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Eli Lilly and Company (NYSE:LLY)

The 30th Annual JPMorgan Chase Healthcare Conference

January 10, 2012 7:00 pm ET

Executives

John C. Lechleiter - Chairman, Chief Executive Officer and President

Analysts

Christopher Schott - JP Morgan Chase & Co, Research Division

Christopher Schott - JP Morgan Chase & Co, Research Division

Good afternoon, everybody. Up next for you, it's -- we have Eli Lilly. A pretty exciting year ahead for the company, with the company getting past the first of the YZ years and with a pretty robust pipeline with a lot data coming, so looking forward to hearing more about the story.

John Lechleiter from Eli Lilly, the company's Chairman, President and CEO, will be presenting. And with that, I'm going to turn it over to John.

John C. Lechleiter

Thanks, Chris. Well happy new year everyone. Thanks to all of you for being here today. I'm delighted to be part of this outstanding conference once again on behalf of Eli Lilly and Company.

Let me remind you, as usual, that my comments will include forward looking information based on our current expectations. Our actual results could differ materially due to a number of factors, including those outlined in our latest 10-K and 10-Q filings with the SEC. The information we provide about our products and pipeline is for the benefit of the investment community. It's not intended to be promotional, and it's not sufficient for prescribing decisions.

A year ago, on the date that I spoke to this conference, we announced a global agreement with Boehringer Ingelheim to jointly develop and commercialize a portfolio of diabetes compounds in mid- to late-stage development. The agreement included 2 late stage oral blood glucose lowering compounds from BI, its DPP-4 inhibitor linagliptin and its SGL T-2 inhibitor, as well as 2 mid-stage basal insulin -- basal analogue insulin compounds from Lilly. I'm pleased to say that in the year since that announcement linagliptin, now called Tradjenta, has been approved for the treatment of adult Type 2 diabetes in the U.S., Europe and Japan, and it is already launched in 8 countries with more to follow.

The registration program for the SGL T-2 inhibitor, now called empagliflozin, is proceeding very well and will complete the first Phase III trials later this year. In addition, the 2 mid-stage basal insulins I spoke about last year are now in Phase III development. The BI alliance is a great example of the broad and aggressive effort we're making to meet the challenge of patent expirations over the next few years, the period we call YZ, and to set the stage for long-term growth.

Now I concluded my presentation here last year with a list of key events for 2011, and I'd like to provide an update on the progress we made during this past year using that identical slide as my report card.

We successfully launched Cymbalta for management of chronic musculoskeletal pain, which has contributed in important ways to Cymbalta's sustained double-digit growth, as well as Axiron for testosterone deficiency. We've been pleased with the uptake of Axiron since it was launched last spring. The most recent IMS data show we've achieved a 10% share of market in total prescriptions and that over 1 in 5 new patient starts are going to Axiron.

We gained regulatory approvals in the EU for BYDUREON and in the U.S. for Cialis for BPH and for Byetta in combination with basal insulin. However, we received complete response letters from the FDA for 2 molecules obtained through acquisitions, liprotamase and florbetapir. We've already responded to the FDA for florbetapir and expect FDA action in 2012.

In terms of submissions, we filed our response to the FDA for BYDUREON, as well as all 3 first-line SPLAs for Erbitux. The FDA has approved Erbitux for head and neck cancer, and decisions on the other indications are expected also this year.

Lastly, with regard to Phase III trials, we completed the duration 6 trial for BYDUREON, although we were disappointed that the trial did not achieve the results we had anticipated. We initiated Phase III trials to investigate mGlu2/3, now known as pomaglumetad methionil. Don't try that after 2 glasses of wine. We'll call it mGlu2/3 for schizophrenia, and as I noted earlier to investigate the use of the 2 Lilly basal insulins in diabetes.

We also initiated Phase III trials to study our Anti-IL-17 monoclonal antibody in psoriasis as the first potential indication rather than rheumatoid arthritis, which is shown on the slide here. With the addition of these molecules we have 12 potential new medicines in Phase III testing, surpassing our goal of having 10 molecules in Phase III by the end of last year. We're pleased with the substantial progress we made in advancing our pipeline in 2011, and we believe our current pipeline positions Lilly to launch a next wave of new products and to return to growth post 2014.

We also continued to deliver solid financial results in the past year as we headed into the Zyprexa patent expiration. Through the first 9 months of 2011, we saw the impact of known headwinds, including patent expirations that are lowering sales of Gemzar outside of Japan; U.S. healthcare reform, which exacted a higher cost in 2011 than it did in 2010; and near-term dilution from expenses associated with our strategic diabetes alliance with BI. While these headwinds negatively affected our results the third quarter, we again delivered strong underlying growth in the rest of our business. Excluding the items I just listed, we posted third quarter revenue growth of 15%, operating expense growth of 3% and non-GAAP EPS growth in the mid-20% range.

Through the first 9 months of 2011, in local currency or in performance terms, Cymbalta revenue grew 17%. Cialis grew 8%. Humalog and Humulin each grew 10%, and Forteo grew 11%. We also saw a strong performance in each of our countercyclical growth areas. Elanco Animal Health posted local currency revenue growth of 23%. And while a portion of this growth has been due to acquisitions, the majority has been from our internal efforts, and the organic growth alone continues to far outpace the overall animal health industry. In Japan, where we're the second fastest growing pharma company, we posted local currency growth of 21%. And even in a difficult environment, our emerging markets performance through September was strong with revenue growing 9% in local currency.

Now at the bottom of the slide you'll also find, for each, our corresponding reported revenue growth rates.

Now let me look ahead. I'll begin with a brief recap of the 2012 guidance that we announced last Thursday. Then I'll review our strategy to bridge the YZ period of patent expirations. And finally, I'll turn to our long-term innovation-based strategy for resuming growth coming out of this YZ period.

As we announced last week, our 2000 guidance -- 2012 guidance includes revenue of between $21.8 billion and $22.8 billion. This includes an expected decline of over $3 billion in Zyprexa sales due to patent expirations in most markets outside of Japan. We expect operating expenses in total, so that's the sum of SG&A and R&D, to be essentially flat in 2012 compared to 2011 even as we make the necessary investments drive growth in key patent-protected brands and countercyclical growth drivers, as well as to advance our Phase III pipeline. We anticipate earnings per share for 2012 of between $3.10 and $3.20.

Now looking a little further out to 2014, I want to reiterate once again that we're on track to meet or exceed the midterm financial targets we outlined last June. Our financial expectations for this period are the same today as they were then. During the YZ period, we expect annual revenue to be at least $20 billion, net income to be at least $3 billion and operating cash flow to be at least $4 billion.

Given our strategy, we will continue to have ample cash to meet our needs throughout this period. We will continue to pay the dividend at least at its current level. It's critically important to management, to our board of directors and our shareholders, and we have no intention of cutting it. We will repatriate around $5 billion per year, as we do now, through YZ and we'll use some of this cash to pay down $2.5 billion of debt maturing in this period.

The strategy we laid out last June for YZ is to continue to drive sales volumes of our currently marketed products, to take full advantage of our countercyclical growth engines, Japan, the emerging markets and our animal -- Elanco Animal Health business and to supplement our internal growth with business development, all the while improving productivity and thus, creating the capacity to fund our pipeline, a prerequisite for long-term growth.

Since 2004, we've been driving productivity improvements across all areas of our business. In 2009, we upped the pace of resizing our organization for the post-Zyprexa period, significantly restructuring everything from our senior management layers, to our support operations, to our sales and marketing organization. As a result of these efforts, we've improved gross margins and contained growth and SG&A and R&D spending. We met the goals we committed to reach by the end of 2011, reducing our expenses by $1 billion and reducing headcount by at least 5,500, excluding strategic additions from acquisitions, high-growth emerging markets and Japan.

Now let me turn to the period beyond YZ. As we look to the future, Eli Lilly and Company remains committed to innovation. Our company is not shifting its focus to generics or consumer products. We're not pursuing a big merger. We're committed to maintaining a productive investment in R&D through the current period of patent expirations, and we're keeping our focus on the keys to Lilly's long-term innovation strategy and ultimately to our success, and that is advancing our late-stage pipeline and sustaining the flow of innovation in the future.

In June at our investor meeting, we showed how we've closed gaps and replenished our late-stage pipeline. Let me now update you on some progress since then.

As I noted earlier, we now have 12 new molecular enemy -- entities. I hope they're not enemies. It's 4:00, okay. As I noted earlier, we now have 12 enemies, how's that, in Phase III. This is the highest number of molecules we've ever had in Phase III development. And the large majority of the molecules in our Phase III portfolio come with convincing Phase II clinical data. I'm pleased to note that 11 of the 12 assets shown here come from our own labs, including ImClone with a complementary mix of large and small molecules. We expect to complete several Phase III trials in 2012, including the TRILOGY study with Effient and ACS medical management; the Paramount and POINTBREAK studies with Alimta in nonsquamous, non-small cell lung cancer; and the 2 EXPEDITION studies with solanezumab for Alzheimer's disease.

Now let me briefly highlight a few molecules in this Phase III portfolio. We initiated 2 Phase III trials, EXPEDITION and EXPEDITION 2, for solanezumab in the second quarter of 2009. Recruitment of over 2,050 total patients proceeded ahead of schedule. Enrollment was completed in December 2010. The last patient visit will occur for both trials during second quarter of this year. The data monitoring committee meets on a quarterly basis and to date, has suggested no changes to the trials. The studies could be stopped for an unexpected safety concern or for futility, but cannot be stopped early based on apparent efficacy. The DMC will meet again later this month, and we plan to provide an update on that meeting in our fourth quarter earnings call on January 31. Let me reiterate that solanezumab is but one molecule, albeit a prominent one, in a large and diverse Phase III portfolio. Moreover, we have additional opportunities coming for Alzheimer's, including our oral base inhibitor, which could enter Phase II in 2012.

A second late-stage molecule, ramucirumab, our potential anticancer drug from ImClone, reached full enrollment in a Phase III breast cancer trial in November, 6 weeks earlier than expected. The trial of more than 1,100 patients at more than 200 sites in 23 countries evaluates ramucirumab combined with docetaxel versus placebo and docetaxel as a potential treatment for previously untreated patients with HER2-negative unresectable, locally recurrent or metastatic breast cancer. Beyond Erbitux, this was the first Phase III trial initiated of an ImClone molecule. It is 1 of 6 ongoing Phase III trials with ramucirumab as a single agent or in combination with chemotherapy in 5 different tumor types: liver, gastric, colorectal and non-small cell lung cancers, as well as breast cancer.

Ramucirumab is a fully human IgG1 monoclonal antibody antagonist designed to bind to the VEGFR-2 receptor and block relevant ligands from binding to the receptor. This is a different approach than that of currently approved VEGF pathway inhibitors, which either prevent ligand binding or act intracellularly to reduce VEGF receptor signaling. We believe this specificity of ramucirumab to the VEGFR-2 receptor may result in greater antitumor activity and could avoid off-target effects.

Our Anti-IL-17 monoclonal antibody began Phase III testing this past December. This molecule is being tested in adults with moderate to severe chronic plaque psoriasis. We presented initial Phase II data for Anti-IL-17 and psoriasis in a poster at the Gene to Clinic conference in London late last year, and we hope to publish a more complete set of Phase II data in a peer-reviewed journal in the near future. The first Phase III study will include about 1,300 patients with a randomized double-blind placebo-controlled induction period followed by a randomized maintenance dosing period and long-term evaluation stage. Additional Phase III studies investigating Anti-IL-17 use in moderate to severe chronic plaque psoriasis are scheduled to begin in 2012. We're continuing to evaluate the start of additional Phase III trials to study other indications including psoriatic arthritis and ankylosing spondylitis.

Yet another molecule that we expected to advance into Phase III testing in 2012 was our CETP inhibitor, Evacetrapib. We shared encouraging Phase II data on Evacetrapib at the American Heart Association meeting in November. Let me briefly summarize those results.

As you see here in our Phase II study, treatment with statins, shown on the black bars, led to a clear-cut reduction in LDL cholesterol or bad cholesterol, but only to minor effects on raising HDL cholesterol, the so-called good cholesterol. The Phase II results also showed that Evacetrapib, the red bars, in combination with 3 commonly used statins: Zocor, Lipitor and Crestor by brand name, substantially increased HDL cholesterol and also decreased LDL cholesterol both in a statistically significant manner. Although it's not shown here, Evacetrapib alone also demonstrated these effects.

This slide summarizes adverse events reported with Evacetrapib. In this 12-week study, administration of the molecule was well tolerated with a low rate of treatment-related adverse events or discontinuation of therapy. No increase in blood pressure was observed in Evacetrapib-treated patients, and no effects on mineralocorticoid and glucocorticoid activity were observed. We're pleased with and encouraged by these study results. In Phase III, a full safety assessment of Evacetrapib will be conducted with exposure to a much larger number of patients.

There's a growing body of knowledge, which indicates raising good cholesterol as well as lowering bad cholesterol may play a beneficial role in treating cardiovascular disease. Cardiovascular disease, as many of you know, is still the leading cause of death globally, and Lilly is committed to identifying potential new medicines such as Evacetrapib to address this significant unmet medical need. It's important to note that these Phase III studies will still take years to complete and that this is, again as you all know, a very competitive space.

The molecules I've highlighted today exemplify the progress we've made in building a robust high-quality mid- to late-stage pipeline with many potential opportunities to advance patient care and treat diseases with large unmet need as well as significant commercial opportunity. As outlined in our investment community meeting last June, we believe our current pipeline provides the foundation for Lilly to return to growth post 2014. This year, we'll begin to generate and disseminate important data that should better help you gauge our potential growth.

The second key to our long-term strategy, in addition to advancing the molecules in our current pipeline, is sustaining the flow of innovation into the future. The work of pharmaceutical innovation today must be all-encompassing. Indeed, the lesson of the recent past is that we cannot continue to do R&D the way we've always done it and expect to produce better results. We must apply creativity and resourcefulness at every phase of development. We must indent new ways of working. We must engage with strategic partners, who can expand the sphere of ideas and approaches.

In the past, I've described steps that we have taken to transform our company to reduce our cost structure, improve decision-making and create a clear line of sight from the lab to the patient. Today, I want to provide just a short mention as I conclude my talk on one aspect of transformation in Lilly research, and that's something we call Open Innovation Drug Discovery. This began life in 2009 as something called the Lilly Phenotypic Drug Discovery Initiative. This unique business model provides external scientists from either academia or a small biotech access at no cost to select phenotypic or targeted assay panels in exchange for the submission of compounds.

Since the beginning of the program through the third quarter of last year, 245 universities, research institutes and small biotechs representing 27 countries have become affiliated with the program. Researchers can access our Open Innovation Initiative through the website you see here. We've now received roughly 68,000 compounds uploaded into our database for evaluation. Of these, we've accepted roughly 43,000 for screening. Interestingly, we find that the vast majority are structurally distinct from those found in our own collection. Furthermore, a study of the first 5,000 compounds evaluated from the program found that in addition to structural diversity, very encouraging hit rates in all the assays studied, generally comparable to or superior to those seen with the Lilly library. We believe that the program significantly complements our internal compound collection. To date, we've signed deals with researchers at Notre Dame, UC Irvine and the University of Valencia in Spain.

As I close my talk, I'd like to highlight the following significant events looking ahead in 2012. We anticipate a number of U.S. regulatory actions, including FDA decisions on the fixed-dose combination of Tradjenta and metformin for Type 2 diabetes: Alimta as continuation maintenance therapy for patients with nonsquamous, non-small cell lung cancer; Erbitux, both in first-line non-small cell lung cancer as well as in first-line metastatic colorectal cancer; and Amyvid for the detection of beta amyloid plaque.

As I noted earlier, we anticipate beginning Phase III trials for our CETP inhibitor in 2012, and we also expect to complete a number of Phase III trials during the year. In addition to those I've mentioned earlier for solanezumab, Effient, Alimta and empagliflozin, we'll complete the first Phase III trials for dulaglutide or GLP Fc, as well as the Phase IIb trial of the JAK1/JAK2 inhibitor in rheumatoid arthritis, where we're partnered with Incyte. Pending the outcome of the JAK trial, our plan is to disclose both 3-month and 6-month data at medical meetings later this year. A number of these trial completions will likely generate public data disclosures during 2012 as indicated in the red text on the slide. We also expect important Phase II data disclosures for our Anti-IL-17 monoclonal antibody and psoriasis, as I mentioned earlier, and for our novel basal insulin analog for both Type 1 and Type 2 diabetes.

We're excited about 2012 and the opportunities we have to continue to advance our pipeline and to begin to generate and share data that will help investors better judge our growth potential post 2014. Thank you very much.

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