Eli Lilly Q2 2007 Earnings Call Transcript

| About: Eli Lilly (LLY)
Wall Street Breakfast

Eli Lilly (NYSE:LLY)

Q2 2007 Earnings Call

July 24, 2007 8:00 am ET


Phil Johnson - Executive Director of IR

Derica Rice - CFO

Jim Greffet - Manager of IR

John Lechleiter - President & COO


James Kelly - Goldman Sachs

Chris Schott - Banc of America Securities

Steve Scala - Cowen and Company

Bert Hazlett - BMO Capital Markets

Tony Butler - Lehman Brothers

Seamus Fernandez - Leerink Swann & Company

Jami Rubin - Morgan Stanley

Scott Henry - Oppenheimer & Company

Mario Corso - Summer Street Research



Ladies and gentlemen, thank you for standing by and welcome to the Q2 '07 earnings call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session, with instructions being given at that time (Operator Instructions).

As a remind this conference is being recorded. I would now like to turn the conference over to our host with Eli Lilly, Mr. Phil Johnson. Please go ahead, sir.

Phil Johnson

Good morning. And thanks for joining us for Eli Lilly and Company's second quarter 2007 earnings conference call. I'm Phil Johnson, Executive Director of Investor Relations, and I'm joined today by John Lechleiter, Lilly President and COO, Derica Rice, Lilly's CFO, and Jim Greffet, Manager of Investor Relations.

You can access the earnings press release and supporting materials, a live webcast and an Internet-based replay of this conference call at lilly.com. The replay and supporting materials will be available on our website through August 24th, 2007.

During this call, we anticipate making projections and forward looking statements that are based on Management's current expectations. But actual results may differ materially due to various factors.

For example, our results may be affected by competitive developments, the timing and success of new product launches, regulatory and legal matters, patent disputes, government investigations, government actions regarding pricing, importation, and reimbursement, change in tax law, acquisitions, business development transactions, and the impact of exchange rates.

For additional information about the factors that affect our business, refer to our forms 10K and 10Q. In addition, the information we provide about our products and pipeline is for the benefit of the investment community. It not intended to be promotional and it is not sufficient for prescribing decisions. Now let me turn the call over to Derica to discuss progress on our priorities.

Derica Rice

Thanks, Phil. We are very pleased with our second quarter results. To set the stage for our call this morning, I would like to highlight a number of trends in the business that reflect our progress in improving execution.

I will focus my comments on the pro forma adjusted results which we believe provide insights into the underlying trends in the business. This view assumed we owned ICOS as of January 1, 2006, and it excludes some items.

Phil and Jim will provide details on the specific items excluded as well as reconciliation between reported and pro forma adjusted results. Slide two summarizes achievements with financial result, key fundamentals and key product trends.

To begin, let me recap the financials. As a result of double-digit sales growth, improving gross margins, and prudent management of operating expenses, we have delivered pro forma adjusted earnings per share of $0.90 for the quarter, an increase of 25% over the second quarter of 2006.

Based on this performance, and the strength of the trends in our business, we are again raising our sales and earnings guidance for the year. I will provide the full guidance at the end of the call, but for earnings, we are raising the pro forma adjusted EPS guidance to $3.40 to $3.50, an increase of $0.11 from the prior guidance range.

Among our goals for 2007 are two important elements. First, improving volume trends, especially in the U.S. And second, growing sales at a faster rate than our costs. The second quarter shows good progress on both fronts.

On the first element, worldwide growth from sales volume in the quarter was more than double that from price. And we are seeing positive volume trends both in the U.S. and internationally.

On the second element, in Q2, total sales grew 14%, three percentage points faster than total operating expenses. We also achieved improvement in the gross margin percentage. Not only did this performance generate strong operating income growth of 26% in the second quarter, but it also gives us the capacity to make commercial and R&D investments to drive future growth.

Furthermore, our cash flow and strong balance sheet enable continued business development activities such as the Hypnion and Ivy acquisitions.

Before going further into these two areas let me provide a quick highlight of three key products, Cymbalta, Zyprexa and Humalog. Under John's leadership, the operational team is bringing a renewed focus and sense of urgency to our key brands.

We have positive news on all fronts. In the U.S., Cymbalta continues to show strong growth, consistently gaining both new prescription and total prescription market share. We are enthusiastic about the prospect for Cymbalta given the positive trends we have seen in our brand preference surveys in the first half of this year.

The initiation in Q2, a promotion of the DPMP indications to primary care physicians, and the upcoming submission in Q3 of Cymbalta for fibromyalgia.

For Zyprexa, we saw modest revenue growth in the U.S. and continued robust performance internationally. We settled additional product liability cases during Q2 and we continue to focus on the urgent need patient who can best benefit from Zyprexa's efficacies.

Based on performance through Q2, we now expect modest worldwide Zyprexa sales growth for the year. This outlook incorporates the expectation of generic competition in Canada and Germany.

Finally, during the second quarter, we submitted the application for the long-acting injectable formulation of Zyprexa in both the U.S. and the E.U. We believe that if approved this will be an important tool to aid dose administration and improve compliance.

For Humalog we are encouraged by recent share trends. Humalog gained new prescription share in the U.S. in all three months of the quarter. The sales force expansion announced in the first quarter has given Humalog a competitive share voice.

Our focus is to bring the most knowledgeable sales representatives to bear for our customers, and to be a partner in providing solutions for their patients with diabetes. We are demonstrating these solutions through innovative pen devices, patient centric materials to help them improve outcomes in their daily lives, and other tools and services to advance the dialogue between the doctor and the patient with diabetes.

As an example, consider patient education material. Historically, diabetes patient education materials were often pamphlets that many patients did not find particularly helpful. In fact, in many cases, they were not even read.

We are developing innovative materials that fit the patient's lives. We have already launched an engaging and formative DVD with more tools on the way. Similar to Q1, we saw improvement in Humalog brand equity scores in Q2.

We regard brand equity as a key leading indicator. This is a long fight which we are intent on winning and we are encouraged by recent trends.

Slides three and four provide some additional perspective on our key fundamentals. On the sales volume front, you can see at the top left of slide three that U.S. volume growth has been improving steadily since 2005.

In fact, volume growth has been positive since Q3 of 2005. The Zyprexa sales trend is allowing the continued strong volume growth of Cymbalta, Alimta, Cialis and Byetta to show through.

In the graph at the bottom right you can see that all of our major products contributed positively to the 14% pro forma sales growth in the second quarter.

Now slide four is a fairly complex slide but we believes it helps explain our strong Q2 performance. Because there is a lot of data here, let me take a moment and describe the graphics.

The underlying data reflects adjusted results for each year. In addition, the 2007 comparison to the first half of 2006 is based on a pro forma view, as if we owed ICOS for the entirety of both periods.

The line represents the gross margin percentage over time. The bars represent the spread between sales growth and OPEX growth. This spread is simply sales growth percent minus OPEX growth percent.

During the period in which sales is growing faster than OPEX, the bars are positive and vice versa. We have placed boxes around three separate periods to highlight three different trends.

First during the period of 2000 to 2003, gross margin percentage was eroding and OPEX was growing faster than sales. Second, during 2004 and 2005, sales grew faster than OPEX, but the growth margin percentage continued to decline.

Third, in 2006 and through the first half of this year, we have seen both improvement in gross margin percentage and a positive spread between sales growth and OPEX growth. This positive trend in both elements, gross margin percentage and the sales to OPEX spread, generated the significant growth in operating income in the second quarter.

These positive results reflect the numerous efforts we have put forth over the past several years. Including stemming the erosion of Zyprexa, accelerating the uptake of Cymbalta, changing the sales trend on Humalog, aggressively managing our head count and driving our productivity agendas, and increasing manufacturing efficiencies and implementing Six Sigma, amongst others.

At the end of this call, I will provide our detailed financial guidance, which incorporates recent trends and known issues such as generic competition, as well as investments we will be making to drive future growth. Now, let me turn the call to Phil and Jim to give a more in depth review of Q2 results. Phil?

Phil Johnson

Thanks, Derica. Slide five shows key events over the last three months. Several regulatory and pipeline achievements occurred. The European Commission approved Cialis for once-a-day use to treat erectile dysfunction.

The European Commission also granted approval to expand the Forsteo label to include the treatment of osteoporosis in men who are at increased risk of fracture. The label has also been expanded to include a statement that in postmenopausal women, a significant reduction in the incidence of nonvertebral fractures, but not hip fractures, has been demonstrated.

The United Kingdom, a national institute for clinical excellence or NICE reversed its previous ruling on Alimta reimbursement within the UK's National Health Service. NICE is now recommending Alimta for patients with advanced mesothelioma who are able to carry out daily tasks but for whom surgery is not appropriate.

Lilly submitted a new drug application in both the U.S. and EU regulatory bodies for approval of the olanzapine long-acting injection. Earlier this month, the last patient visit was completed in the TRITON study for prasugrel.

Efforts are now focused on processing and locking the database with the goal of presenting the data at the American Heart Association meeting in November and submitting to the FDA by year end.

On the legal front, in June, Lilly received notice of court rulings by the Canadian Federal Court and the German Patent Court that allowed the introduction of generic olanzapine by competitors into the Canadian and German markets.

As of mid-July, generic olanzapine is on the market in certain Canadian provinces. In business development, Lilly completed the acquisition of Ivy animal health, a privately held applied research and pharmaceutical product development company focused on the animal health industry.

Moving on toward the financial results for the quarter, worldwide sales grew 14% to $4.631billion. We will begin with a review of specific product sales performance and then discuss the other lines of the income statement.

Slide six shows worldwide Zyprexa sales increased to 9% to $1.213 billion. Sales in the U.S. increase 4% to $564 million due primarily to higher prices offset partially by lower demand.

International sales increased 14% to $649 million, due to increased demand and the favorable impact of exchange rates. As mentioned earlier, based on recent court rulings, competition from generic olanzapine is occurring in Canada and is expected in Germany.

While our practice is not to provide sales by product by country, given these rulings, we realize that investors need to understand Zyprexa sales in these two countries. For the year 2006, Zyprexa sales in Canada and Germany were approximately $250 million, and $180 million respectively.

Keep in mind that the rulings relate only to the tablet form of Zyprexa and not the Zydis quick dissolving wafer. Zydis represents between 1/4 to 1/3 of Zyprexa sales in these two markets.

Slide seven shows the progress made in stemming the erosion of U.S. Zyprexa volume. As you can see, total retail prescription volume is tracking closely with the prior year, much more so than in the past. As Derica mentioned earlier, based on this trend, as well as continued growth overseas, we expect modest Zyprexa revenue growth for 2007.

Moving to slide eight, Cymbalta sales in the second quarter were $520 million, up 67%, compared with the second quarter 2006. U.S. sales increased 70% to $458 million, due to strong demand. International sales totaled $62 million, an increase of 53% over prior year, and a 12% sequential increase over Q1.

Slide nine shows continued market share increases year to date for Cymbalta in the U.S. Cymbalta continues to gain share in both major depression and DPMP against its branded competitors.

Also in the long-term care segment of the depression market, Cymbalta has made significant share gains. During the second quarter, we expanded our DPMP efforts in the U.S., initiating detailing of this indication to primary care physicians.

This builds on the expanded promotion of DPMP as specialists and the promotion of the generalized anxiety disorder indications begun in Q1. As Derica mentioned, the significant gains we have made in Cymbalta's brand preference with customers reinforce the value Cymbalta offers patients with depression, DPMP and generalized anxiety disorder and positioned the product well for future growth.

We are optimistic about Cymbalta's potential in fibromyalgia and we plan to submit our application for this indication to the FDA during Q3. Phase III data will be presented at the international myopain society meeting in August. Jim.

Jim Greffet

Slide 10 shows worldwide Byetta sales for the quarter were $152 million, a 54% increase driven by demand. Lilly reports half of the gross margin from U.S. sales of Byetta plus sales of pen to Amylin. And total Byetta sales recognized in Lilly's income statement were $80 million, a 54% increase.

On slide 11, Humalog sales grew 12% to $358 million, reflecting increased volume in the U.S. and internationally, increased prices in the U.S. and foreign exchange rates. As Derica discussed earlier, we are making progress in the goal to reaccelerate the Humalog brand.

Slide 12 slows Humalog's new prescription share trends since January, 2005. Humalog gained new prescription share in each month of Q2, reflecting the support we're putting behind this brand.

On slide 13, Humulin sales for the quarter were up 10% to $243 million, driven primarily by higher prices in the U.S., increased volume outside the U.S. and the favorable impact of foreign exchange rates.

Slide 14 shows worldwide Cialis sales. Global sales were up 26% to $293 million in the quarter, reflecting strong global demand. Sales in the U.S. were up 17% to $110 million, while sales outside the U.S. increased 32% to $183 million.

In the U.S., Cialis continues to make solid share gains in a market where growth is moderating. International sales which represent over 60% of the total are growing robustly.

Slide 15 shows quarterly Forteo sales of $177 million, up 21% over Q2 of last year. U.S. sales were up 22% to $124 million. U.S. Forteo sales benefited from access to medical coverage through the Medicare Part D program and decreased utilization of the Company's U.S. patient assistance program. International sales of Forteo were up 19% to $54 million.

Moving to slide 16, Alimta sales in the second quarter were $207 million, an increase of 35% over Q2 2006. U.S. sales increased 22% to $107 million, due primarily to increased demand. Sales outside the U.S. were up 53% to $100 million, due to increased demand and favorable exchange rates.

Slide 17, shows the revenues from the products Lilly has launched this decade. Alimta, Byetta, Cialis, Cymbalta, Forteo, Strattera, Symbyax, Yentreve and Xigris. On a reported basis, sales of these products grew 61% in Q2, reaching 1.5 billion or 32% of our sales. On a pro forma basis these products grew 34%. Before looking at the rest of the income statement, let's look at the impact of price, exchange rates and volume on the sales results.

A summary by geography on a pro forma adjusted basis is shown on slide 18. For the quarter, Lilly sales growth of 14% was driven by a volume impact of 8%. A favorable price impact of 3%, and a favorable exchange rate impact of 3%. For your information, slide 19 shows the impact of price, rate and volume on a reported basis. For the quarter, Lilly's reported sales growth of 20% was driven by a volume impact of 14%, a favorable price impact of 3%, and a favorable exchange rate impact of 3%.

Now, let's look at the rest of the income statement. The acquisition of ICOS creates some complexities when comparing financial data across years. Consistent with the approach in Q1, we will provide multiple views of the results to facilitate analysis. Slide 20 provides a summary of these views.

The reported results for each year include all financial results as reported according to generally accepted accounting principles. Consequently, the impact of the ICOS acquisition appears in reported results as of the acquisition date. Up to and including January, 2007, reported results reflect our earnings from the Lilly ICOS joint venture in other income and deductions net of tax. Subsequent to the ICOS acquisition, so beginning in February, 2007, all ICOS and Cialis-righted revenue and expenses are shown in their respective lines of the income statement.

Another view of the results is being shown, pro forma adjusted. This view is intended to show the trends in our ongoing operations and to provide comparable data across years. The pro forma adjusted results reflect the reported income statement, adjusted to exclude charges such as the restructuring of our manufacturing operations, in the 2007 in process charges from the acquisition of ICOS, Hypnion and Ivy and the in licensing deal with OSI. Reported results are also restated using GAAP methodology as if Lilly owned ICOS for the entirety of each comparison period.

By incorporating the impact of the ICOS acquisition into both periods, we are better able to gauge performance across time. As we indicated in Q1, we will focus on pro forma adjusted results as we feel it provides better insight into the underlying trends in our business. For information we have provided a reported earnings statement on slide 21. Details about our reported earnings are available in our earnings press release dated today, July 24th, 2007.

Slide 22 shows the pro forma adjusted income statement. Gross margin as a percentage of sales in the second quarter was 78.4%, an increase of 80 basis points compared to Q2, 2006. This increase was primarily due to manufacturing expenses growing at a slower rate than sales, and higher prices, offset in part by the expense resulting from the amortization of the intangible assets acquired in the ICOS acquisition, and the impact of foreign exchange rates.

Overall operating expenses increased 11% in the quarter. SG&A was up 14% to $1.5 billion for the quarter. The increase was primarily due to increased marketing and selling expenses in support of key products, primarily Cymbalta and diabetes care. R&D expense grew 6% to $854 million, or 18% of sales. The increase was primarily due to increases in discovery and late stage clinical trial costs.

Slide 23 shows second quarter other income and deductions, which contributed $2 million, an increase of $13 million. The adjusted effective tax rate was 22% for the quarter. To help investors better understand the underlying trends in our business, slide 24 shows the adjustments made to reported earnings per share in order to arrive at pro forma adjusted earnings per share. To calculate pro forma adjusted earnings, Q2 2007 reported earnings has been adjusted for the $328.1 million in charges, for in process research and development, related to the acquisitions of Hypnion and Ivy. No pro forma adjustments are required to the Q2 results as we owned ICOS for the entire period.

The year-to-date 2007 reported earnings have also been adjusted for the following charges taken in Q1: $123 million for asset impairments, restructuring and other special charges, $328.5 million for in process research and development related to the acquisitions of ICOS and the in licensing agreement with OSI. Finally, year-to-date results are adjusted to show the pro forma impact as if we owned ICOS for the entire period. Now, let me turn the call back to Derica to update you on our financial guidance.

Derica Rice

Thanks, Jim. Slide 25 provides a summary of financial guidance on a pro forma adjusted basis. As I mentioned in my introductory remarks, we are raising our sales and earnings guidance for the full year 2007. Specifically, we now expect sales growth in the low double-digits. Consistent with prior guidance, gross margin as a percentage of sales is expected to improve slightly compared with 2006.

We are also raising operating expense guidance, and expect total operating expenses to grow in the low double-digits, as we make investments to drive future growth. We continue to expect other income to contribute less than $100 million, and we anticipate the effective tax rate to be approximately 22%. As I mentioned earlier, we are raising pro forma adjusted earnings per share guidance to $3.40 to $3.50 per share, from our previous guidance of $3.29 to $3.39 per share, an increase of $0.11. We expect continued strong cash flow in 2007 and capital expenditures of approximately $1.1 billion.

For the third quarter of 2007, we expect EPS of $0.85 to $0.87. On the guidance front, we are also planning a change in our guidance practices. Beginning in 2008, we will no longer provide quarterly EPS guidance. We will continue to provide yearly EPS guidance, supported by guidance for line items such as sales, gross margin, operating expenses, tax rates and capital expenditures. We will update guidance when we announce quarterly results and as necessarily through the year. Based on our research, the approach is more consistent with our pharma peers and still provides an appropriate level of detail to our investors. This concludes our financial review for the second quarter and we will now take your questions. John is here to address operational execution, I can respond to financial questions, and Phil and Jim will back us up. Operator, first call please.

Question-and-Answer session


(Operator Instructions) And our first question comes from the line of James Kelly of Goldman Sachs. Please go ahead.

James Kelly - Goldman Sachs

Thank you and good morning. My question relates to Zyprexa and the depot formulation, and thank you for the additional data in Canada and Germany. How do we think about the potential for this indication, I'm sorry, for this formulation to potentially address some of the concerns in foreign markets? Thank you.

John Lechleiter

Right now Jim, as you know, we just filed in both the U.S. and Europe for the depot formulation in the second quarter. We believe that it will provide additional opportunity for us, particularly in those settings, where we know there are patients who have great difficulty complying with the daily oral therapy. I think at this point, it's very difficult to provide a precise answer in terms of whether the extent to which the depot would compensate for the loss of the oral form.

I think it's important to keep in mind, and I think we mentioned in the call that we still have the Zydis, the rapid, the kind of wafer, the dissolving wafer form, oral form of Zyprexa protected in both of those markets so we are going to continue to try to hold our ground there with the oral as we launch the depot subsequent to our hoped for approval.


All right thank you. Our next question comes from the line of Chris Schott of Banc of America Securities. Please go ahead.

Chris Schott - Banc of America Securities

Great. Thank you. Just two quick questions. Good to see you got some pretty strong volume gains this year but what's interested in that 8% price gain you're seeing in the U.S. market, is this still some benefit from M&A and I guess can you comment specifically on the U.S. Zyprexa, kind of U.S. year-over-year price versus volume trends?

Again, it seems like you're getting a strong price benefit? Any moderation expected for that in the second half of the year? Second question is for Derica. Obviously you've taken on a little bit of debt here with the ICOS acquisition and was interested in just your thoughts about increasing the Company's balance sheet leverage, whether that would be share buybacks or acquisitions, and just what's your appetite for that? Thank you.

Derica Rice

Okay Chris, this is Derica. Let me try to respond to both of your questions. Regards to Zyprexa in the U.S., in regards to the second quarter and the overall 8% price, yes, we still saw some benefit from the M&A pricing benefit, that is, in the second quarter results specifically in the U.S. that's a part of the 8% price improvement. We still expect, however, that as we continue throughout the year that the pricing benefit for M&A will continue to dissipate as we do a full year comparable.

So in the second half of this year, we think that the pricing impact in terms of growth will become more negligible. Secondly, in regards to Zyprexa, which is a key part of that, we know that with the adoption of the M&A, part of this is driven by the mix of patients on Zyprexa between Medicare and Medicaid. And obviously, as that works itself through as well, then we expect to see the pricing benefits to Zyprexa which is a part of M&A to dissipate as well in the second half.

On your second question regarding our capital structure, and given the strength of the balance sheet and the improving cash flows that we're seeing, Chris, yes it is something that we are considering in terms of going forward. Would we potentially lever up our balance sheet more than we have today?

As you are aware, we did take on $2.5 billion of debt associated with the acquisition of ICOS. As John stated and as you've heard many of us say before, that as we look to pursue business development opportunities more aggressively, clearly that is the first cause that I would look to utilize the leverage in my balance sheet, obviously as well to compliment any additional internal opportunities we have in regards to additional R&D efforts in terms of projects under development.

And in the absence of both of those opportunities, meaning that we have fully exhausted all of those, then yes, we may consider other opportunities to lever and potentially we would look to give some of the cash back to the shareholders, as we look to build cash over the next few years.

Phil Johnson

Okay next caller, please?


Thank you. Our next question comes from the Steve Scala of Cowen. Please go ahead.

Steve Scala - Cowen and Company

Thank you. I have two questions. First, if we take the midpoint of your Q3 and full year guidance, it implies Q4 earnings will be flat year-over-year, I think. Why will it be flat? Can you remind us of the reason? And secondly, what is your latest thinking on the timing of presentation of the [Timmy 38] data?

Lilly said previously that it would have the [Timmy 38] data during the summer. So what is your latest thinking on issuing a press release with the top line results perhaps in August or September and then presenting it at a later time? Thank you.

Derica Rice

Okay, Steve, this is Derica. I'll take the first question and I think Jim will field the second question. In regards, if you're looking at our first half performance, and I think you're simply stated your question is if you look at our first half then why are we not seeing the similar output in the second half. As I talked about in some of my opening comments, there is really three factors that's driving kind of the differing performance in the second half versus the first half.

We expect to see on the positives continued volume trends in the second half similar to what you've seen in the first half. So that's, and we're very encouraged by the base operating trends that we're seeing so we don't anticipate that dissipating through the next six months.

There are however, three factors, three additional factors that will occur in the second half that wasn't present in the first half. First of all, we will deal with the expectation of generic competition for Zyprexa in both Canada and Germany, and we provided a reference that, and you guys can to support your own internal analysis, our Zyprexa sales in 2006 in Canada was approximately 250 million, and in Germany, it was approximately 180 million. So as we expect to see that competition ramping up in the second half, you can see what type of, what the erosion curve may look like.

Secondly, we also have the, in the second half which we did not have in the first half, the impact of regularly scheduled maintenance shutdowns in terms of our manufacturing operations, at some of our key parental operations. And that will occur in the July/August time frame and we expected it also to occur in the December time frame. So that will obviously have a more negative impact on our gross margins versus what you saw in the first half.

And thirdly, as we looked at the improving performance trends in terms of our baseline operations it does give us the opportunity to make some additional investments both in R&D efforts, in regards to resourcing additional R&D projects, as well as continuing to beef up some of our commercialization efforts, and to make those types of investments otherwise where we wouldn't have had the capacity without the conclude performance. And we've seen where that can have a positive impact such as what we did in the first quarter of last year, where we start, of 2006, where we began to increase our investment behind Cymbalta with also with the branded with the ads and then you've seen us follow on with that with the first quarter this year with the expansion of our diabetes sales force in the U.S. and increasing that footprint by 40%. So as we continue to see those type of opportunities, where we think we can drive further growth in our business, we will look to make those types of investments.

Jim Greffet

Steve, it's Jim, I will take a shot at the TRITON study. So as we mentioned in our prepared remarks, the TRITON [Timmy 38] head-to-head Phase III study of prasugrel versus Plavix has now had the last patient visit and we're working full force on processing all the case report forms locking the database to be able to derive the results from the study. Our desire is to have the full data set come out at the American Heart Association meeting in November. It 's not lost on us that this is fairly important data point for our investors and I think our messaging has been pretty clear here. That when we have the results we'll take stock of where we are in the calendar.

The desire would be to fully leverage the prestige of the American Heart Association and have the debut come out at that meeting. However if we have the results well in advance of the meeting or if we have the results as we're crossing an earnings call for example or a quarterly filing, then we'll need to take a hard look at where we are and make a decision accordingly. So at this point it's probably premature to say we will or we won't issue a press release, but we're certainly appreciative of the importance of the data and we'll make sure that it comes out in an appropriate and as timely manner as we can.

Phil Johnson

Next caller please.


Thank you. Our next question comes from the line of Bert Hazlett of BMO Capital Markets. Please go ahead.

Bert Hazlett - BMO Capital Markets

Thanks. I have two questions. My first is on Zyprexa LA. When should we see data for that? And could you remind us, if you expect any material advantage, compared to the Zyprexa, oral form, other than dosing with that product?

And then secondly, could you just discuss some of the market dynamics you're seeing in diabetes. You've successfully reinvigorated Humalog or maintained growth there certainly, but Byetta on a week-to-week basis seems-- the growth seems to be slowing a bit. Is there some effect from the DPP4's that you're seeing or is there something more that we should be aware of? Thanks.

John Lechleiter

This is John Lechleiter. I think with respect to the Zyprexa LA, I think the advantage there is going to be the once monthly, the four week, every four week format, and the opportunity we have to really do a better job helping many patients who for one reason or another are not able to achieve successfully daily oral medication. Recall from the [KD] study, this is a chronic disease, it requires ongoing therapy, but the average length of treatment was something like nine months, as we looked across the current oral medication so we think there is a significant need here.

I think we've been pretty clear so far as we talked about the limited amount of information we've provided, and we don't expect to see differences in terms of other kinds of performance characteristics of the product delivered in this format, versus the oral product. In terms of data presentation, Jim…

Jim Greffet

Yes we think the early part of next year so we don't anticipate the data coming out from our Phase III studies until the early part of next year. We want to make sure we get the package before the agency did a review and given the competitive space, we're going to keep that data under wraps for a little while, probably the early part of next year.

John Lechleiter

In terms of your question about Humalog, clearly, there are patients who would have been candidates to start on a starter insulin who are certainly now considering Byetta or who have Byetta as a treatment option. Nonetheless, obviously this is a progressive disease and we expect as physicians and patients opt for tighter control of blood sugar which we know is absolutely key to treating the disease and preventing long term complications, that there's still a great opportunity here with Humalog and with the Humalog mixture.

So we're going to continue to be very competitive in this space, introduce new delivery devices to improve the quality and caliber of our interaction with the physician health care professional to be helpful for patients and to continue hopefully also to gain share with the Humalog family.

Jim Greffet

I was going to say Bert just on Byetta as well, just two things, one remember with the sales force expansion that we announced in the first quarter, we've actually increased for Byetta alone the volume of interactive respirations by 30%, compared to the fourth quarter of last year. Secondly, if you look at our message on Byetta, it continues to be around the same glucose control with the secondary benefit of weight loss. Taking all of those two into account, if you look at the actual results that we're seeing with Byetta, one we continue to see market share gain for the quarter, in both new prescriptions and total prescriptions.

Secondly, if you just went down, and we worked through a lot of the inventory, the sampling issues that we had last year, we've actually seen double-digit growth in the 10 micro milligram prescription. So we're actually encouraged by the resurgence of the growth trends that we've seen in both of market share appreciation and the overall growth profile, versus what we were seeing in the second half of 2006.

Phil Johnson

Bert I'm sorry, we got the wrong product. Next caller, please.


Thank you. Our next question is Tony Butler from Lehman Brothers. Please go ahead.

Tony Butler - Lehman Brothers

Yes, thanks. Three brief questions. Number one, Derica, could you update us on some of the expansions in the facilities for pens and I believe for insulin and where those facilities may be in progress?

And second, the planned shutdowns, I've heard you and/or Lilly make comments about planned shutdowns in the past, and while I understand them, I'm curious if you could expand a little bit further, what are all facilities shut down or one or two and is this a rolling process?

And really it applies back to Steve's question on gross margin for the remainder of the year. And thirdly, John, there has been some shift in volume demand for Zyprexa and I'm curious, as you've gone out on the road and spent time with physicians, well, with reps and thus physicians, if you could comment on how there has been or if there is any change in the dialogue between that rep and that physician as it relates to Zyprexa from say a year or even two ago? Thank you.

John Lechleiter

Tony, I'm going to take a stab. This is John. I'm going to take a stab at all three here and Derica may want to comment a little bit on the gross margin in particular. First of all, we announced, as you know last year, our decision not to complete construction of a facility that we had under way to help us manufacture pens in Virginia. Instead, we're going to add whatever incremental capacity we need to add to help us manufacture more pens and to continue to be very competitive there within our existing facilities. We also use several contractors to do sub assembly and I think we've got a reasonable network in place that will allow for continued expansion of insulin and other products delivered in this format going forward.

As far as plant shutdown goes, we oftentimes will shut down our plants in Europe, for example, in the summer July forward, it's not usual for us to also shut down a plant for planned maintenance, et cetera. These would be normal occurrences. Later in the year, in December, for example. So with that in mind, we've -- looking ahead to the second half of the year, while we expect to see gross margin improvement over 2006, we're not going to continue to see the sort of expansion that characterized the first half of the year.

As far as Zyprexa goes, our approach has been very consistent, Tony, through obviously a challenging period for Zyprexa in the U.S. the past several years. Our message to physicians around the urgent patient, the use of using Zyprexa for the people who stand to benefit most from the product, and for whom the balance of efficacy and the side effect profile are favorable, continues to really resonate, and I think physicians understand the benefits Zyprexa can offer those patients and I think as a result, we're seeing moderation in what had been a declining trend. Any other comments, guys, on the gross margin side?

Phil Johnson

Tony this is Phil. Real quick on the gross margins, we also expect in the second half of this year to bring online capacity for the Zyprexa long-acting injectable formulation and we'll see additional expenses from that capacity we do not have in the first half of the year. Derica?

Derica Rice

Well just recognize, Tony that when we talk about our planned maintenance shutdown, these are for preventative maintenance and also think about how we actually do manufacturing in the pharmaceutical business versus others where we tend to campaign, so we won't-- so it's not like we can -- some of our manufacturing process, you can't stop midstream because of the chemical nature of it. So we tend to have very discrete points where we will conclude operations to do the preventative maintenance type work if necessary.

Jim Greffet

It's Jim, let's just go ahead and back through the cycle so we get all four of us chiming in on one question. There's one other thing on the dialogue on Zyprexa that's probably bears mentioning, and that's brand equity scores. We run brand equity evaluations on most all of our major products twice a year or so.

And for a long period of time if you look at the attributes and the brand equity scores the number of negative attributes coming from our customers on Zyprexa exceeded the number of positives actually. Over the past six to 12 months we've seen that switch and now there's a greater predominance of positive brand equities score coming from our customers on Zyprexa than negative, we think that is a lot to what John had said on the urgent need and the crisp dialogue we have between our reps and doctors. That's probably the best proxy for the changing tides in the way that the interaction is going right now with our customers in that space, we feel pretty good about it.

Phil Johnson

Next caller please.


Our next question comes from the line of Seamus Fernandez of Leerink, Swann. Please go ahead.

Seamus Fernandez - Leerink Swann & Company

Thank you very much. Just a quick question. Can you just update us on the impact of rebate accruals related to Medicare and Medicaid, and how we should be thinking about that? You have you identified the magnitude of the potential earnings impact in your 10Q and I was just wondering if you could give us your thoughts on how we should be thinking about that in the subsequent quarters coming up, and if that will be any form of a contribution in 2008? Thank you.

Phil Johnson

Seamus, this is Phil. Essentially what we saw with the M&A last year, an implementation was really quite an unusual occurrence and led to some pretty significant shifts in where our business was being generated from. We had to estimate that at that point in time without the actual data, obviously, in hand. As we received that data from Medicare/Medicaid, sort of three to six months after the fact and the dust settled, we could clearly see that in the second quarter of last year we actually had a much different shift than we had anticipated, and if we would have had the actual data in realtime, would have made a smaller sales discount accrual.

So essentially for the first half of the year, things worked out fine, but in the first quarter, we had a little different dynamic than in the second quarter. This is leading essentially to this additional, as the earlier caller had asked, incremental pricing benefit over and above the list price.

So the 8% we're seeing for the quarter in the U.S. is impacted in addition to list price increases by the issue of the comparative 2006 where we're having to make these estimates, I think (inaudible) and others have mentioned in their calls were very difficult to make at the time given the significant share shift. So with the best knowledge we have right now, we could say that the first half of the year, we would see residual benefit from M&A on the pricing front, that should dissipate and be relatively negligible in the second half of 2007 as well as in 2008. Does that get to your question? Next caller please.


Our next question comes from the line of Jami Rubin from Morgan Stanley. Please go ahead.

Jami Rubin - Morgan Stanley

Thank you. Along the lines of prasugrel, I was just wondering if you could comment on how you plan to provide headline data on Byetta LAR, if again are you waiting for a medical meeting? Or is this something that you could issue in a press release sometime this fall? And secondly, what are your European -- what is your European regulatory strategy with respect to LAR? If you could comment on that as well. Thanks.

Jim Greffet

Jami, it's Jim. On the Byetta LAR data, we've said that we will have a readout of that study in Q4 of this year. If you use -- this isn't a commitment but at least is a reference point. If you look at how the Phase II data was released, there was a press release in the latter part of the year with the top line results of the Phase II and then the full data set was released at the American Diabetes Association meeting the following June.

That's probably a decent proxy for the approach that we might use here. We have said that the data will come out so I would anticipate that given that there aren't any I think major medical diabetes meetings in the back part of the year, we'll put it out in some sort of a press release or conference call, depending on the time of the data.

The EU regulatory strategy, we haven't talked about in great detail yet. Recall in our contract that Amylin, Lilly is responsible for the filings outside the U.S. We're excited about the opportunity and we'll make sure that we move as quickly as we can. Stay tuned, as we get farther along in the process, we'll give more clarity on what the timing is.

Phil Johnson

Next caller please.


Our next question comes from the line of Scott Henry of Oppenheimer. Please go ahead.

Scott Henry - Oppenheimer & Company

Thank you. I just had a couple of questions on the pipeline. First, on the Zyprexa depot, how should we think about the review times in the U.S. and outside the U.S., as well if, if you could comment on manufacturing, are you comfortable with capacity? And should I assume there will be an inspection prior to approval?

John Lechleiter

I think with respect to review times for depot, we announced obviously that we filed in the second quarter, I think it's reasonable to think in terms of standards-- what you might call standard review times in both the U.S. and the [EFDEU]. With respect to manufacturing, we have been building a new capacity now for several years, that will enable us to manufacture the product both the powder and the formulated product.

As Derica mentioned earlier, it's our intention to begin to bring those facilities online, later this year, we believe we have capacity that is very adequate for what we believe the anticipated demand for the product will be.

Phil Johnson

Next caller, please?


Our final question comes from the line of Mario Corso of Summer Street Research. Please go ahead, sir.

Mario Corso - Summer Street Research

Yes, thanks for taking me question. On the Zyprexa depot are you at all concerned that this opens the door for labeling discussions and the fact that the discussions could move in the direction away from class labeling? I know, my understanding is that all the manufacturers were asked for cholesterol and metabolic side effect data probably over a year ago, so I'm wondering where you think that whole class labeling issue stands at this point? Thank you.

John Lechleiter

I think whatever consideration the FDA is giving, and what it always does, which is to review data on all the products in the class on an ongoing basis, I think that would be independent of our filing of the Zyprexa depot. And as such, I don't see in this filing any triggers for action that the FDA would not consider under what you might call ordinary circumstances, it just continues to stay abreast of all of the data for all of these products in the category.

Derica Rice

Okay. Well, I think that that will be the last question we'll take this morning and this is Derica and I just wanted to say thank you for your time this morning. We hope that this hour has been helpful in understanding our performance for the second quarter and our outlook for the remainder of the year. And John Lechleiter, perhaps you would like to make some summary comments.

John Lechleiter

Thanks, Derica. And thanks to everyone for joining us this morning. We aim to be-- to continue to be delivering on our priorities with the solid financial performance we reported in the second quarter which included strong sales volume and operating income growth. We've again increased financial guidance for 2007. We're investing in the business to drive future growth.

We have increasing cash flow and a strong balance sheet which gives us the flexibility to execute on our business development strategy. The pipeline is progressing well. There are a number of important pipeline catalysts in 2007, including the advisory committee meeting today, and the FDA action date later this year for Evista for breast cancer risk reduction. The expected submissions of Cymbalta for fibromyalgia and prasugrel for acute coronary syndrome with PCI, plus a readout of results from the Byetta LAR study. The earlier stage pipeline is robust, with a mix of novel approaches, as well as established mechanisms of action. (Audio cut out. Technical difficulties.)

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.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!