Eli Lilly & Co. (NYSE:LLY)
Q2 2011 Earnings Call
July 21, 2011 9:00 am ET
Jan Lundberg - Executive Vice President of Science & Technology and President of Lilly Research Laboratories
Derica Rice - Chief Financial Officer, Executive Vice President of Global Services, Member of Operations Committee and Member of Policy & Strategy Committee
Philip Johnson -
Phil Johnson - ED of IR
Ronika Pletcher - IR Department
David Risinger - Morgan Stanley
Catherine Arnold - Crédit Suisse AG
John Boris - Citigroup Inc
Jami Rubin - Goldman Sachs Group Inc.
Tim Anderson - Sanford C. Bernstein & Co., Inc.
Steve Scala - Cowen and Company, LLC
Christopher Schott - JP Morgan Chase & Co
Gregory Gilbert - BofA Merrill Lynch
Seamus Fernandez - Leerink Swann LLC
Marc Goodman - UBS Investment Bank
Ladies and gentlemen, thank you for standing by. Welcome to the Q2 earnings call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Vice President of Investor Relations, Phil Johnson. Please go ahead.
Good morning, and thanks for joining us for Eli Lilly & Co.'s Second Quarter 2011 Earnings Conference Call. I'm Phil Johnson, Vice President of Investor Relations. Joining me today are our Chief Financial Officer, Derica Rice; our Chief Scientific Officer, Doctor Jan Lundberg; and Ronika Pletcher and Jill Thoren for Investor Relations.
Since we just provided a comprehensive overview of our business at our investment community meeting on June 30, today, we'll limit our prepared remarks, leaving more time for the Q&A session. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 3 and those outlined in our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decision.
Since the Q1 earnings call in April, we've had a number of significant event, many of them in our diabetes business. On the regulatory front, we had important news for Bydureon. The European Commission granted final approval of BYDUREON, the long-acting formulation of exenatide and the first once-weekly treatment for adults with type 2 diabetes. We launched in the U.K. last week, with launches in other European countries expected over the course of 2011 in the first half of 2012.
We submitted BYDUREON to regulatory authorities in Japan and, along with Amylin, we completed the thorough QT study to support the U.S. NDA for BYDUREON. In the study, when administered at and above therapeutic levels, exenatide did not prolong the corrected QT interval in healthy individuals. Further, the study found no relationship between QTc interval and plasma exenatide concentrations. We intend to submit our reply to the FDA's Complete Response Letter in Q3.
We also had quite a bit of regulatory news on the linagliptin, the FDA approval of linagliptin, under the trade name Tradjenta, for the treatment of adults with type 2 diabetes. Along with Boehringer Ingelheim, we launched the product here in the U.S. in May, presented as the first DPP4 inhibitor to be approved at one dosage strength, with no dose adjustment is recommended for patients with kidney or liver impairment.
The Japanese Ministry of Health and Welfare (sic) [Ministry of Health, Labor and Welfare] approved linagliptin under the trade name Trazenta. Along with the eye [ph], we expect to launch the product in Japan later this quarter. Continuing the string of rapid approvals, regulatory authorities in Mexico and Brazil also approved linagliptin, known there as Trayenta, and launches in these countries are also expected in Q3. In Europe, the CHMP recommended approval of Trajenta, and we expect final EC approval later this quarter. Clearly, we're very pleased with the significant progress achieved during Q2 in our diabetes business.
In non-diabetes regulatory news, along with Bristol-Myers Squibb, we submitted the sBLA for Erbitux in first-line, non-small cell lung cancer. On the clinical front, at ASCO, we presented positive data from PARAMOUNT, the second study to evaluate the use of Alimta's maintenance therapy in patients with advanced nonsquamous non-small cell lung cancer and the first study to evaluate the use of continuation maintenance with Alimta, following first-line Alimta plus cisplatin therapy. Based on data from PARAMOUNT, we submitted our dossier [ph] in Europe earlier this year. And we plan to submit here in the U.S. once we have more mature, overall survival data.
On the business development front, we received final EC approval for and finally closed on our acquisition of Janssen's animal health business. We signed an exclusive worldwide collaboration agreement with Synthes, under which the 2 companies will jointly develop site-specific bone-healing products. The companies will also conduct and fund the evaluation of additional orthopedic uses for Forteo. In addition to the development component of the agreement, the collaboration includes the co-promotion of Forteo to orthopedic surgeons in the U.S. and in select o U.S. countries.
We signed agreements with private investors to establish BioCritica. Based in Indianapolis, BioCritica will initially focus on the continued U.S. development and commercialization of Xigris for severe sepsis. BioCritica will acquire the U.S. development and commercialization rights to Xigris and will also receive the rights to potentially acquire several critical care compounds currently in pre-clinical development of Lilly. The collaboration agreement also includes an option for BioCritica to acquire the development and commercialization rights to Xigris outside the U.S. at a later date.
We entered into a collaboration with Medtronic to research and development new approach to treating Parkinson's disease that involves delivering a potential new medicine to the brain using an implantable drug delivery system. Specifically, the goal of the collaboration is to develop a therapeutic approach for Parkinson's disease that combines the strengths of Lily's biologic, a modified form of glial cell derived neurotrophic factor with Medtronic's implantable drug infusion system technology.
Lastly on the legal front, the Supreme Court denied Lilly's petition to reconsider a federal appeals court ruling invalidating the Gemzar method of used patent. And the judge for the U.S. District Court for the Southern District of Indiana ordered all generic drug manufacturers, challenging the validity of the crack compound patent for Cymbalta not to sell a generic version of duloxetine until the patent expires. As a result, we do not expect generic duloxetine come into market until the Cymbalta patent expires in June 2013 or December 2013, if we're successful in obtaining the six-month pediatric exclusivity.
Now as a background, Ronika will discuss our Q2 financial results and provide our pipeline update, and Derica will then cover key events to our major 2011 and our financial guidance for the year. Ronika?
Thanks, Phil. As we've done on previous calls, we'll focus our comment on non-GAAP results, which we believe provide insights into our underlying trends in our business. This view excludes certain items, such as restructuring charges, asset impairments and other special charges. I'll start on Slide 6 with a quick look at our Q2 income statement.
On a non-GAAP basis, you can see that we generated robust revenue growth of 9% this quarter. Excluding Gemzar outside of Japan and the effective view of health care reform, revenue would've grown 13%. Compared to Q2 2010, gross margin as a percentage of revenue decreased 1.8 percentage points but we're still strong at 80.4%. This decrease is entirely due to the effective changes in foreign exchange rates on international inventories sold.
Operating expenses, defined as the sum of R&D and SG&A, grew 12% this quarter. This increase was driven primarily by SG&A, which increased 16%, over an increase in R&D with 6%. Drivers of the increase in operating expense include expenses related to our diabetes alliance with Boehringer Ingelheim, the unfavorable effect of changes in foreign exchange rates, higher sales and marketing expenses to support launches of new products and new indications, as well as the pharmaceutical manufacturers fee associated with U.S. health care reform, which was roughly $45 million. Excluding the effect of U.S. health care reform and the BI alliance, operating expenses would've grown 7%.
Other income and deductions was in net expense of $58 million this quarter, which was higher than it was last year. The higher net expense was due to a write-down in the value of the liprotamase asset as a result of the FDA Complete Response Letter we received in April, in which the agency requested additional clinical data.
Our tax rate was 20.9% this quarter or 1.6 percentage points lower than in Q2 2010. This reduction is primarily due to the R&D tax credit that was not in effect during Q2 2010 but was in effect during Q2 2011. At the bottom line, our non-GAAP EPS decreased 5% from $1.24 to $1.18.
Consistent with the 2011 guidance we provided in January, we saw a robust EPS growth in our business in Q2, excluding U.S. health care reform, the effect of Gemzar patent expiration outside of Japan and investments related to the BI diabetes alliance. Excluding these items, EPS would've grown in the high teens.
Slide 7 shows our reported income statement, while Slide 8 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 look at foreign exchange and its effect on our Q2 revenue. As you can see on Slide 9, total revenue growth of 9% was again driven by solid volume growth of 5%. This quarter, foreign exchange contributed the remaining 4%, while price had virtually no impact on worldwide revenue growth.
We continue to see strong volume growth from our 3 counter cyclical growth drivers: Japan, Animal Health and emerging market. Volume growth in Japan was 15%, driven by the recent launches of Cymbalta and Forteo. Recall that the Q1 precautionary buying as a result of the Japanese earthquake and its aftermath increased Q1 sales by about $30 million to $35 million. As expected, this was largely worse in Q2, trimming Japan's volume growth this quarter by about 6 percentage points.
Unlike the Animal Health, volume growth was 16% in Q2, driven by the increase in demand for food animal products globally as well as the launch of Trifexis in the U.S., the continued expansion of our PA [ph] animal business globally and the acquisition of certain European animal health assets from Pfizer.
Finally, embedded within the Rest of World line is our emerging markets revenue growth of 11% in volume and 13% overall. Particularly noteworthy was China's revenue growth of 20% volume and 26% overall. This quarter, it is worth reviewing the effect of foreign exchange on the rest of our income statement. While FX did not have a large effect on EPS growth, it did affect individual line item.
Slide 10 shows the year-on-year growth of select line items of our non-GAAP income statement, both with and without the effective changes in foreign exchange currencies. The numbers in the first column are the same as those used on the last column on Slide 6. Let's focus on the second column of the numbers which groups out the effect of foreign exchange rate.
First, you'll see the 5% growth in revenue I mentioned earlier. Below that, you'll see that cost of sales and gross margin also grew 5%. This is consistent with the statement that the reduction in gross margin as a percentage of revenue was entirely due to the effect of foreign exchange on international inventories sold. In total, operating expenses grew 9%, excluding FX. This increase was driven by the BI deal, the launch of new products and indications and the pharmaceutical industry fee.
Since the increase in operating expense exceeded the increase in gross margin, operating income declined 3% and EPS declined 4%. You can see that while FX had a material impact on revenue, cost of sales and operating expense, it really almost had no impact on operating income for the EPS this quarter. So while FX didn't have much of an impact on EPS growth, U.S. health care reform, the effect of due of our patent expirations outside of Japan and the investments related to the BI alliance certainly did. As mentioned earlier, excluding these items, EPS would've grown in the high teens.
On Slide 11, you'll find year-on-year growth of these same items on our income statement on a reported basis, both with and without FX. Now before turning the call over to Derica, let me provide a brief update on our pipeline.
On Slide 12, you'll find a view of our portfolio of new molecular entities in clinical development as of July 11 inclusive of the changes since our April update. Our clinical phase portfolio now stands at 70 to state [ph], including 33 compounds in Phase II and Phase III. Biotech molecules represent over 40% of our Phase II and Phase III assets as well as our overall clinical portfolio.
Advancing our pipeline remains our number one priority. As reflected by the arrows, you can see that since our April update, we received FDA approval for and launched Tradjenta; we've had two assets in the Phase II testing; we advanced an additional 3 assets in the Phase I testing, including our basal insulin RGs [ph]. We expect to begin pivotal trials for this molecule before year end, and we terminated development of one Phase I asset.
As Doctor Lundberg shared during our investment community meeting on June 30, we're very pleased with the progress we've made, building a robust, high-quality pipeline with many potential opportunities to advance patient care and nasal [ph] diseases, with large, unmet needs as well as commercial opportunity. We're on track to meet or exceed our goal of having 10 entities in Phase III by year end and believe that our current pipeline provides the foundation for Lilly to return to growth post-2014. Derica?
Thanks, Ronika. To set the stage for our financial guidance, let me briefly cover some of the key events for the remainder of the year.
As mentioned earlier, having now received the CHMP recommendation for approval of linagliptin, we look forward to the European Commission approval later this quarter and then launching the product in Europe later this year. In addition to our successes so far this year, we have a number of other potential regulatory approvals in the U.S. this year, including Cialis for BPH, by aide in combination with basal insulin; and Erbitux for first-line head and neck cancer. Expect the regulatory submissions include our response to the FDA Complete Response Letter for BYDUREON, the sBLA for Erbitux and first-line metastatic colorectal cancer, and our response to the FDA Complete Response Letter for Amyvid. We continue to expect a maturing of our mid to late stage pipeline as Phase III trials could begin this year for, one, our novel basal insulin analog and our new insulin glargine product, as well as our anti-IL-17 monoclonal antibody.
Finally, on the legal front, at anytime, we could have rulings from the CAFC on the Strattera patent challenge and from the District Court in Delaware on the Alimta patent challenge. Now you may recall that in the Alimta case, the judge had indicated from the bench that a ruling would be issued in Lily's favor.
Now in terms of our 2011 financial guidance, we've updated the guidance issued in April for a number of factors, including continued strong volume growth in revenue, driven by our 3 counter-cyclical growth engines and our patent-protected brand; secondly, stronger foreign currencies, which drives up the expected growth rates of revenue, SG&A and R&D; thirdly, very prompt approval to linagliptin in multiple markets, which is driving an increase in expected SG&A spend in 2011, as well as some additional expected revenue; and fourthly, the write-down of the intangible value of liprotamase, which is driving higher expected net other expense for the year.
In total, these changes result in an increase in narrowing of our non-GAAP EPS guidance. We now expect 2011 non-GAAP earnings per share of between $4.25 and $4.35. Our 2011 reported EPS guidance range of $3.85 to $3.95 reflects the $0.23 IPR&D charge from the BI alliance and $0.17 in restructuring charges for the first half of the year.
Now these changes have resulted in updates to the most of the individual line items as well. Revenue is now expected to grow in the mid-single digits, while we expect the gross margin as a percent of revenue to decline by 2 to 3 percentage points. SG&A growth is now expected to be in the high single digits, and R&D growth is now expected to be in the low single digits.
Other income is now forecast to be a net loss in the range of $100 million to $175 million. We still expect our 2011 effective tax rate will be approximately 21% on a non-GAAP basis and approximately 20% on a reported basis. And we expect capital expenditures to be in the range of $700 million to $800 million. Now Slide 15 provides a reconciliation between reported and non-GAAP EPS for 2010 and the associated growth rates from these numbers to our revised 2011 guidance.
In summary, 2011 continues to play out as we had anticipated. We're making progress advancing our pipeline, and we're delivering solid financial result. We remain on track to meet our goal of having 10 molecules in Phase III development by the end of this year.
And as John articulated on June 30, we're seeing promising signs that, in addition to increasing in numbers, our mid- to late-stage pipeline is increasing in quality as well. We firmly believe that our current pipeline serves as the foundation to return to growth post-Years YZ.
We also remain on track to meet our 2011 headcount as expense containment goals, helping to create the financial flexibility to invest in our pipeline, our counter-cyclical growth engines in current brands, as well as maintain the dividend. In Q2, we saw this impact of the headwinds that we anticipated when we issued our 2011 financial guidance in January, and when we updated that guidance on our Q1 earnings call in April. These headwinds are patent expirations that are lowering sales of Gemzar outside of Japan; U.S. health care reform, which is exacting a higher cost this year than it did in 2010; and near-term dilution from our strategic diabetes alliance with Boehringer Ingelheim. While we did see the negative impact in Q2 of these items, we again delivered strong growth in the remainder of our business. Excluding those 3 items, on a non-GAAP basis, we posted revenue growth of 13%, operating expense growth of 7% and high-teens EPS growth.
Moving forward, we will continue to focus on delivering a solid financial result, improving productivity to allow for appropriate investment in our patent-protected products and our pipeline and outspeeding the next generation of Lilly molecules to market to provide growth post-Years YZ.
Now this concludes our prepared remarks, and we will open the call for the Q&A session. Operator, first caller please.
[Operator Instructions] And our first question comes from the line of Marc Goodman from UBS.
Marc Goodman - UBS Investment Bank
Yes, I was hoping you could give us a little more flavor for the volume growth of the product in Japan, Cymbalta, Zyprexa, Alimta. And then secondly, can you give us a sense of a little more detail in the emerging markets? I know you mentioned the one growth rate for overall, but can you give us a sense of, besides China, what else is going on, what other launches are driving the business there?
Okay, Mark, thank you for the question. I will go ahead and take that question, and Derica, if you're free to kind, if you like. For emerging markets first is, we mentioned on the call, we definitely had very strong growth in China. But in addition to that, we're seeing growth in a number of other emerging markets spread across the Asia region. And also, very good growth still from the South American countries. We do have some upcoming patent exposures. We'll begin to see, for example, in Brazil, weigh more heavily. But we continue to see a very strong growth across a number of those geographies. In Japan, Marc, it really is still pretty widespread and good growth. Forteo, for example, is off to a very strong start with the launch on the second half of last year. Cymbalta is doing very well. The insulins are doing extremely well. Alimta share growth has been extremely good since the launch there. Going back, I think, that would have been earlier in 2010, again, late 2009, so really broad-based growth across a number of products driving the Japanese performance.
Marc, this is Derica. The only thing I would add is, if you look at Japan, not only do we have a good growth, but it's been sustained. So we had about 40%, 41% growth in the second quarter. But we knew -- excuse me, in the first quarter. But we knew that had some buy-in as a result of the earthquake and the tsunami. But if you were to normalize for that with a de-stocking that we saw in the second quarter, we basically about 30% to 31% growth in each of the first 2 quarters of this year.
Yes. We had about, as Ronika mentioned, $30 million to $35 million of buy-in. We think in the first quarter, about $20 million, $25 million, if I work its way out in the second quarter.
And our next caller comes from the line of Tim Anderson from Sanford Bernstein.
Tim Anderson - Sanford C. Bernstein & Co., Inc.
A few questions. Pfizer said it'll be getting rid of its animal health business, and that's obviously an area that you continue to invest in. And I'm wondering why it wouldn't make sense for Lilly to go after that? Would it just be an antitrust issue? Second question is on your Phase III trials for your version of insulin glargine. Are you going to have Lantus as an active comparator? And then the last question, just on the Janssen animal health business. I don't believe we have any financial details there, and I'm wondering how that ties into the 2011 guidance. Is that deal an accretive transaction for you?
Okay. Tim, thanks for the questions. We'll have Derica go ahead and take maybe your first and a comment on the third. And then Jill and Jan will handle the glargine question, please. Derica?
Okay. Tim, in regards to our animal health business, your 2 questions, one, in regards to Pfizer's decision around our own animal health business, I think it's very early to speculate as to what the nature of the transaction that we'll be seeking, whether it'll be a sale, a spend or an outright IPO. I think it's still to be determined. So at this stage, it will be really speculative on our part. Clearly, we will watch how that situation evolves. And if there are some assets that become available that we're interested in, then, yes, we will pursue them. But we're very happy as well with our -- the current state of our Elanco animal health business. And right now, we're the fastest growing entity in that space, and we feel very good about the launches that Jeff talked about in New York, where we've had 6 launches so far this year coming from our own pipeline. So with or without an additional transaction, we believe we have the capacity to sustain the type of growth that you've seen through this point. And in fact, in the second quarter this year and in the second quarter here, Elanco grew actually 20%. In regards to the impact of the Janssen deal that we just closed this year, it's basically neutral to the bottom line.
And, Tim, in terms of the financial, this is one that, if you look at industry sources like that notes [ph], you'll likely see that Janssen sales indicated that roughly $200 million or so for 2010. We would encourage you to keep in mind that does include sales of their products in markets where they're actually going through a distributor, the actual sales that they would have prior, are we going forward, when we book, would be less than that $200 million-type level. Jan?
In relation to our insulin glargine product, which has an intense human testing, we will use Lantus as comparator in Phase III trial.
Our next question comes from the line of Jami Rubin from Goldman Sachs.
Jami Rubin - Goldman Sachs Group Inc.
Derica, my question relates to the Boehringer Ingelheim deal. So, projected sales posted $5.6 million. This quarter, obviously, very early to tell. But if you could just remind us how that deal works? Because I think you had talked about achieving accretion next year or the year after, I don't remember, but I'm wondering if that is dependent on you reaching a certain level of sales with Tradjenta? Or is there a flexibility built into the contract to reduce spending if you're not getting to the level that you anticipate? And also, so you're increasing your SG&A spend for the back half of the year. I'm just wondering what's changed? Because we -- the BI deal has been known, the pharmacy fees have been known, et cetera, et cetera. So just if you could just provide a little bit more granularity on what additional levels of spend, and is it behind the Tradjenta launch?
Sure, Jami. In regards to the BI ideal, essentially, it's a profit share if you look in terms of the deal structure itself. Clearly, we've had very good news around that brand. So we got -- received an earlier than expect to launch both in the U.S. as well as in some of the key markets outside the U.S. like Mexico, like Brazil, like Japan. So when you look at our SG&A spend guidance for the year, the primary driver of the increase is FX related, similar to what we talked about on the top line. But at the same time, we are supporting the earlier launches of Tradjenta in those key markets that I highlighted. So those are the 2 factors. And in terms of characterization we've been getting in the past, we talked about their being dilution obviously higher this year driven by the upfront charge that we had in the first quarter and then lessening between 2012 and '13, and then turning positive '14 and beyond. We obviously would have like it little more dilution this year given the incremental investment codes [ph] on some of these approval and launches coming towards the earlier end of the spectrum of what was contemplated. However, we're potentially making up for that and more in our full year guidance by the raise that you've seen on a non-GAAP basis.
And now, we'll go to the line of Steve Scala from Cowen.
Steve Scala - Cowen and Company, LLC
In the Zyprexa commentary in the press release, Lilly states it is difficult to predict the precise timing and magnitude of the impact on Zyprexa sales from the introduction of generics. This language was not in the Q1 release to my knowledge. May I ask why Lilly believes it is difficult to predict the timing and the magnitude? What is unusual about this situation? There was no similar language, for instance, in the Strattera paragraph. And what percent of U.S. Zyprexa sales are protected by contracts that extend into 2012 and therefore will not be impacted by the patent expiration?
Steve, what's really centered around that is the nature of the erosion curb. I mean, we know exactly the date when we lose the official patent. But what you will see is, probably as we go through this, there will be an impact on our returns policy. So for, at the time of the product goes generic, how much inventory will actually be sitting out in the retail channel, which creates an exposure turn of returns. The second is with the actual adoption rate in terms of generic utilization will be, in terms of buying power and patterns of wholesalers, as well as formularies. So that's where the unpredictable nature of this comes in. But we think we've accounted for a reasonable estimate of that in the guidance range that we provided. And even with those types of uncertainties, if you heard from Phil earlier in on the call, we still have a strong enough underlying business fundamental that has enabled us to be in a position to raise our guidance overall.
And next caller goes to the line of David Risinger from Morgan Stanley.
David Risinger - Morgan Stanley
I have 3 questions. And I apologize if any of these have been asked. I joined the call a little late. So first of all is a financial question for Derica. And then, I have 2 product questions. With respect to Slide 9, it indicates that U.S. price had a 0% impact on year-over-year revenue growth. Can you just explain to us how you reflected the negative impact of health care reform in that line? I'm assuming that, that is what brought that down to 0% given numerous list price increases for U.S. products. Second, how do you see Effient competing with Rowenta [ph]? And could you characterize how we should think about the competition playing out in the U.S. differently from x U.S. market? And then third, how much of a positive read should investors take away from a futility analysis later this year that results in solanezumab continuing to completion, meaning, could you give us a sense for how low or high the efficacy bar is in the futility assessment?
Derica's on the first one, and Jan will handle your second 2 questions, Dave.
David, in regards to the U.S. price, it's really being affected by 2 factors. One is the incremental impact of U.S. health care reform, both the full year effect of U.S. health care reform, as well as the introduction of a donut hole provision. The second thing that impacting it is also the erosion of Gemzar in the U.S., the price erosion. Those are the 2 things that are allowing our net effect of selling price impact to be 0. Jan?
Right. So let me start with the antiplatelet agents. As you all know, Effient is a irreversible, once-daily antiplatelet, while Brilinta is a reversible, twice-daily agent. A key difference is that, in the Effient studies, which of course are not the same as the Brilinta studies. And to really compare them, we need direct head-to-head studies. But the U.S. patients in the Effient studies did better than Plavix, but for some, still unclear reason in Brilinta. The U.S. patients actually did better on Plavix than on Brilinta, with which, it's a discrepancy for Brilinta to the whole world data. There is also some dyspnea some side effects with Brilinta that Effient doesn't have. So for the moment, I think we have here 2 effective antiplatelet agents in the more whole world populations, while in the U.S. population, Effient did better. And the FDA, I think, took that interpretation into actually saying that Brilinta should not be used when you have a high aspirin dose, which clearly Effient can be used when you have. And since, I think, the U.S. treatment paradigm today has a high number of high aspirin in combinations, it is actually would favor Effient. But overall, we need the head-to-head studies to really make a direct comparison. In relation to solanezumab and the futility analysis that will come up later this year, this is a judgment then of the DMC, of the benefit-risk component. They will look clearly at safety as well as futility of efficacy, and this is their judgment. But my interpretation is that, since Alzheimer's disease is a very serious disease, there is no real treatment to stop progression of disease. And we don't really know today when would the potential effect start of preventing than amyloid. So my feeling is, this will be a judgment call for the DMC. And whatever the outcome, we need to wait for the full study before we can draw any clear conclusions.
Our next question comes from the line of John Boris from Citi.
John Boris - Citigroup Inc
First question, just in light of budget negotiations in Washington, there is some risk, at least some would believe, that's been weighing on the group that the government may come back and look for some additional funds. And obviously, the dual eligible side that could be pointed to, do you believe that, that provision potentially could be pulled during budget negotiations? Just your thoughts around what the risk is around that and what the impact would be. And then one question for Jan has to do with the SGLT-2. The profile, does he believe the increased bladder cancer risk is a class effect? Is that something that we might see with the Boehringer compound, along with the liver toxicity that we've seen? And then, one final question just has to do with AG, using an authorized generics strategy on Zyprexa and Cymbalta, just your thoughts around that.
Great. So we'll have Derica take your first question, John, and then Jan for the SGLT-2 question. And I'll handle your AG question.
As it relates to the debate or discussion around the deficit-reduction challenge in the U.S., clearly, it's still very early, and it's hard to draw any conclusion based upon the dialogue, at least that I'm aware of. But for the kinds of things that are being debated, if they were to want to introduce with Medicaid-type rebate into Medicare Part D that would be a profound impact, not only for Lilly but for the industry. And so, that's something we would not support, and I don't think our industry peers would either. Along those same lines, we also would not be supportive of reducing the bio -- data protection from biologics or the strengthening of the position of iPad. So these all group concerns that we have. And obviously, we continue to engage in discussion and dialogue with the parties at hand. And if any of those were to move forward, then they would clearly have an impact on jobs in the U.S., and I don't think that's where we all want to go, given the budget discussions that we had in trying to stimulate the economy.
With regards to the SGLT-2 class, it is important to remember that this is an agent which has quite a unique action that is independent of insulin secretion. And also, this agent is lowering blood pressure and body weight. So it has clear beneficial attributes. In relation to the reported increase in cancer then for the BMS-AstraZeneca compound, we have no evidence so far that this is happening with the empagliflozin. Clearly, we only have more short-term observations, and we really need to have all the Phase III data before giving any definite answers. We observed also single case of the high slow. We have not seen that in our studies. Just a final comment to come back to the cancer, the reports here, that there is no clinical data or mechanistic hypothesis that would support that there is an increased risk of, for instance, bladder cancer. It's a finding. Like always, safety is paramount, and we need to observe this and be cautious about the future.
And John, to refer to your question on potential authorized generic for Zyprexa or Cymbalta, let me answer in sort of generally with. What we will be doing each and every time that we do have a patent expiration whether it be an injectable like we have with Gemzar, or oral small molecule like Zyprexa or Cymbalta. We'll definitely look at a host of different options, and I think it's safe to assume that we have, in both occasions, already done planning, looking at different things to see what is the most appropriate late life cycle strategy for the molecule. I would say that is not the case, where an AG would always be a preferred approach. So really, it will be molecule-by-molecule basis. If we were to elect not to do one, on the next one up, for example, I wouldn't take that as indication that we didn't like the way that AG went with Gemzar. In fact, we've felt that has gone quite well. And if we would be one, for example, on Zyprexa, I don't know if that would mean necessarily we would do well on Cymbalta. It really does come down to what the lines of business the customer groups that these products go to, capabilities or partners, et cetera. We'll keep you posted, but at that this time, we have no comment specifically on what would be planned, what would be likely for the Zyprexa.
And we'll go to the line of Seamus Fernandez from Leerink Swann.
Seamus Fernandez - Leerink Swann LLC
Just 2 questions. One for Jan. Jan, could you just -- I didn't know if there is any reason to think about the molecular structure of dapagliflozin as a C-glucoside versus the molecular structure of the Boehringer Ingelheim compound relative to possible liver effects. So maybe you can weigh in on that. And then separately, can you just update us on any price changes that have occurred incrementally in Europe versus your expectations? And update us on any proposals that may actually be out there as we work through the incremental possibilities of the debt crisis.
We'll go to Jan for the first question, and then I'll try to answer your question on the looking forward in Europe, what we're going to be expecting, what's happened very recently.
In relation to structural activity relationships in relation to potential liver effects of the SGLT-2 agents, I think it's too early to make any conclusions based on a single case. That's the first comment. And secondly, I think history tells us that liver effect can be direct but they can also be indirect to where the immune system, et cetera, could respond. But I think for the moment, we have to get our data for our compound before we do any conclusions about liver risks.
Seamus, in terms of Europe, there really have not been any substance to changes of late. We have seen for example, as we have been expecting, sort of the next round of publishing of price referencing list in Greece in this June period. It was very much in line with our expectations and do not have a significant impact on Lilly products. The newest one I'm aware of probably would be some legislation passed in Poland that will take effect actually in January of 2012, so no impact to this year. Where there will be agreement to go ahead and cap the government's expenditures on pharmaceuticals as a percent I believe of the overall health care spend, with the industry providing some rebates if spend exceeds those levels. Clearly, with continued budget pressures in a number of countries, we'll continue to monitor the situation. We do think that there are already some pretty substantial cuts taken, particularly on the pharmaceutical side of some of the health care and broader entitlement spending in European nations. So we wouldn't expect that to be necessarily the first place for them to go. But again, we might have situation. Clearly, we're not out of the wood with the overall situation for the global economy.
We'll now go to the line of Catherine Arnold from Credit Suisse.
Catherine Arnold - Crédit Suisse AG
I'd like to ask a question or 2 about the pipeline. If you could comment on where we are on the trilogy study for Effient, is that still on track? I think it's to complete the first half of next year, if data could be presented. And the second half of next year, was there anything about the Brilinta label that would be surprising relative to what your expectations were internally? And then lastly, Arxxant is on your pipeline chart, but I don't know if we've heard anything about that for a long time. And I'm wondering why, what's happening with this particular product?
We'll have Ronika to take your first question on the status trilogy, and I'll handle the last 2.
With regards to trilogy, keep in mind that, that an event-driven trial. But the current estimate and we typically stick to what's estimated in clinicalresults.gov. And that's estimated right now to complete in April of '12, so that trial's progressing and we look forward to that data.
And with regard to the label on Brilinta, we'll probably act a little bit later today after we finished the call, have a chance to debrief more fully with the team, who evaluated that when it came out after the close yesterday. So at this point, I don't have a specific comment for you under any items that were surprising. If Jan, you've heard anything from the team or not?
I think for the moment we are still discussing.
And in terms of Arxxant, Catherine, so as you're probably aware, a number of years ago, we had submitted to the FDA for the diabetic retinopathy. Indication have received, I guess, what now would be called the Complete Response Letter to basically asking us to provide them with more substantive data around the visual acuity. So we're in the process of completing the last diabetic macular edema study that could potentially furnish the date of the FDA is looking for. Last that I had was a petrol [ph] with concludes or late this year. I think the latest may be early next year. Once we have that data in hand, then we will either decide, do we submit to the FDA, ask them to reconsider the application or do we pull the NDA with the agency?
Let's go to the line of Greg Gilbert from Bank of America.
Gregory Gilbert - BofA Merrill Lynch
I have 2 questions. First, I was hoping you could offer any preliminary thoughts on how the Medco express combo could affect Lilly. And if you don't have anything specific to say yet, maybe you could offer up conceptually what types of things you're going to look into to be able to answer that question down the line? And secondly, Derica, can you offer any color on SG&A and R&D lumpiness between 3Q and 4Q?
Regard to the Medco express, it's still early. We do not anticipate there's going to have a material impact on Lilly. I think the bigger impact may actually be on the health plans themselves that they service in terms of going from reducing the number of players. For us, we obviously feel very good about the attributes of our brand. And then maybe at the therapeutic area, where we compete today, there is already low-cost generic options available, yet our brands have held up very well. So in cases like depression or even in schizophrenia, with reason all being generic. So we're not anticipating that this is going to have a material impact on Lilly at this stage but once again, still early. In regard to the Q3 or Q4 impact of SG&A and R&D, I think it's pretty much embedded in our guidance and the color I've provided earlier. If you're looking at SG&A, primarily what you're seeing in terms of our change in our line item guidance is the impact of exchange rate, both in SG&A and R&D. And then, more specifically for SG&A, it's also the impact of the earlier spend, launch spend behind Tradjenta. And we've considered that to be a huge positive force.
We now go to the line of Chris Schott from JPMorgan.
Christopher Schott - JP Morgan Chase & Co
Just the first couple of questions were on Zyprexa. Maybe the first one would be, I was reading about Zyprexa in Europe, can you talk about the severity of generic erosion you're anticipating here, given that some of these market obviously, historically, have had lower rates of generic penetration. My second question on Zyprexa was, with the upcoming patent expiration, can you just help us a little bit to understand a lot better the impacted gross margin and quantify how much of an impact to gross margin we should expect due to the loss of that franchise?
We'll have Ronika handle the first one. I think Derica will take a shot at your second question.
So with regard to Zyprexa and the patent expirations in Europe, you might keep in mind that in major Europe, we actually lost patent in Spain and some smaller other countries in this past quarter. We didn't see much erosion but expect to see additional erosion as we go through the year. With regard to the rest of major Europe, the patent will actually expire in September. And keep in mind, we would, again, expect to see additional erosion as that occurs.
Chris, in regard to the impact of the gross margin as well, I will not quantify the specific. I can give you a clear, directional impact and it’s detrimental. So when we lose a brand like Zyprexa and with its level of profitability, you'll see an unfavorable impact to our gross margin line as that plays through our P&L and financial results.
One of the other things, Chris, I had to keep in mind for European erosion, we may be in a little bit different environment now in some of the countries in the past had slower erosion. I think it became pretty apparent to many of the payers that there would be very large brand and a large number of them coming off patent. And then the fact that we've positioned themselves to benefit as they should from those patent expirations. So much of the action that you saw in 2010 even was really directed against reducing prices of generic and setting up situations, where once a branded product goes generic, so the initial price was for generics will come out lower. You probably put this in detail, that in many products, you've seen in the past that branded price will be a little lower in Europe than here in the U.S. But actually, the generic price will be substantially higher in Europe than here in the U.S. So again, I think you're going to see a stronger push to use generics more quickly and more fully, in some of the markets in the past may have been slow-erosion markets.
And then, our final question comes from the line of Seamus Fernandez from Leerink Swann.
Seamus Fernandez - Leerink Swann LLC
Just a quick follow-up on the Effient versus the Brilinta situation. Can you just at least, in terms of the launch trajectory and the percentage share that you currently have of the incident ACS patient population, can you guys update us on that? I think earlier, you had given us an estimate of I think about 11% share at one point, and I'm just wondering where we sit today at least in the U.S. market on a relative basis.
All right. Seamus, we'll have Ronika to hear. You found some of the updated data?
Right. So you might remember, Seamus, we've gotten some excitingly so traction with regard to Brilinta over the last -- excuse me, with regard to proxy grow over the last couple of quarters. We've seen there as we've seeing quarter-over-quarter nice trends with our TRx. We're still seeing continued growth with regards to new to brand, which has been very impressive given where we are in the current launch. Right now, that exceeds about 13%. Again, we are seeing about 1 in 5 ACS patients, and STEMI type, specifically, are receiving Effient, which is pretty impressive. And so, we hope that, that traction continues. Again, we are seeing quarter-over-quarter growth in our NRx and TRx and are excited by this trend as doctors continue to accept and try prozigro [ph] or Effient.
With no further callers on the queue, I'll go ahead and turn over to Derica to wrap-up the call.
Well, let me conclude by first of all, thanking all of you for joining us for this morning's call and more specifically for your questions. We hope that the information we provided today is helpful for your investment of Lilly's financial performance and for our end of our future prospect. As always, the IR team will be available to answer any additional questions you may have. And I look forward to our continued dialogue, and I hope you all have a great day. Take care.
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