments on the pro forma non-GAAP results, which we believe provide insight and to the underlying trends in our business. This view assumes we won’t include as of January 1, 2008. And excluding sold items such as restructuring charges asset impairments in other special charges.
Now let’s start on slide eight with a quick look at our fourth quarter income statement before we reviewing this effect of foreign exchange. On a pro forma non-GAAP basis you can see that we generated strong revenue growth of 13% in the fourth quarter. While operating income fell 10% this reduction in operating income was driven 6.4 percentage points drugs on our gross margins percent. The decrease in gross margin percentage form 82.3% to 75.9% is due to the unfavorable impact of cost of sales arising from the effective changes in the value of the U.S. dollar on international inventory sold in the period. Specifically changes in the foreign currency value of the U.S. dollar load cost of sales in Q4 of 2008, while increasing cost of sales in Q4 of 2009.
In December we shared information with you on to expand with in our gross margin as the percent of revenue. Both with and without the effect of changes in foreign currency exchange rates on international inventory sold. Now many of you commented that this information was helpful. In the supplemental slide you’ll see that we updated the slide we presented in December and we have also provide a gross margins as a percent of revenue for each quarter of 2008 and 2009 both with and without this FX effect.
This quarter’s operating expenses to find as some of R&D and SG&A to slightly less than sale, within operating expenses marketing selling and administrative expenses grew 12% driven by higher marketing and selling expenses outside of the U.S. and the impact of foreign exchange rate. While R&D expense grew 2% due to increased incentive compensation and increased late stage clinical trial cost.
Moving down the income statement you’ll see the improvement in other income due to lower net interest expense. In addition our tax rate increased by about two percentage points. Net income in earnings per share decline 10% and 11% respectively due to the negative effects of changer than foreign exchange rate on our cost and good sold as I previously mentioned.
Now for the year you can see that we generated leverage between revenue and operating income. As revenue grew 5% while operating income grew a robust 15% this leverage between revenue and operating was driven by a 2.2 percentage point expansion in our gross margin percent. Net income and earnings this year both grew 16%. Now slide nine shows our reported income statement, while slide 10 provides a reconciliation between reported and pro forma non-GAAP EPS. Additional details about our reported earnings are available in today’s earnings press release.
Now lets look at how foreign exchange affected our Q4 results starting with revenue. As you can see on slide 11, for the fourth quarter total revenue growth of 13% on a pro forma basis includes a favorable 3% impact from foreign exchange after that impact total revenue grew 10% driven by a robust 6% volume growth, this robust volume growth was consistent across all major geographies. Japan’s substantial volume growth was largely driven by (Inaudible) mid 2009 approval for both first line and second line non-small cell lung cancer.
For the year total revenue growth of 5% on a pro forma basis includes a 3% negative impact from foreign exchange absent that impact total revenue grew 8% driven by 5% volume growth.
On slide 12, we provided some price range and volume analysts on a reported basis. Now lets look at the rest of the income statement. Slide 13 shows the year-on-year growth of select line items as our pro forma non-GAAP income statement both with and without the effect of changes in foreign exchange rates. Now the numbers in first column are the same as you saw earlier on our pro forma non-GAAP income statement. I’ll focus my comments on the second column of numbers, which splits out the impact of foreign exchange rates and our pro forma non-GAAP results.
First for the quarter you’ll see that 10% revenue growth that I mentioned previously, below that you’ll see a 3% growth in cost of sales, while operating expenses grew slightly less than revenue this quarter. The 9% performance growth in operating expense was driven by increases of 9% in both marketing selling and administrative expenses and R&D expenses. Our 10% performance growth in revenue translated into 15% performance growth in operating income and 16% in EPS.
Finally, you will see in the last column that for the year we grew revenue faster than both cost of sales and operating expenses leading to 14% performance growth in operating income and EPS. Now for your information on slide 14, we’ve provided a year-on-year growth of select line items of our reported income statement with and without the effect of foreign rates. Comparison of 2009 to 2008 operating income and EPS are not meaningful due to charges taken in 2008.
Now let me wrap up my comments with our 2010 financial guidance. We reconfirmed the 2010 financial guidance provided at our investor meeting in December, this guidance excludes the potential impact of healthcare reform in the U.S. and also as a reminder our guidance reflect earnings per share of $4.65 to $4.85 on both as reported and non-GAAP basis. In terms of line item guidance, we expect total revenue to grow in the high single digits driven primarily by (inaudible) Cymbalta, Humalog, (inaudible) franchise. We anticipate gross margin as a percent of revenue to be flat to declining. However excluding the effect of foreign exchange rates on international markets sold, we expect gross margin as a percent of revenue to increase.
Marketing selling and administrative expenses are projected to grow in the low to mid single digits. Resources and development expenses are projected to grow in the low double digits. Other income for the year is expected to be a net deduction of between $150 million and $200 million. And the effective tax rate for the full year considered to be approximately 22%.
Finally we expect cash flow to be sufficient to fund capital expenditures of approximately $1 billion anticipated business development activity and the company’s dividend. Slide 16 provides a reconciliation between reported and pro forma non-GAAP EPS for 2009 and the associated growth rates from these numbers to our 2010 guidance.
Now let me turn the call over to Nick and Ronika for a product review and pipeline update.
Thanks, Derica. The last two quarterly calls we discussed underlying prescription and share of market trends for several of our major products. Since we just provided detailed product updates that are meeting in December, this quarter we will take a look at three business development transactions. As mentioned earlier in late December, Lilly entered into a co promotion agreement in the U.S. and a licensing agreement in Latin America with Kowa to market Livalo.
We are pleased to partner with Kowa and are excited to help bring this new statins to market. Livalo is an HMG-CoA reductase inhibitor approved by the FDA for patients with primary hyperlipidemia and mixed dyslipidemia as an adjunctive therapy to diet to reduce elevated total cholesterol LDLc, (inaudible) and triglycerides while increasing HDL-C. Livalo was approved by the FDA in August of 2009, and the drug has been marketed in Japan since 2003.
This deal enables us to more effectively utilize our current sales force as it allows us to expand our product offerings in the cardiovascular therapeutic area, an area of high focus given the launch of (inaudible).
While Livalo effectively lowers bad cholesterol similar to other prominent stands, Livelo will offer physicians an additional option for their patients who may not be responding or tolerating their current treatments and for their more complex patients to reduce multiple mitigations and at a risk of potential drug interaction that may occur with some of the other currently available statins.
Lilly & Co are working towards a mid 2010 launch of Livelo in the U.S., where Kowa will record sales and pay Lilly an undisclosed escalating co promotion fee based upon that sales. Under the U.S. agreements the party shared cost of commercialization and development equally and Kowa is responsible for manufacturing the products, while Lilly responsible for distribution. The undisclosed upfront payments to Kowa will be amortized over the products remaining patent life and will be booked to collaboration in other revenue, the agreement runs for the life of the patents, which has a current expiration date of January 2016. Kowa has applied for the five-year patent tern extensions.
In Latin America Lilly plans to submit Livalo to regulatory agencies during the second half of 2010 and hopes to launch Livalo by mid 2011. The agreement in Latin America is for a period of 10 years from product launch. In late December Lilly also announced that it entered into an exclusive worldwide license in collaboration agreements for the development and commercialization of insights oral JAK1, JAK2-inhibitor INCB28050 currently in phase II.
The addition of this asset serves to further bolster our inflammatory and auto immune disease pipeline, the asset is currently in an ongoing placebo controlled Phase II dose ranging study that hasn’t rolled 100 patients with RA. After three months of treatment patients in the placebo ARM will crossover and receive active drug and the study will continue for another three months.
We also plan to run a larger Phase IIb trial, which will generate the data necessary to inform dose selection for Phase III. So at this point there have been no scientific date disclosures on INCB28050. The current data disclosure plan includes sharing six months data on the ongoing Phase II trail in patients with RA at the ATR meeting in October of this year and with insight also planning to share top line three months results sometime in the first half of the year.
Lilly is very excited about this opportunity given that RA and other auto immune diseases are chronic debilitating diseases, but still presents an unmet medical need. The current therapeutic continuum typically starts with oral agents such as (Inaudible), but a significant proportion of parties are not well controlled and therefore typically move to biologics most commonly the anti-TNFs. Even in patients receiving anti-TNFs only about 50% good achieved good (inaudible) response.
Therefore the Norman treatment for these patients is to cycle from one therapy to the next. If INTB28050 is successful with a favorable benefit risk profile, it could be a positioned higher up by therapeutic continuum then anti-TNFs and therefore not in direct competition with our own internal portfolio of biologics. We hope that our internal antibodies will be positioned at least finically as the treatment of choice following the failure of anti-TNFs. As safety and efficacy data on these assets increases these compounds could assume a role as first line biologic as failure of oral therapy.
As John mentioned earlier in January November Lilly and Bristol-Myers Squibb restructured our existing collaboration agreement to allow for the co-development and co-commercialization of necitumumab, or IMC11F8 which is currently in phase III clinical trials for non-small scale lung cancer. Necitumumab is a fully humanized version of Erbitux. Lilly and BMS will share the cost of developing and potentially commercializing necitumumab in the US, Canada and Japan. Lilly retain fully rights to the assets in the world.
Now provide a brief update on our pipeline. Our pipeline for demonstrates changes inside the analyst meeting as of January 21. The reason in addition and then progress of our compound further underline our robust pipeline in both quantity and quality. Our clinical states portfolio now can use 64 to (inaudible) including 29 compounds in Phase II and Phase III.
We continue to develop a robust biotype portfolio; bio type molecules representing nearly half of our late stage Phase II and this entered over third of our overall clinical portfolio. Our focus remains unchanged and BUC our pipeline is our number one priority. As reflected by the 520 since our last form of portfolio we have as just one oncology asset of Phase I for more than three assets of Phase II one for diabetes a glucose (inaudible) activator one force of our anti IL23 antibody and one for cancer and EG inhibitors. Added our previously notion new in license asset INCB 28050 a JAC1, JAC2 inhibitor our phase II advance the to some anti phase III as first patient visit occurred in late December added little over to our co promotion and licensing agreement recover in U.S. and Latin America and finally one phase I oncology assets was terminated.
Now lets turn to page 21 to highlight the milestones between now and mid 22. Those nearly inter permanent aniline expected (inaudible) weekly news on several funds including potential action by the FDA on our settlements weekly in the need the vision of these we can tell the European medicines agency we go from (inaudible) initialization of our once weekly cardio vascular outcome study excel design the show improvements in cardio vascular outcome as well as initiation of the region six our open label study of the once weekly (inaudible). For Cymbalta we could have FDA action on a clinical SNDA they will initiate the (Inaudible) Phase III. This concludes our prepared remarks. We will now open the call for the Q&A session.
(Operator Instructions). Our first question will come from the line of Robert Hazlett at BMO Capital Markets.
Robert Hazlett - BMO Capital Markets
Thanks for taking my question on the cardiovascular franchise you license with all you had the launch on going with the play book locker, do you expect this to be an area, where are you focus on in terms of licensing. And then secondly looking at Zyprexa long acting we spread on as well above the $1 billion globally, could this trying your expectations for Zyprexa (inaudible). But could you just frame your expectations for Zyprexa (inaudible)?
This is Phil, thanks for the question. With the formation of our new structure each of that various areas that we designated will be focused on developing sustainable long-term business and that will include not only advancing molecule that come out of our own laboratories that continued in licensing and business development. With regard to Zyprexa (Inaudible) we still need this, it is an important opportunity to provide additional attractive options for patients particularly those that are difficult to control their symptoms of schizophrenia. We are currently in the process of rolling out that product in Europe. As you know I think you are aware there are some significant requirements in terms of popping the market place making sure that position in various centers are properly trained here in U.S., we are in the beginning stage of similar process and would expect fully launch that product here state side at the end part of this year.
We’ll go to the line of Catherine Arnold at Credit Suisse.
Catherine Arnold - Credit Suisse
Thanks a lot and good morning. I wanted to get real reaction on some level to Asia performance I know your building access, I know its early days I know, we’re in a different world and regards to launches and the up tick versus the same, but even considering all of that I guess I would think you would be disappointed with yearly results of the product and I wondered if you could react to that, and tell me have you readjusted marketing plans, have you change the team is there anything going on that scene that might sort of give us a little bit more confidence in sort of the change and execution here. And then could you talk about the color of deal in terms if you don’t hit financial targets for that collaboration is there an opportunity to exceed that some down the road?
Catherine for your question will John answer to question on Ethine and even Nicholas will go in detail question on the colonial?
Catherine, I think that first of all to important to point that the initial, the indication we have approved for Ethine which is treatment for patients experiencing a fee as we’re undergoing PCI, it represent we know one slides in the pie in terms of the total range of indications that for example that competitive product has, so I think we are we haven’t made dramatic changes in direction we’re obviously responding as you would expect us to the imports that we get from payers from our position customer as we understand what we need to do to get up the product properly positioned and to take advantage of radar compelling data set to help positions understand the advantages that believe we can offer for many patients. So we’re going to stick with the plans that we have in place now, we are pleased with the level of understand or gaining both Tier 2 and Tier 1 would be the access that we are gaining unrestricted in Tiers 2 and 3 the placement now of the product in the catalogs of hospitals that account for well over 50% of all of all the procedures they spend place with procedure so I think that we’re not put off by the initial results of this product by any means we remain very confident in it as know we have the medical management trial well under way now so both companies Lilly and IE tier going to continue to be thoughtful but continue to be very supportive of making sure that Ethine has the very best chance to succeed.
And one additional point on the Ethine as well we now have in hand some of the promotion materials that have been improved by (inaudible) be putting those in the hands of the sales rep starting in February so we’re excited about that. Regards to co we have not disclosed any of the financials provision or the termination provision to that agreement Catherine so the portion I can’t help you that question.
Catherine one last thing with regarding to the building of access that continues to progress well as John mentioned in December we have done here in the U.S. we will currently approved in stock in catalogues that perform lot 50% of PCI here in the U.S. that’s now an access of 60% that something that continue to build nicely over the coming months so we are able to much more fully compete for those new patients coming and getting those stunting procedures.
Thank you, we’ll go fort the line of John Boris with Citi.
John Boris - Citi
Thanks for taking the question. First question just have to do with foreign exchange can you directly can you just give some color on what you your assumption is for foreign for exchange going into 2010 and then a question on Cymbalta the SNDA that was filed for chronic pain was schedule to haven’t add some and then the FDA cancel that is that have implications or have you been notified by the FDA about an extension of that for do for date for that commitment and then can then can you provide any color on the last safety update, which you provided to the FDA on Cymbalta I would assume that something that’s ongoing of which is there a label change on the Verizon or something to that effect just might be expecting. And then just on the roll out if you were to secure approval is Quintile still its going to involve with the relationship with them were they would be assisting you in the roll out of that chronic pain indication, thanks.
They are doing how that affects end of the some of the questions.
John regards to the (inaudible) effect on 2010 if rates were to stay were they are today we would expect to see modest improvement on both the sales line and the international income line associated with that versus the dollar. We would expect to also see the opposite being on our cost for good sold line similar to what you see here in the fourth quarter of 2009 that would obviously for the year at be more modest and what you saw in the fourth quarter, but you would see a increase in our cost of good sold due to the FX effects if wait state were they are today.
And John on our reason volatile question and the FDA has not going to any of communicated any kind of a extension to the do for day there has been no major amendment declared so we still have the think do for day had earlier. The safety information essentially with provided us part of the routine 120 days safety update we do submit one new efficacy and safety study of part of that update and that not show any new safety signal and then lastly there is not currently any active promotion agreement with Quintile as you may recall the original agreement they will have residual payment coming to them over the next three year as result of the original involvement with the commercial product.
And now it comes from the line of Tim Anderson with (inaudible). Please go ahead.
I have couple of questions, first could you please share with this year latest thinking about the competitive landscape the GLP-1 category with the reason approval of the choose and how that may impact Byetta. And secondly your thought on the potential risk for therapeutic substitution of Cymbalta with XRXR when it goes generic later this year and how you plan to manage that. Thank you.
And john is behind your first question one GLP I landscape the number hadn’t handle your question on Cymbalta.
I think the launch of the regulated here in the U.S. obviously changes the landscape here to keep in mind we’ve been they’ve been that product is going available in Europe for a number of months now on of the things we’ve observed in a couple of those markets in Europe is that the overall market flow in this category is expanding and so I think that some degree is that happens here all boats will arrive as it work we are going to emphases in the process of meeting the competitive challenge of the entry to second product we are going to emphasize the fact that we have treat us Byetta has been used in over million patients I think they’ve been 10 million or so prescriptions written we think we have a very good understanding of the benefit risk profile by it product has been used and trusted by many positions and patients and I think that base of the experience we have (inaudible) important obviously we are looking forward to the approval of the weekly version of (inaudible) which we think have the potential to offer even more advantages relation to the competition that could come with generic effects so later. We continue to this involve those got a unique profile with doesn’t quite strong in the market place with the approved indications and – depressive disorder (Inaudible) disorder DT&T in – and that season will be further strengthen until we see (Inaudible) in chronic pain. On every in December 2009, as well as December 2008 even with strong generic competition already in that market place from a variety of products with the generic as well as the launch of (Inaudible) for example as continued to perform quite well among those branded products and so we were optimistic – to insure despite and we continue in generic process that we will see.
Thank you, and next line is from the David Resinger with Morgan Stanley. Please go ahead.
David Resinger -Morgan Stanley
Yes thank you very much, I have two question. Could you please comment on the outlook for Q4 going forward at what type of growth you are expecting and also discuss the implications of the Nocimed is that approved. And then second, could you just discuss the key pipeline events that investors should be watching in 2010, beyond LAR? Thanks.
Dave thanks for the question, we’ll go ahead and have Nick any of your Forteo question and Ronika some of your 2010 events question.
Yeah, thanks Dave. With various to Forteo we feel very good about these the lift we’ve gotten so far with the Forteo connected programs where we have more hands on approach of helping patients initiate therapy and stay on and work through their therapy. So we saw a good start to that program last year and we hope to continue to see a good subscriptions to that program going into 2010 as well. With regards to Denocimed we really believe that the Denocimed was again going to be viewed as a restorative much like some of the bisphosphonates and could be positioned similar to re-classed. We believe that the Forteo continues be unique and that it is an antibiotic and it does build new bone and so we feel that there is still going to be strong position for Forteo even with the potential strong capitation from Denocimed.
Dave, with regards to pipeline events I’m going to initially make my connection with towards the moment that was recently announced that is today announced with regards to IL-23, IL-23 was promoted into the next phase. Later this year we should have a (Inaudible) data available. I’m not sure what medical meeting will be available at, but that’s from new information that will be up there as well as our GKA as well will have data presentation or publication later next year, but there was one of the two that were promoted. We also hope to have from Phase II, phase advanced data with regards to the hitting on compound early this year as well. And also something is gotten all of attention with our GLP-1 SC program the initiation of our AWARD program, which is the full phase III program.
Next line of Chris Schott of J.P. Morgan, please go ahead.
Chris Schott - J.P. Morgan
Thanks. Just a series of good question should be starting with that (Inaudible) Phase III program, just also update us in terms of just how we staying about timing of completion of that program, how you always you expect from that front and are you monitoring (inaudible) level with that phase III program. Maybe the new step back as it relates to the GLP-1 portfolio did you expect the black box one you saw on your competitors label is going to be something that’s products specific or something to be apply to all long acting GLP-1 until I guess this fetch more information on this. And then finally when you receive FDA approval for Byetta LAR do you need to expand the resources dedicated to the GLP-1 franchise or should we think about support maybe inline with those currently seeing with (inaudible). Thanks.
Hi Chris thanks for question I will take a short and look for list my comments if you like to augment the response. In terms of the GLP-Fc timing of completion at this point I know the team is essentially finalizing protocols a number of these are likely appear over the next few months, sorry before the way to comment on potential timing until that process has completed, Chris, but that should be something and I say within the next couple of months trials would be finalized and protocols in Quintiles drug for that award program. My expectation would be as likely we wouldn’t measure Kapitonas unclear based on some of the discussions that you may have seen communications from FDA as they talked about the approval whether not be the particularly meaningful and in fact whether implementing this in practice could in fact lead to additional surgery that really not necessary, Black Box being product specific clearly each one of these products, thus have a different set which regard to pre clinical and clinical data in the case of wide of (Inaudible) molecule we also have substantial amount of data from the marketing of the product over the last five years are so. So our expectation would be that the FDA will in fact and look the data, but the different companies have generated for the different molecules to make the determination of what the propitiate laboring is for that molecule.
And in terms of expanding resources my understanding at this point in time we’re essentially resource along with support launch of (Inaudible) once weekly, obviously would be monitoring the competitive landscape and also the needs once you get to that point determine who need to make any adjustments in that particular sales force size that we’ve got currently any approximately.
Chris, the only thing I would also add obviously everybody is concerned about safety of new class of drugs like the (Inaudible) I would also point your attention to the really strong efficacy deed that cumulated on once we clear, if you just go through each of the duration, I think you walk away pretty done impressed with these drugs could potentially do for the treatment of diabetes and that allow us to also be affected in by FDA.
Thank you, next will comes the line of Jami Rubin of Goldman Sachs. Please go ahead.
Jami Rubin – Goldman Sachs
Thank you, just a follow up on your (Inaudible) sales in the U.S. continue to decline and my question is – what extent this is – effect (Inaudible) on the EQW opportunity and how important this having a robust by base on that launch I mean I think initially our expectations – expectations would be that deliver Eli with significantly drive increase penetration to the GP community. So, if you could comment on that and then John back to at the end, just curies expectations are 500 to 1 billion for this opportunity and potential even larger and I just wonder is there a point and time, is there and then flexion point we should be looking for at which all formularies include at the ended or until what point to we say what point do you feet that you have been the information to be able to sort of reset expectations? Thanks.
Jami, thanks for your questions, John, you want to handle the – I think question first and then (Inaudible)
Jami, I think the results – following the launch in August as I said earlier, do not diminish are believe the (Inaudible) is going to be an important product obviously when in the business forecasting the peak sales everyone out there views but I think if you go back and you look at the data and you look at the opportunity we had whether with in the patients upset or the other question around the effectiveness of the molecule of the consistency I should say of the effectiveness of the molecule relative to other choices. We feel just good about (Inaudible) today as we did with the when we launch the product. So, I think it’s too early to say that we should reset expectation I think positions are increasingly of the mind, ask how should the product to used and which patient should I use the product. So, I think – I am very (Inaudible) to say after six month (Audio Gap) we are going to stay with it, we are going to continued generate publications coming out of the large clinical trail the serve is the basis for the regulatory approval we are going to continue to pursue the medical management indication is well.
And Jami for divide of days and how that might influence Type I once weekly, clearly we have been hoping that we have better performance in 2009 when we had continue efforts from similar comments from – yesterday with variety effects are contribute it do that we are inherent on continuing the improve the performance of wider with I think the numbers uncertainties now behinds with regard to approval of monotherapy and the label update of the occurred late in the Europe, we are continue to also monitor the progress of (Inaudible) in a number of markets already have been large. I think from the early results for this class (inaudible) once weekly I will promising, but we have seen the number of the markets in Europe is pretty substantial expanse of the overall market size for the good class and again as mentioned earlier the kind of efficacy data that we have generate is going to tide once weekly we think would be a very strong player with that product in the growth phase. So, we are obviously waiting the FDA review of our NDA and very helpful of this product it will be a very important of the treatment of Type II diabetes clinical.
Next will come from the line of Tony Butler with Barclays Capital. Please go ahead.
Tony Butler - Barclays Capital
Thanks very much. John, just a little bit more on (Inaudible) or only we actual currently marketing while they do ones marketing overall, or is there some other go-to-market strategy. I’m trying get you to separate the financial aspects of this transaction, if some factor or something more strategic. And then the second question more product related. There was a movement of one drug specifically ramp to Phase III. And I’m curious given a Phase II trial is still is ongoing, what was the ration how to move into Phase III trial which I think began in December. Dr. Paul, if you could help us there? Thank, very much.
John, for Tony’s first question at the end and we’ll now let Steve for the (inaudible) question.
Okay. Tony I’m sorry, I was distracted. Your question on (inaudible)?
How this will fit in with the current sales force we had.
Tony, at this point in time, we don’t anticipate having incremental resources to support the launch of Livalo. We’re going to be doing this in partnership with Kowa. We feel that the target physician audience for our message around Livalo is very well aligned with the physician audience who will hold on today in our efforts around (inaudible). So the product really fit well within the existing framework that we have in place.
Tony, on test pursuant just to remind you, this is a very unique side of toxic agent. Actually, as I think back in sort of reflect on the development of (inaudible) it has many similarities. What we tend to do as you know when we developed oncolytic agents as we tend to find activity in a given tumor. In this case we found a good enough activity in a very difficult cancer metastatic melanoma to advance this in the Phase III. And we feel very good about given the alternatives, the benefit risk for this particular disease is more than appropriate to advance, we’re enthusiastic about. We have actually seen some other responses, some other tumors of varying cancers et cetera, so very difficult cancers. And we’ll continue in Phase II work with this molecule and if we see additional responses that are better than standard of care, we will continue to think about additional Phase III trials. So again given unique mechanism of actions compound effect that we’ve seen, a good activity in melanoma that’s what prompted us to move this compound forward and moving into Phase III. Obviously, we will be thinking about tailoring strategies, trying to find those patients that respond better to the agents, just like we did with Alimnta as we progress.
Operator, next caller please.
We’ll go to the line of Barbara Ryan with Deutsche Bank.
Barbara Ryan - Deutsche Bank
Thanks for taking my call and I also want to pass along my well wishes for you Dr. Paul on your retirement. I just had a question Derica for you and it’s really related to a sense in the press release, it had a lot of conversations surrounding the impact of current fee fluctuations on your P&L and there is a statement on page five of your press release that basically says net income and earning per share declined blank and blank respectively, excluding the impact of exchange, earnings and earnings would have increased approximately 16%, again that’s versus a decline of a 11%. And what we had discussed previously in my understanding was that there was a sort of loss in the P&L where currency would have a net positive or negative impact on the top line and that would be offset by [3:55] effect on the gross margin and then clearly your expenses would fluctuate with that currency change on the top line as well. So I’m just wondering if something has changed or I misunderstood or if you can just put that sense in the press release in context relative to currency thinking?
Sure, Barbara. The way to look at this is that you saw dramatic movement in the exchange rates as a dollar versus the Euro in the fourth quarter. And so you got an exaggerated effect in the P&L in the fourth quarter. However, if you look at that same effect over the 12 months, I think you basically see it at a mutual level. And so if you look at our full year results both with and without FX, you do not see as much of a dramatic difference. And that’s consistent with our inventory returns. So our inventory returns are about 12 months. So when we have those kinds of short moments, it takes about 12 months for the full effect to flow through our P&L. And so when you saw that back change in the fourth quarter, that’s why you got exaggerated effect in our gross margins in the fourth quarter. If you went back to the same period, I mean fourth quarter of 2008 and you would seen of that effect.
Barbara Ryan - Deutsche Bank
One thing Bob, also call your attention to in December we had provided slide in the material direct has presented that we look at on rolling four quarter basis the gross margins of a percent of revenue but we are going to without the FX impact on international event. So, let me seems to be one that is may be moving of that counter (Audio Gap) update of that in the current quarter slide that for the first supplementary slide of our call correctly and the slide 23 and we also done this time as giving you by quarter for the last two years what the gross margin as a percent of revenue would have been with that impact. So, I think you can look at that we didn’t understand the magnitude of some of the effects we have been the quarterly basis. This is an effect that (Inaudible) stay stable essentially would be non event there is no impact from it unfortunate that’s not the current environment list in the future but this hopefully well help you in team to understand what more as underlying trends apart from this particular accounting affect that you do see in our international or in our cost of good sold due to the foreign currency impact of the international inventories sold the given period, sort of that help with you guys.
Next comes in the line of Eric Lo of Banc of America. Please go ahead.
Eric Lo - Banc of America
Thanks for taking my questions, may be another question on gross margin affects impact as well, if you were to use current FX rates what would be to impact to gross margins from currency for the first quarter? Second question is that on the cost restructuring program do you have any update on the programs in southern (ph) how much of cost saving may we seen in 2010, and then third question on animal health what is the outlook for sales in 2010 as it was type pretty robust growth in our most recent quarter, what is out this?
Thanks for your questions Eric, I think trying to (Inaudible) effective, okay let me start with if you take the look at we are the current FX rates are today, why we are not prepare to give you specific estimates for the first quarter. We would expect to see increase in our cost of good sold due the FX effect on the inventory sold in the period if FX this way stay with they are currently. So, you would see similar effective what you saw in the fourth quarter. However, we anticipate that was dissipate on modeling (Audio Gap) normalize that. Secondly, it regards to our cost reduction programs we continue to make very good programs. If you look at our headcount that we will be reporting, we are probably down year on year somewhere around another 5 to 600 employees there is making progress to our ultimate goal that the 5,000 by the end of 2011. You also see regards to our billion dollar cost reduction goal we continued to make very good progress and what you are going to see as probably not one big announcement that we will come out. But you will see a serious of actions that we take to stably pulled out cost that beginning with actions that we did with (Inaudible) that we are announce – last year. So, with that completing the advantage deal and closing that on January 1st of this year, you will see that one step towards reducing on a cost basis. (Audio Gap) and regard to your third question and regard to the animal health outlook. We actually start a nice rebound and the animal health market in the fourth quarter. So, and regard to our diary business, which also effects our RDS key compound we actually saw book prices or diary prices increase, which was a very positive for the milk producers and therefore they will much more able to use the added of the enhancement. And we saw the reflected in our fourth quarter results for our animal health. The question is how sustainable is that to be and so we are carefully monitoring that is the end of the year 2010. We have not seen terrific and change in the first few weeks of January but it’s still early.
One last thing before I turn the call over to John to rap up, do you keeping mind. If you look at some of the your change – slightly provided in the backup slide 23 will help that is if you look at year-on- year compare as we move to quarterly basis here in 2010, and we didn’t have a substantial additional cost that we booked costive sales in both Q1 and Q3 of 2009 and again as we discussed we had a substantial reduction in the –
We had a substantial reduction in the cost of sales in Q1 and Q3 of 2009 and a substantial additional cost to cost of sale in Q4 2009. So year-on-year compares in the number of these quarters even if the rates for the (Inaudible) where they are today could be significantly swinging. John
I think we go ahead and ramp up, I want to thank everybody for taking time this morning for this update on our company. We appreciate your continued interest. We are pleased with our performance in our progress in 2009, we are excited about the opportunities a head of us this year. We have very strong financial performance in 2009, highlighted by volumes driven revenue growth. On performance basis that is excluding the effect of foreign exchange we delivered increasing gross margin as a percentage of revenue. We got leverage between revenue and operating income growth and we demonstrated robust EPS growth. We prudently managed working capital and CapEx and once again generated strong operating cash flow and we expect this strong financial performance to continue as (Inaudible) of in our 2010 guidance.
We remain confident at this type of financial performance provide the resources we need to strengthen and progress our pipeline, to invested our transformation allowing us to speed development and to improve our competitive version key therapy to (Inaudible) in geography. To stream light our cost base to deal with the patent expirations coming later this decade, and to respond to a challenging healthcare environment.
We move into the new decade poised to become a more efficient and effective company, one that remains focused on innovation and with the pipeline that we expect to deliver long term sustainable growth. As always we will keep you informed of our progress. Have a great day.
Thank you. Ladies and gentlemen this conference will be available for replay, after 11:00 am Eastern time today until February 4 at midnight. You may access the ATC executive play back service at any time by dialing 1-800-475-6701 and entering the access code of 139270. International participants may dial 320-365-3844.
That does conclude our conference for today. Thank you for your participation and for using AT&T executive telegram for service. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!