Phil Johnson – VP IR
Derica Rice – SVP & CFO
Dr. Jan Lundberg – President Lilly Research Laboratories
Bart Peterson – SVP Corporate Affairs
Nick Lemen – Director IR
Ronika Pletcher – Director IR
Tim Anderson - Sanford C. Bernstein
Eric Lo - Banc of America-Merrill Lynch
Marc Goodman – UBS
David Risinger – Morgan Stanley
Jami Rubin – Goldman Sachs
Chris Schott - JPMorgan
Catherine Arnold - Credit Suisse
Steve Scala - Cowen & Company
Eli Lilly and Company (LLY) Q1 2010 Earnings Call April 19, 2010 9:00 AM ET
Welcome to the Eli Lilly Q1 2010 earnings call. (Operator Instructions) I would now like to turn the conference over to Executive Director of Investor Relations, Mr. Phil Johnson. Please go ahead sir.
Good morning and thanks for joining us for Eli Lilly & Company's first quarter 2010 earnings conference call. I am Phil Johnson, Vice President of Investor Relations. Joining me are our Chief Financial Officer, Derica Rice; our President of Lilly Research Laboratories, Dr. Jan Lundberg; our Senior Vice President of Corporate Affairs, Bart Peterson; 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 three and those outlined in our latest 10-K.
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 www.lilly.com. The supporting materials, the replay, and the podcast will be available on our website through May 21, 2010.
Q1 was a strong quarter for Lilly on many fronts. In terms of financial performance we posted robust results with volume-driven revenue growth, substantial leverage on a performance basis between growth in revenue and growth in cost of sales as well as in operating expenses, and significant improvement in other income.
As Derica will describe excluding the effect of US healthcare reform, this strong financial performance has positioned us to raise the top end of our guidance range by $0.05 and the bottom by $0.10. On our last call we discussed three business development deals that we had recently completed, with Kowa, Incyte, and Bristol-Myers Squibb.
Since that time we’ve continued to be active in business development completing three more deals. We’ve entered into a global licensing agreement with Acrux for the commercialization of an experimental underarm testosterone solution, completed a deal with Boehringer Ingelheim in which we re-acquired full rights to Cymbalta in OUS countries other than Japan, and we agreed to acquire European rights for several animal health products from Pfizer.
Like the three deals we discussed in January we think each of these deals helps to solidify our financial and commercial position in the short to medium term. Ronika and Nick will provide more details on these deals later in the call.
On the regulatory front in Europe we submitted exenatide once weekly for regulatory review. Our regulatory team did a great job expediting this submission allowing us to submit well in advance of the end of the first half. Here in the US the FDA issued a complete response letter for exenatide once weekly or Bydureon. We expect to submit our response this week.
Finally the PDUFA date for Cymbalta in chronic pain passed without FDA action. We expect that the FDA will schedule and advisory committee meeting in the second half of this year. On the legal front the Judge in the Southern District of Indiana case with [Teva] upheld our Gemzar compound patent and ruled in our favor on nearly all of the grounds Teva had raised for invalidity of our method of use patent.
You may recall that the Judge in the Michigan case with [Sun] had already issued a partial summary judgment ruling invalidating our method of use patent on the grounds of [inaudible] double patenting. As a result the Judge in Indiana did not rule on this particular issue. In the Sun case the Court of Appeals for the Federal Circuit will hear our appeal on May 7th.
The Board of Patent Appeals and Interferences affirmed the US Patent Office’s rejection of the patent claim Pfizer had asserted for Viagra. As a result Pfizer’s litigation alleging that Cialis infringed Pfizer’s patent claim was dropped by agreement of both parties. Also in Cialis litigation the Court of Appeals for the Federal Circuit affirmed the Delaware trial court’s decision rendering its opinion that certain scientists at Vanderbilt University should not be included as joint inventors on patents relating to Cialis and its use in treating erectile dysfunction.
Finally we reached a proposed settlement of the outstanding shareholder derivative litigation. Now perhaps the biggest news for Lilly and for the healthcare industry was the passage of new legislation that brings significant changes to US healthcare. These changes began to effect our financial results in Q1 and will have a greater impact on our results in the future.
Before discussing our Q1 financial performance and our 2010 guidance, let’s review some of the major provisions of the new legislation. As you’re probably aware many of the provisions that raised money to pay for healthcare reform take effect within the first 12 months. However the provisions expanding insurance coverage are not slated to take effect until 2014. Let’s start with those provisions that will effect our 2010 results. Changes to the Medicaid fee for service program and to the 340B program take effect retroactive to January 1st of this year.
For the Medicaid fee for service program these changes include an increase in the statutory minimum rebate from 15.1% to 23.1% and a limitation on the maximize rebate to 100% of the product’s price. Changes in the 340B program are focused on expansion of the program to include additional institutions such as children’s hospitals, freestanding cancer hospitals, critical access hospitals, and rural referral centers and sole community hospitals meeting certain criteria for disproportionate share adjustment under the Social Security Act.
Changes to managed Medicaid will take effect as of March 23, 2010, the date the healthcare legislation was signed. Specifically the new legislation calls for an expansion of Medicaid fee for service rebates to managed Medicaid. In addition our 2010 results will also be effected by channel accruals that we will have to book to reflect greater discounts and rebates to the various elements of healthcare reform.
Why is this? Well, government expenditures for purchases in any given period correspond to sales we made to wholesalers in prior periods. Therefore in advance of the government expenditure occurring we need to reflect our best estimate of the eventual discounts and rebates we’ll have to pay.
From a practical perspective this means we need to accrue for these future government discounts and rebates at the time we make our sale to wholesalers. In total we expect that these various elements of US healthcare reform will negatively effect our 2010 revenue by $350 to $400 million.
Finally our 2010 results will be effected by changes to the subsidy paid by the government to employer’s who provide their retirees with the drug benefits that’s at least equivalent to the Medicare Part D drug benefit. Beginning in 2013 the Federal government will tax the subsidy it provides to such employers.
While this tax will not take effect for three more years, accounting rules dictate that we recognize the present value of this future tax liability as a one-time charge upon passage of the tax law change. As this tax law was officially passed in March, our taxes for Q1 reflect a one-time charge of $85.1 million.
Now let’s discuss those changes slated to take effect on January 1st of next year, on this date two additional provisions of the healthcare reform legislation will kick in. First branded pharmaceutical companies will provide a discount of 50% on drugs dispensed to certain Medicare Part D participants when they are in the donut hole.
Second branded pharmaceutical companies will collectively pay a multibillion annual fee to the government. Implementation of these two provisions will undoubtedly be complex. Until specific regulations are written its not clear exactly how each of these provisions will be implemented. We’ve made initial estimates of the effect of these two provisions on our 2011 results.
Although these estimates could change substantially as the regulations are finalized. When these provisions are added to those taking effect in 2010 we anticipate that our 2011 US revenue could be negatively effected by $600 to $700 million. Keep in mind that our exposure to various elements of healthcare reform is dependent upon product mix.
For example our exposure will decline significantly after Zyprexa patent expiration. By January, 2014 the US healthcare legislation calls for a significant expansion of insurance coverage. This includes expansion of the population eligible for Medicaid as well as the establishment of state health insurance exchanges.
The Congressional Budget Office has estimated this will eventually extend coverage to approximately 32 million Americans who are currently uninsured. Finally the healthcare reform legislation authorizes a regulatory pathway for follow-on biologics. The legislation includes important incentives for biotech research including data package protection of 12 years.
Now with this background, Derica will discuss our Q1 financial results and our 2010 guidance.
Thanks Phil, as I’ve done in the past I’ll focus my comments on our non-GAAP results which we believe provide insight into the underlying trends in our business. Now this view excludes certain items such as restructuring charges, asset impairment, and other special charges.
Since the ImClone acquisition was completed in late 2008, pro forma comparisons are no longer necessary. Now let’s start on slide eight with a quick look at our Q1 income statement before reviewing the effect of foreign exchange. On a non-GAAP basis you can see that we generated strong revenue growth of 9% in the first quarter, in spite of the negative impact of US healthcare reform.
Gross margin as a percent of revenue decreased from 83.8% to 79.5% due to the effect on the cost of sales of changes in the value of the US dollar on international inventories sold in the period, specifically this effect significantly lowered cost of sales in Q1 of 2009 and modestly increased cost of sales in Q1 of 2010.
Once again in the supplement section of our slide deck we have provided a slide showing the trend in our gross margin as a percent of revenue both with and without this particular foreign exchange effect. Now this quarter’s operating expenses, defined as the sum of R&D and SG&A grew by 7%, less than the 9% revenue growth.
Within operating expenses, marketing, selling, and administrative expenses grew 6% driven by higher marketing and selling expenses outside of the US and the impact of foreign exchange rates which were partially offset by lower legal expenses, while R&D expense grew 10% primarily due to increased late stage clinical trial costs.
Now despite generating leverage between revenue and operating expenses, operating income declined 3% due to the significant increase in cost of sales caused by foreign exchange. Now moving down the income statement you will see an improvement in other income and this improvement is primarily due to damages recovered from generic pharmaceutical companies following our Zyprexa patent litigation in Germany, a gain related to the disposition of investment securities acquired in the ImClone acquisition, and lower net interest expense.
In addition our tax rate increased by over five percentage points driven primarily by the one-time charge of $85.1 million associated with the imposition of tax on the retiree drug subsidy. Let me also remind you that the failure to pass an extension of the R&D tax credit also served to increase our Q1 tax rate.
Net income and earnings per share declined 1% and 2% respectively due to the negative effect of changes in foreign exchange rates on our cost of goods sold and the impact of the US healthcare reform. Q1 earnings were reduced by $0.12 per share due to the impact of US healthcare reform. It was comprised of two items, first approximately $60 million or $0.04 per share in accruals for higher rebates and secondly, a one-time tax charge of $85.1 million or $0.08 per share.
Slide nine shows our reported income statement while slide 10 provides a reconciliation between reported and non-GAAP EPS. Additional details about our reported earnings are available in today’s earnings press release. Now let’s take a look at how foreign exchange effected our Q1 results and let’s start with revenue.
As you can see on slide 11 total revenue growth of 9% includes a favorable 3% impact from foreign exchange. Absence that impact of foreign exchange total revenue grew 6% driven by 4% volume growth. Japan’s substantial volume growth continues driven by Alimta’s mid 2009 approval of both first line and second line non-small cell lung cancer, as well as continued strong growth in Humalog and Zyprexa.
Lilly remains among the fastest growing companies in this very important market. Slide 12 shows the year on year growth of select line items of our non-GAAP income statement, both with and without the effect of changes in foreign exchange rates. The numbers in the first column are the same as those you saw on slide eight.
I’ll focus my comments on the second column of numbers which strips out the effect of foreign exchange rates. First, you’ll see the 6% revenue growth I mentioned previously. Now below that you’ll see that the cost of sales grew by only 1% reflecting continued expansion of our gross margin percent on a performance basis.
Operating expenses grew 5% which was also less than our revenue growth, and as mentioned earlier, increased investment in late stage clinical trials drove R&D which was up 9% on a performance basis. SG&A on the other hand, grew much less which was only 3%. As a result of holding growth in both cost of sales and operating expenses below the revenue growth rate, our 6% performance growth in revenue translated into 9% performance growth in operating income as as well as 10% growth in EPS, including the $0.12 per share negative impact of healthcare reform.
Now for your information on slide 13 we provided the year on year growth of select line items of our reported income statement both with and without the effect of foreign exchange rates. Now let me wrap up my comments with our 2010 financial guidance.
As you may recall up until now our 2010 guidance has explicitly excluded the potential effect of US healthcare reform. Now that specific legislation has been signed into law we are incorporating the estimated impact of this new legislation into our guidance.
We’ll do so in two steps, first we’ll provide our 2010 guidance still excluding US healthcare reform so that you can have a clear idea of how our underlying financial expectations for the year have changed since our last earnings call. Then, we’ll layer in the estimated effect of US healthcare reform. Moving forward this will be the basis for future guidance updates.
So, excluding the estimated impact of US healthcare reform we are modifying our guidance to reflect our strong underlying business performance including improvement in other income as well as for recent movement in foreign exchange rates.
At the bottom line we are raising our non-GAAP EPS guidance for the full year from a range of $465 to $4.85, to a range now of $4.75 to $4.90, an increase of $0.05 on the top end of the guidance and an increase of $0.10 on the bottom end of the guidance.
In terms of line item guidance, we’ve slightly modified our revenue guidance to mid to high single-digits to reflect the recent weakness in foreign currencies versus prior periods. Other income and deductions is now forecast to be a net deduction of $50 to $100 million. This represents an improvement of $100 million from our previous guidance of a net reduction of $150 to $200 million.
This improvement is primarily driven by recovery of damages from companies that had large generic [Lanzapine] in Germany, and a gain on the sale of investment securities acquired in the ImClone acquisition. All other line item guidance remains unchanged. On a reported basis, our earnings per share guidance excluding US healthcare reform reflects the $0.03 charge for the Acrux deal and the $0.02 restructuring charge resulting in an EPS range of $4.70 to $4.85 per share.
Now let’s discuss US healthcare reform and how we expect it will effect our financial results, as mentioned earlier we expect US healthcare reform to negatively effect our 2010 revenue by $350 to $400 million. In addition our 2010 results are also negatively effected by the one-time tax charge of $85 million related to the future taxation of the retiree drug subsidy.
Incorporating the estimated effect of US healthcare reform yields the following EPS and line item guidance, on both a reported and a non-GAAP basis, our 2010 EPS will be approximately $0.35 lower resulting in a range of $4.40 to $4.55 on a non-GAAP basis and a range of $4.35 to $4.50 on a reported basis.
We now expect total revenue to grow in the mid single-digits driven primarily by Alimta, Cybalta, Humalog, Cialis, animal health, Effient, and the exenatide franchise, partially offset by the negative impact of US healthcare reform. We still anticipate gross margin as a percent of revenue to be flat to declining.
However excluding the effect of foreign exchange rates on international inventories sold, we still expect gross margin as a percent of revenue to increase. Marketing, selling, and administrative expenses are still projected to grow in the low to mid single-digits. Research and development expenses are also still projected to grow in the low double-digits.
As mentioned earlier other income for the year is now expected to be a net deduction of between $50 and $100 million and as a result of the $85 million charge in Q1 related to future taxation on the retiree drug subsidy, the effective tax rate for the full year is now anticipated to be approximately 23%.
Note that our full year tax rate guidance assumes eventual extension of the R&D tax credit retroactive to January 1st, 2010. Finally we still expect cash flows to be sufficient to fund capital expenditures of approximately $1 billion and anticipated business development activity and the company’s dividend.
Slide 15 provides a reconciliation between reported and non-GAAP EPS for 2009 and the associated growth rates from these numbers to our revised 2010 guidance. Now let me turn the call over to Ronika for an update on the Effient launch.
Thanks Derica, for Effient Q1 sales of $9 million showed modest growth over Q4 2009. However this included continued inventory reductions on the original stocking. We estimate inventory was reduced by $7 million in the first quarter. Sequential quarter total prescription growth was 124%. While uptick has been slower than planned we are encouraged by the recent demand trend.
Currently new to brand share for Effient exceeds 8% of the total OAP market and has continued to show strong growth. New to brand trends reflect placement of approximately 1800 patients on Effient therapy per week. Current estimates of the approximately 16,000 PCI’s are conducted in the US per week.
Access continues to expand. Of targeted hospitals Effient is now on formulary and stocked in the cath lab in 75% of all accounts, up from 60% earlier this year leading our expectations. In addition payer formulary access continues to progress well. As of April 1st, examples of payers making positive decisions include express script, Medco, [inaudible], Healthnet, United Part D prescription solutions, and [inaudible] Therapeutics, as well as many other PBM’s and health plans.
Finally in the US we believe our focus on the high risk ACS PCI patients such as those with diabetes has gained traction in the market as market research suggests that this patient type is often cited as improved and which physicians feel Effient is an appropriate choice. Our sales force is well prepared to communicate these messages using promotional materials that incorporate feedback from [DD Mac].
In Europe despite the widespread availability of generic clopidogrel, we continue to achieve strong reimbursement and favorable pricing. Reimbursement covers 100% of the label population in most countries. It is important to highlight that following hospital formulary approval protocol inclusion is a critical step in the hospital access process across Europe.
In Germany Effient experienced a slower than expected start due to the complexity of the protocol inclusion and access process. However a clear account focus and intensified cath lab activities are accelerating access to formulary protocol inclusion and ultimately patient initiation.
As a result first quarter sales in Germany showed a 147% increase over Q4. Similarly in the UK PCI centers and primary care [inaudible] have made progress establishing formulary access and creating protocols. The 59 PCI centers with current formulary approval represents 75% of all PCI’s performed in the UK. As a result first quarter sales in the UK increased 190% over the previous quarter.
In the near-term we expect OUS sales growth to be bolstered by uptick in recently launched markets. Newly launched Effient in Australia in December of last year notably Effient was approved on its first submission in Australia and was listed for the full label population and length of therapy. We launched Effient in France in January and we’ve integrated learnings from the UK and Germany to drive quicker formulary access and protocol inclusion.
Most recently we launched Effient in Spain in late March, in Italy, early April. Remaining planned launches in 2010 include Canada and over 30 additional countries. In March Lilly entered into an exclusive worldwide licensing agreement for the commercialization of Acrux’s experimental underarm testosterone solution Axiron.
The product is currently under regulatory review by the FDA for the treatment of testosterone deficiency in men. In exchange for these rights, Acrux will receive and upfront payment of $50 million plus $3 million upon transfer of manufacturing assets. Acrux may also receive a milestone payment upon issuance of marketing authorization in the US and commercial milestones in royalties based upon global sales of Axiron.
We believe that Axiron will be a strong strategic fit for Lilly leveraging our experience in men’s health with Cialis to advance both the science and clinical outcomes for men with low testosterone. Axiron has the potential to be the first testosterone solution to be applied via an underarm applicator for patients who have testosterone deficiency.
We look forward to working with Acrux and the FDA during the regulatory review process.
Also in the first quarter Lilly and Boehringer Ingelheim terminated our agreement to jointly develop and commercialize duloxetine with Lilly purchasing BI’s interest in the compound. This termination means that excluding Japan, all rights to duloxetine for all indications will revert back to Lilly. Lilly paid $400 million upfront to BI. In addition BI will receive a royalty on sales through the end of 2012.
Over the past few years we’ve been steadily building our animal health business, both through organic growth particularly in the large and growing companion animal segment and through acquisitions.
In 2007 we acquired [Ivy] Animal Health, in 2008 we acquired worldwide rights, to [Monsanto’s] dairy cow supplement [Posilac] and in March of this year we agreed to acquire European rights to certain of Pfizer’s animal health products. These products are used in both production and companion animals. These products also include vaccines, a new area for us and one we are poised to expand in the coming years with our own pipeline.
To support our entry and future growth in vaccines, the [transic] action also included the acquisition of a vaccine manufacturing plant in Ireland. Detailed financial terms of this deal are not being disclosed. This deal is expected to close in Q2 pending regulatory approvals. Now I’ll provide an update on our pipeline.
Our pipeline slide demonstrates changes since our January 21 earnings call as of April 12. The recent additions in progress of our compounds further underline our robust pipeline in both quantity and quality. Our clinical stage portfolio now stands at 68 distinct NME’s, including 30 compounds in Phase 2 and Phase 3.
We continue to develop a robust biotech portfolio. Biotech molecules represent half our late stage Phase 2 and Phase 3 assets and over a third of our overall clinical portfolio. As we’ve said before advancing our pipeline is our number one priority. As reflected by the arrows on slide 20 since our last formal portfolio update, we have advanced four assets into Phase 1, one for anemia, two for cancer and one for pain, promoted one asset to Phase 2, our Basal insulin for diabetes, added Axiron for testosterone deficiency, and finally one Phase 1 schizophrenia asset was terminated.
So while the patent expirations of the coming years will hit us hard, we have eight molecules in Phase 3 today and we anticipate at least 10 molecules in Phase 3 by 2011, if not sooner, with more coming behind. We expect that this will position us to launch two novel molecules per year beginning in 2013 providing a foundation for future growth.
We’ve seen encouraging progress in our late stage pipeline. Our Alzheimer’s program continue to enroll ahead of schedule. We completed enrollment of our first Phase 3 trial for Semagacestat, our [inaudible] inhibitor last year and will complete enrollment on the second Phase 3 study this month.
We’ve also exceeded 50% enrollment on one of the Phase 3 studies for Solanezumab, our [inaudible] antibody and are closing in on 50% enrollment for the second Phase 3 study. We completed enrollment on the Phase 3 prelude trial evaluating Enzastaruin for diffused large B cell lymphoma. We also initiated our Phase 3 award program for our GLP-1Fc assets in the first quarter and we have Phase 2 data on NERI for depression, both as a mono therapy and for augmentation and are moving forward with our plans to initiate Phase 3 in the first half of 2011.
We plan to present this data at a scientific conference in the future. This concludes our prepared remarks, and now we will open the call for the Q&A session.
(Operator Instructions) Your first question comes from the line of Tim Anderson - Sanford C. Bernstein
Tim Anderson - Sanford C. Bernstein
On the reform figure can you parse our the 2011 revenue figure into what will come from the Medicaid rebates versus other components like the donut hole filling that the excise tax and the 340B and I guess same for 2010, if you could split it between rebates for Medicaid and 340B. Second question on emerging markets its something that most drug companies are talking about a lot, I don’t really hear Lilly talking about it as much and in fact unless I’m missing it, it doesn’t seem like you even disclose your sales in these regions and I’m wondering when we can expect Lilly to give more transparency on your sales levels and strategy in these regions.
Let me try to address both, in regards to the healthcare reform impact the aggregate numbers that we provided of $350 to $400 million impact in 2010 and the $600 to $700 million in 2011, that’s the level that we’re comfortable disclosing at this time. We do not have plans to disclose the pieces of that in terms of breaking it down into the element of the excise tax versus the Medicaid rebates.
Now my rationale behind that is that there is still for some of the elements of the healthcare legislation still being discussed and still to be further defined, especially around the excise tax as it relates to the composition of sales and whether it will be branded sales, and so forth. So, it would be premature to try to get to that level of detail at this stage.
But we did try to provide to you all at an aggregate level what we think in totality the range of impact could be. In regards to our emerging market strategy in fact we are quite active in that space in terms of trying to take advantage of the opportunities in those geographies. Clearly in China, marked by China, Brazil and Turkey where we have a great presence, but we’re not just looking at exercising those opportunities on a commercial basis, we’re also taking advantage on R&D.
So, for example we are increasing both our R&D and manufacturing presence in China. We’ve actually doubled the size of our sales organization in China over the last 12 months to take advantage of our diabetes and [CNS] and oncology portfolio there. So, while it may not be I guess as transparent to the marketplace we are employing a lot of different efforts and strategies there to take advantage of that marketplace.
However, and if you look at our price rate volume slide, that gives you some idea if you’re looking at the rest of the world at what we are able to achieve in those markets today.
Just qualitatively on healthcare reform, the larger element would likely be given what we know today, the fee that will be assessed on the industry and our portion of that, the impact in Medicaid of the higher minimum rebate from 15.1% to 23.1% and the extension of that Medicaid fee for service pricing into the managed Medicaid book of business, still a negative impact but less would be things like the 340B expansion.
So that gives a little bit of color while we’re not in a position however to give specific numbers for each one of those line items.
There is also as you look at Lilly relative to some of our pharmaceutical peers there’s also a product mix aspect in there as well. So, products like Zyprexa that’s heavily Medicaid weighted obviously has a disproportionate impact on Lilly maybe versus some of our peers. And so you can see that over time how the, as our portfolio mix changes then the impact of healthcare reform on Lilly will also change.
Your next question comes from the line of Eric Lo - Banc of America-Merrill Lynch
Eric Lo - Banc of America-Merrill Lynch
Just wanted to follow-up on the healthcare reform impact for 2011, the excise tax is that recorded also in sales and as part of your $600 to $700 million impact that you are guiding us to. And a question on Effient, I was wondering if you have changed your detailing effort behind Effient over the last couple of months. And third question on Byetta, with the [inaudible] appearing to have gained about 20% of new prescription share, have your marketing message for Byetta changed and what’s your overall expectations for the franchise and are there any plans to increase the sales and marketing dedicated to the franchise.
In regards to the healthcare reform impact in 2011 and the excise tax, the impact of that would be shown as a reduction to net sales is what we are anticipating at this time. [inaudible] another item that’s still to be resolved, but at this stage that’s the assumption that we’re making.
In terms of the Effient messaging, as we discussed in the past we’ve continued to be very focused on the patient population that seem to have the best risk benefit from the drug and in particular for example diabetics is one area where we’re clearly focusing on to ensure the initial physician experience is positive.
We do detail to the full label that we have, but would highlight some of those areas where we have the strongest risk benefit.
With regards to Byetta, what we’ve seen most recently is we have seen some share of market softening, but its largely stayed flat, that’s key. We have seen some very slight softening in the brand, and its specifically within the [endo’s] group and they’re trying to get clinical experience with the new drug, but in the long run we feel as though the growth of the GLP market actually drive more patient utilization of our Byetta BID and unfortunately when it comes time for our launch of our [Exentide or inaudible] we feel as though the market will be educated more broadly with regards to the GLP 1 class itself.
Your next question comes from the line of Marc Goodman – UBS
Marc Goodman – UBS
First on the JAK product can you give us a flavor for when we’re going to get the data. I know you’re going to show something at ACR but what are we going to get before that and then secondly on Alimta can you give us a flavor for just to help quantify what’s going on in Japan and how much bigger that is really driving versus your expectations, is it $300 million international in the quarter, so how much of that was Japan, what kind of growth are we seeing there.
The current data disclosure planned for the JAK-1/JAK-2 inhibitor is to present the six-month data from the ongoing Phase 2 at ACR in November of 2010. We also believe that Incyte will share an update on the progress of that trial in the first half of this year.
Marc Goodman – UBS
So the three-month data is going to come soon.
They’ll provide an update in the first half of this year.
With regards to Alimta sales in Japan we are really pleased with the uptick there. Keep in mind that we receive both the first line, second line indication approval at the same time. Unfortunately we don’t give specific sales estimates by product or by country but Alimta sales have been strong but we’ve also seen other products have fairly strong sales growth as well as mentioned in the call including Zyprexa, Humalog, Cialis, and Gemzar.
So we’ve very pleased with the Alimta progress in Japan.
Marc Goodman – UBS
If you excluded Japan from the Alimta numbers would there still be growth.
There certainly would be, we had very strong volume growth in the US, in Japan, and in the aggregate of the other markets worldwide, all three of those broad geographies had very solid growth and frankly in terms of dollars, probably a similar kind of magnitude.
If you think about the geographical mix that for us to achieve 57% overall growth for Alimta globally says that it has to be driven by more than just the Japanese marketplace.
If you remember from the last couple of annual investment community update meetings, we’ve been talking about Japan, while it is a mature market, being one that given the timing of launch of various products and line extensions, should provide some counter [typical] growth for us relative to what we would see in the coming years in the US and Europe and I think you’re seeing essentially the beginning part of that trend that we had been talking about for the last couple of years.
Your next question comes from the line of David Risinger – Morgan Stanley
David Risinger – Morgan Stanley
I had a couple of questions on reform and then one on Alzheimer’s so with respect to reform could you just provide a little bit more detailed explanation on the impact of rebates going up and the implications for 2010 specifically if you could please explain the extension of Medicaid pricing that would be helpful. And then second for 2011 I’m assuming that your $600 to $700 million revenue impact does not reflect some marginal benefit from additional revenue from seniors being pushed through the donut hole. If you could confirm that and also maybe talk about whether you are expecting a revenue benefit in 2011 from the seniors being pushed through the donut hole and then finally if you could just walk us through the timing on the Phase 3 readouts from your Alzheimer’s program. I’m assuming that those will be in 2012 but if you could walk us through the timing that would be great.
With respect to the impact of Medicaid rebates increasing, the expansion of not only the Medicaid fee for service from minimum rebates of 15.1% to 23.1% we also have the shifting of the expansion of the rebate into Medicaid managed care. Now, Medicaid fee for service is a larger portion of the overall Medicaid sales than Medicaid managed care but nonetheless that is another meaningful increase.
And also the increase in the rebate has an impact on the 340B discount as it currently exists and as 340B will be expanded as well. Secondly, with regard to revenue benefits from the donut hole, partial filling of the donut hole, that’s something that we’re still looking at and the behavioral aspects of seniors as they, in 2011 begin to receive a 50% discount is something where we’re not certain of what those impacts are going to be at this time and as a result we’re still analyzing that.
Dr. Jan Lundberg
First of all being a newcomer to Lilly I’m very pleased that Lilly has these two Phase 3 trials in a very high medical need area. The first component, the [inaudible], the two trials identity one and two, are planned to be completed in June, 2012. In reality it is 21 months after the last patient enrollment. The second one, Solanezumab, the antibody, expedition one and two trials are also coming in the same timeframe, the date currently is July, 2012, 18 months after the last patient enrollment.
I guess a couple of other things just to provide some additional color in terms of the benefit, potential benefit coming from additional patient utilization as pharma companies help fill the donut hole, there are two components that we’ve looked at. There’s one that we have quantified and put in some potential upside for and that is a few more individuals actually getting through the donut hole as opposed to stopping treatment under the current reimbursement scheme.
Frankly there’s not a huge percentage currently because [inaudible] example and probably the one we have the biggest issue in our portfolio we estimated about 15% to 30% at most of patients stop treatment as they hit the donut hole. Some of that you just might expect from normal compliance. Some of it could be financially related. So there could be a slight benefit there but its not a large impact.
The other one that I’ve heard a number of people on the street discuss is our doctors currently not putting patients on medications because they’re quite sure they won’t be able to afford them, and they don’t want to start them to have them have partial treatment. Early market research would indicate that you need to have a more substantial closing of the donut hole to make a significant impact in that particular area.
The other thing for the 21 months, just to give you the math as well to make it easy on you, September we completed enrollment in the first trial 21 months from that date would be approximately June of 2011. If we complete enrollment as Nick said which we plan to here in April on the second trial, that takes you up to January of 2012. As we’ve discussed in the past its very likely that we will hold off on announcing results from the first trial until we have both trials actually closed.
We can preserve the data integrity of all the data from the second trial as well.
David Risinger – Morgan Stanley
Did you mention that for 2011 revenue you did include a potential marginal benefit from a few more individuals getting through halfway through the donut hole.
There’s a very small amount that’s in the net estimate that we’ve put together for the donut hole but it is a net cost clearly.
Your next question comes from the line of Jami Rubin – Goldman Sachs
Jami Rubin – Goldman Sachs
Just to follow-up more, I’m trying to understand the $600 to $700 million so assume that $300 million is the excise tax plus the donut hole, does the donut hole, is it offset by any patient assistance programs, I think that on the [Roche] conference call their portfolio, their mix is different from yours but they expected their donut hole to be offset by patient assistance programs, are you seeing the same thing. Secondly can you remind us what your exposure is to Medicaid and thirdly, the $600 to $700 million for 2011 are they’re any bottom line offsets to that or should we just assume that all just drops right to the bottom line.
First of all I’m not sure where the $300 million number that you threw out because as it relates to 2007 we haven’t provided that level—
It was the increase to $600 to $700.
In regards to the bottom line offset we, while we’ve been obviously all anticipating that there could be some form of healthcare reform in the US we had already begun our activities in terms of having to restructure our business and make sure that we’re accounting for the expected declining margins. So if you go back to September of last year when we announced that we were looking to reduce our headcount by another 5500, as well as also save an additional billion dollars by the end of 2011, we are far down the road in achieving some of those outcomes.
Today we’ve taken out about 1500 of the 5500 and we’ve made considerable progress in terms of our billion dollar savings goals. So we feel very good there. The impact that you’re seeing us talk about here on the call primarily only relates to the top line impact both in 2010 and 2011.
On a gross basis, both Medicaid fee for service and managed Medicaid combined account for just over 10% of our total US business and on a net basis is slightly under 10%. So roughly 10% of our US business is exposed to Medicaid.
With regards to the other portion of your question specifically with regards to the patient assistance programs, we have said in the past that we did see an uptick in the patient assistance programs in 2009, we saw an uptick continue into the first quarter of 2010. All will transition as these pieces of the legislation are enrolled or activated, is yet to be seen. And we can’t say at this point will there be a direct offset with regards to the expense in the patient assistance program versus the expense incurred with regards to healthcare reform, that’s yet to be seen.
Some of that may come into play more in the 2014 period or if states elect to adopt early the expansion for example of the criteria for inclusion into Medicaid, but likely not a short-term effect that we would see.
Your next question comes from the line of Chris Schott - JPMorgan
Chris Schott - JPMorgan
First question on animal health can you just quantify the revenue associated with the Pfizer assets you’re acquiring. Second question just on the reform issue again, within the $350 to $400 million 2010 impact, I know you’re not going to give specific breakdowns of the Medicare pieces etc., but can you just quantify how much of this year’s impact is from that channel accrual piece in anticipation of future discounts as compared to items that are being actually implemented in 2010 and then just a final question on your Basal insulin that’s now moving to Phase 2, can you just talk about timelines when development of that product and just differentiating features you might see there.
We estimated the sales of the Pfizer animal health product were about 60 million euros in 2009. We anticipate that revenue could come down due to competitive pressures over the next several years.
In regards to the channel accrual it’s a small portion of the charge that we are talking about for both 2010 full year as well as the $62 million we’ve talked about for Q1.
Dr. Jan Lundberg
We have seen recent Phase 1 data on the Basal insulin product and we are very pleased to have a flat 24 hours profile on glucose levels. There was very little variability in glucose levels and the very acceptable safety. So now we have just entered a larger study in Phase 2 clinical testing. I don’t want to comment about the timeline specifically, I’ll just say that we are very excited about this program.
Your next question comes from the line of Catherine Arnold - Credit Suisse
Catherine Arnold - Credit Suisse
On healthcare reform, do you have an estimate in terms of what you think the baseline was for seniors hitting the donut hole in regards to the compliance rate, 50% of them, [inaudible] or some kind of proxy you can give us to think about that. And then I just wanted to follow-up on the Basal insulin question, I wondered if you could talk about your interest being driven by a combination with the GLP-1, I think that’s what you’re seeing Novo and [inaudible] do, and I wondered if you have the same intention as far as your GLP-1 plus, and if so is it yours or is it your partners that might be the combination of choice and then last question is related to Alzheimer’s program, at the AAN there was some progress of diagnostics in regards to detecting disease earlier, if the confirmation of these final results comes later this year, would you think about moving ahead in earlier disease setting and if so would you do that for both the [inaudible] and the [inaudible] programs.
We’ll need to follow-up on your first question, we don’t have the data that you’re asking about. For the Basal insulin GLP combo clearly we’ve seen a number of companies talking about moving forward with, some of these kinds of programs. There’s currently nothing that we’ve discussed publically and we’ll continue to monitor this space and see what the best way is for the GLP’s to become a very significant portion of the treatment for type 2 diabetics. If you heard from our past comments we continue to feel that the GLP’s will be over time a very significant player in the treatment of type 2 diabetes.
The profile for example that we show which is [Zenatide] once weekly compares to essentially all of the major current therapies is extremely promising, very strong [inaudible] control, very good profile, initial things that we’ve seen in terms of [CB] risk and definitely compared to some of the other drugs like insulins, low risk of hypoglycemia make it something that we think would be a very significant drug in the treatment of type 2 diabetes going forward.
Dr. Jan Lundberg
In the Alzheimer area there is a key need to identify the right patient which have been the type of [ameloide] disease that we believe the majority of Alzheimer patients would have but certainly some dementia are likely to be caused by other factors such as more vascular problems in the brain. So from the standpoint of the current therapies, I think we need the [ameloide] diagnostics to be combined with Alzheimer’s treatments and preferably to do that as early as possible in the lifespan of the Alzheimer’s disease.
So I assume the readouts for these first two programs will guide us actually how early do we need to treat an Alzheimer patient and also for how long. I also see a great interest in the evolution of diagnostics for the Alzheimer area specifically then to have some additional markets and recognition to in time realize when there is a need then to treat further [ameloide] accumulation.
Your final question comes from the line of Steve Scala - Cowen & Company
Steve Scala - Cowen & Company
Will the healthcare reform hit to earnings in 2011 be roughly $0.50 a share and will that be evenly spread throughout the year. Secondly excluding healthcare reform really is cutting our revenue growth guidance due to the recent exchange trends, why isn’t this same exchange trend benefiting R&D and SG&A guidance. It appears that the higher guidance is higher earnings guidance is solely due to the higher other income. And then lastly Cymbalta chronic pain claim early notes in the release that it expects and FDA advisory meeting in the second half but when the meeting was cancelled the first time, I thought the company was saying that no meeting would be required. So what has changed please.
What we said is that we did a broad range because there’s, for 2011, because there’s still some quite dynamic pieces in there especially around the excise tax as well as the donut hole that we were articulating earlier. So that’s why we focused primarily on the range of the $600 to $700 million in terms of the sales impact.
In terms of the foreign exchange changing the guidance for some elements in that other, we talked in the past about the foreign exchange having a larger effect on revenue, a similar effect probably on SG&A but not quite as large. I think you can take by the fact that we’re moving the revenue guidance and not the SG&A guidance, but probably its was close enough to begin to tip it so we had some possibilities of being in that lower range on the revenue side and we’re still within the range on the SG&A side.
And then for R&D, R&D has a much lower exposure given where we actually have the spend to changes in foreign exchange rates.
But recall in our SG&A in Q1 we did see about a three percentage point impact in our SG&A growth in Q1 due to the movement in foreign exchange and that was three percentage point increase.
With regards to the Cymbalta chronic pain, we are currently have always said and we’ve been consistently saying with [inaudible] as well that the FDA can schedule a review at any time. We have had discussions with the FDA and in those discussions our expectation is that a panel will be held in the second half of the year. We stand behind our data that we submitted.
We feel that its promising data. We’ve had other pain indications prior with regards to fibromyalgia and [DP-NP] so we stand behind that data and we’re prepared to address any of the questions of the panel if it occurs in the second half. And we’re ready to do so.
I want to thank you all for your questions, before I turn it over to Derica, just remind you that today also is our Annual Shareholder Meeting. So Ronika, Nick, and I will be available for your questions later. We will probably be out though between 11:00 and 12:00 at the Shareholder Meeting so apologize if we have any delays in getting back to you.
Thanks Phil, let me just try to close today’s session with some over-arching remarks. First of all we’ve had a very good start to 2010 and it was highlighted by volume driven revenue growth. We’ve had substantial leverage on a performance basis which drove operating income to grow faster than our revenue and we’ve also seen significant improvement in other income as we highlighted.
Now excluding the effect of the US healthcare reform, this strong financial performance has positioned us to raise the top end of our 2010 EPS guidance by $0.05 and the bottom end by $0.10. This strong financial performance also provides the resources we need to strengthen and progress our pipeline and engage in business development and pay out dividends.
In fact, in the past three months we’ve completed three more business development deals, we’ve made significant progress on products such as [Bydurion] and our Alzheimer’s drugs, [inaudible], [inaudible], GLP-1Fc, and our Basal insulin. And as, all the while we’ve initiated Phase 1 trials for four new molecules.
Now while the US healthcare reform clearly provides a near-term challenge, we are confident our innovation-based strategy will create value for patients, payers, and shareholders. We’re focused on advancing our pipeline to deliver on our strategy and we believe that our pipeline will enable us to launch two new novel molecules per year beginning in 2013 and return us to growth after the year’s [inaudible].
I want to thank you for taking your time this morning to allow us to update you on Eli Lilly and Company and we greatly appreciate your interest in our company. And as always we’ll keep you informed on our progress and have a great day.
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!