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Eli Lilly & Co. (NYSE:LLY)

Q3 2007 Earnings Call

October 18, 2007 9:00 am ET

Executives

Phil Johnson - ED of IR

John Lechleiter - President and COO

Derica Rice - CFO

Jim Greffet - Manager of IR

Analysts

Roopesh Patel - UBS

Jim Kelly - Goldman Sachs

David Risinger - Merrill Lynch

Chris Schott - Banc of America

Tony Butler - Lehman Brothers

Jami Rubin - Morgan Stanley

Steve Scala - Cowen

Scott Henry - Oppenheimer

John Boris - Bear Stearns

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2007 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions and answers and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Phil Johnson with Eli Lilly & Company. Please go ahead, sir.

Phil Johnson

Good morning. And thanks for joining us for Eli Lilly & Company's third quarter 2007 earnings conference call. I'm Phil Johnson, Executive Director of Investor Relations and I'm joined today by John Lechleiter, Lilly's 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 web cast and an Internet based replay of this conference call at lilly.com. The replay and supporting materials will be available on our website through November 19th, 2007.

During this conference 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, governmental 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 10-K and 10-Q.

In addition, 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 decisions.

Now, let me turn the call over to John to discuss progress on our priorities.

John Lechleiter

Thanks Phil. We are very pleased with our results in the third quarter. Before we go into the detailed results for the quarter, let me provide an overview of some key themes. 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 assumes we owned ICOS, as of January 1, 2006 and it excludes some items. Later in the call, Phil and Jim will provide details on the specific items excluded, as well as reconciliations between reported and pro forma adjusted results. Consistent with our approach in earlier calls this year, slide two summarizes achievements with financial results and fundamentals. To begin, let me recap the financials.

Third quarter sales again, grew by double-digits, and at a rate faster than our operating expenses, resulting in pro forma adjusted earnings per share up $0.91, an increase of 18% over the third quarter of 2006. Considering these results and underlying trends, we are again raising our earnings guidance for the year. We will give the full guidance at the end of the call, but our revised pro forma adjusted EPS guidance is increased $0.05 cents from the top end of the prior guidance to a range of $3.50 to $3.55. This would represent growth of 16% to 17%.

Let me visit two key fundamentals; sales volume trends and the growth in total sales, compared to the growth in operating expenses. We have solid delivery on both in the third quarter. Strong volume trends continue and worldwide growth from sales volume in the quarter was 8% versus 2% from price. I’ll show more detail in a minute, but the sales volume growth we posted in the second and third quarters is the best we’ve seen since the year 2001.

Regarding operating leverage, in the third quarter total sales grew 13%, two percentage points faster than total operating expenses. As we called out in the second quarter call, we did see a decline in the growth margin percentage because of scheduled plant shutdowns in the third quarter.

Nonetheless the leverage we generated at the operating expense line drove operating income to grow faster than sales. Finally the MacroGenics deal announced this morning underscores our commitment to use strengthening cash flow to acquire promising technology from outside the company.

Slide three, shows how volume and price have contributed to our worldwide sales growth since 2000. The 2007 comparisons use the pro forma adjusted results and we have also adjusted for the sunset provisions for the Actos contract in the U.S. So the volume growth for 2006 and 2007 here is slightly higher than the all in view shown elsewhere in our materials.

However we believe this is a comparable view overtime to illustrate the trend. As I indicated earlier the volume growth for the second and third quarter of 2007 is greater than all the periods back to 2001. Further more in the third quarter you can see that volume dominates the picture and contributes four times more than price to our overall sales growth.

On the price front, note that the impact of price has been in the 2% to 3% range for most years. It bears noting that the blip in 2006 and the first half of 2007, includes the effect of MMA. As we indicated in past calls we believe that by the third quarter this year the effect of MMA is incorporated. So year-on-year comparisons no longer show the additional price benefit.

Slide four, provides additional detail on volume trend. The 8% total volume growth is the strongest it has been in some time and all of our key products are contributing. The graph on the right shows the relative contribution of each product to the overall volume growth. As an example of how to read the graph; Cymbalta contributes 4.4% of the 8% total volume growth, Alimta contributes 1.2% and so on.

Cymbalta is an important contributor to overall volume growth and we have yet to launch in several of the major OUS markets such as France, Canada and Australia. Beyond Cymbalta several other products are growing very well relative to their size. Alimta and Byetta volume grew more than 30% in the third quarter and Cialis grew in the mid-teens. In the U.S. we are very pleased with the strong volume growth of Cymbalta, Alimta and Cialis, but we are also focusing on accelerating the trends on other key brands like Byetta, Humalog and Forteo.

Volume trends are also strong internationally and our international operations are now almost 50% of our sales.

Slide five, is an updated graph that we first showed in our second quarter call. The 2007 data is now year-to-date through September. We call that the line represents the gross margin percentage over time. The bars represent the spread between sales growth and OpEx growth. This spread is sales growth percent minus OpEx growth percent. During periods in which sales is growing faster than OpEx, the bars are positive and vice versa.

Our third quarter results continue the trend we highlighted last quarter, while we saw an expected decline in gross margin in the third quarter, our year-to-date gross margin remains an improvement from last year. Furthermore, we continue to see a positive spread between sales growth and OpEx growth. This trend is in contrast to the other period shown, in which either or both of the elements, gross margin or sale to OpEx spread, were not contributing to accelerated income growth.

Keep in mind that we will make investments in our key brands. So the relationship of sales growth to OpEx growth may vary in individual quarters. However, as we have done over the past few quarters, our intent is to continue to grow sales faster than costs and expenses. These positive results reflect the numerous efforts we put forth over the past several years, including the stemming of the erosion of Zyprexa, accelerating the uptake of Cymbalta, changing the sales trend on Humalog, maximizing other growth drivers, like Alimta, Cialis and Byetta, aggressively reducing global headcount, increasing manufacturing efficiencies and implementing Six Sigma.

Before Phil and Jim provide the details of our third quarter results, let me give a quick update on three of our key products. In the U.S., Cymbalta continues to show strong growth, gaining both new prescription and total prescription market share. With the start of the Fall TV Season, we have launched a new DTC campaign continuing the successful depression hurts theme.

Cymbalta is now under review by the FDA for fibromyalgia, what we hope would be the fourth indication for this best in class molecule. On the access front, Cymbalta had solid tier-2 unrestricted access on commercial formularies. On part with or even better than our branded competitors, our market research has recently identified that Cymbalta's formulary access is better than many positions perceive it to be. With the significant number of generic options in the antidepressant category, formulary access is an important factor in the prescribing decision. Having identified this perception gap, we are communicating the broad tier-2 coverage to positions so that this perception is not a barrier to use.

For Zyprexa, we saw modest revenue growth in the U.S. and continued robust performance internationally. Based on performance through the third quarter, we continue to expect modest worldwide Zyprexa sales growth for the year. In the third quarter, we saw generic competition enter the market in Canada, but we have not yet seen generics on the market in Germany. For our planning, we are assuming generic competition in Germany in the fourth quarter. Throughout the world our focus remains on the urgent need patient for whom the balance of Zyprexa efficacy and tolerability is optimal.

Reinvigorating Humalog in the U.S. remains a top priority. The battle for market share is a month-by-month fight, but we remain confident in our strategy and our ability to grow Humalog market share. Let me be clear, we are not where we want to be with Humalog in the U.S. But the story is much better now than a year ago and the gains we've made this year, including continuing positive progress and leading indicators of performance demonstrate our focus and commitment to winning in this highly competitive market.

Providing value to customers starts with innovative therapy options and we are leading the industry with new insulin pens. We launched two reusable pens earlier this year, and we are pleased to announce the FDA approval of our third new pen, a next generation pre-filled device called the KwikPen that we'll launch in the U.S. in early 2008.

Product innovation is only part of the equation. We believe our focus on providing solutions beyond therapy alone, such as superior disease education and a new customer centric approach to form a true partnership with physicians will differentiate LillyDiabetes in the market and contribute to growth for Humalog.

We are encouraged by improvements in several leading indicators, including brand equity scores. For the third consecutive quarter Humalog brand equity score improved relative to competitors. We've seen our biggest gains in two areas, quality and innovation of delivery devices and overall brand preference for Humalog, which has been increasing throughout the year compared to competitive meal-time products.

Beyond the U.S., Humalog is performing well internationally. In the third quarter, Humalog showed volume growth in all of our top nine OUS markets. Italy and Mexico had volume growth in excess of 30%, Japan volume grew more than 20% and the UK, France, Spain and Canada were in the high single low double-digits.

Now, let me turn the call to Phil and Jim to give a more in depth review of third quarter results. Phil?

Phil Johnson

Thanks, John. Slide seven, shows key events over the last three months. On the business development front we announced this morning that Lilly will acquire the exclusive rights to teplizumab, a humanized anti-CD3 monoclonal antibody from MacroGenics. In addition, the two companies have entered into a global strategic alliance to develop and commercialize teplizumab as well as other potential next generation molecules for use in the treatment of autoimmune diseases. Teplizumab is currently being studied in the PROTEGE trial, a global pivotal Phase II/III clinical trial for individuals with recent-onset type 1-diabetes.

We also had several regulatory developments. In September, the U.S. Food and Drug Administration approved Evista for a new use to reduce the risk of invasive breast cancer in two populations; postmenopausal women with osteoporosis and postmenopausal women at high risk for invasive breast cancer.

In September, the U.S. Food and Drug Administration approved a new pre-filled insulin pen, KwikPen that will be available with any of the Humalog formulations. Launch is expected in early 2008.

In August, we announced the submission of a supplemental new drug application to the U.S. Food and Drug Administration for Cymbalta for the management of fibromyalgia.

In September, we announced the submission with the European Medicines Agency for centralized review of Alimta, in combination with cisplatin, for the, for the first-line treatment of advanced non-small cell lung cancer.

In October, as a part of ongoing discussions with the U.S. Food and Drug Administration, Lilly updated the Zyprexa and Symbyax U.S. product labels. Specifically, the changes include new warnings for weight gain and hyperlipidemia and updated information in the warning for hyperglycemia. The label also states that while relative risk estimates are inconsistent, the association between atypical anti-psychotics and increases in glucose levels appears to fall on a continuum and olanzapine appears to have a greater association than some other atypical anti-psychotics.

Also in October an upcoming update to the Byetta U.S. label was announced. The precaution section of the label is being updated with information about acute pancreatitis, including additional guidance regarding the symptoms that may be suggestive of acute pancreatitis and subsequent patient management.

Finally on the patent front, in October, the United States Supreme Court denied the petitions for certiorari that were filed by Teva Pharmaceuticals and Dr. Reddy's Laboratories regarding their challenges to the validity of Lilly's U.S. Zyprexa patent.

Moving on to review financial results for the quarter, worldwide sales grew 13% to $4.587 billion. We will begin with the review of sales performance of selected products and then discuss the other lines of the income statement.

Slide 8, shows worldwide Zyprexa sales increased 8% to $1.166 billion. Sales in the U.S. increase 4% to $541 million due primarily to higher prices offset partially by lower demand. International sales increased 11% to $626 million, due to increased demand and the favorable impact of exchange rates.

Slide nine, shows the progress made in stemming the erosion of U.S. Zyprexa volume. Total retail prescription volume continues to track closely with the prior year, much more so than in the past.

Moving to slide 10, Cymbalta sales in the third quarter were $513 million, up 47% compared with the third quarter of 2006. U.S. sales increased 45% percent, to $444 million, due to strong demand. International sales totaled $69 million, an increase of 64% over the prior year and an 11% sequential increase over Q2.

Notice that there is a sequential decrease in worldwide sales between Q2 and Q3. While Cymbalta demand increased sequentially, U.S. rebate adjustments made in Q3 was a primary driver for the sequential decline in worldwide sales.

Recall that for any product when a shipment is made and the gross sale is recorded discounts are recorded for the expected channels through which that sale will travel. The discounts vary by channel based on the contracting arrangements in each. Adjustments are subsequently made to reflect the actual channel distribution. For newer products like Cymbalta, there can be more variability in the channel especially as new access wins are gained or formulary during changes. The underlying sequential demand trends for Cymbalta reflect continued strong performance.

Slide 11, shows worldwide Byetta sales for the quarter were $165 million, a 30% increase driven by demand. Lilly reports half of the gross margin from U.S. sales of Byetta plus sales of pens to Amylin and 100% of OUS Byetta sales. Total Byetta sales recognized in Lilly's income statement were $87 million, a 40% increase.

On slide 12, Humalog sales grew 12% to $363 million. U.S. sales increased 9% to $216 million reflecting increased prices and higher demand. Sales outside the U.S. increased 19% to $146 million, driven by increased demand and the favorable impact of foreign exchange rates, offset in part by declining prices.

As John discussed earlier, we are not satisfied with the share of market progress with Humalog in the U.S. Slide 13, shows, while share gains were achieved in the second quarter, we saw declines in the third quarter.

On slide 14, Humulin sales for the quarter were up 6% to $243 million, driven primarily by increased volume outside the U.S. and the favorable impact of foreign exchange rates offered in part by declining process outside the U.S. and lower demand in the U.S.

Slide 15, shows the worldwide Cialis sales. Global sales were up 27% to $311 million in the quarter, reflecting both strong demand and increased prices in the U.S. and internationally. Sales in the U.S. were up 22% to $117 million, while sales outside the U.S. increased 30% to $195 million.

Slide 16, third quarter quarterly Forteo sales of $181 million, up 21% over Q3 of last year. U.S. sales were up 20% to $125 million, primarily due to higher net effective prices and increased volume. International sales of Forteo were up 24% to $56 million due to higher demand and the impact of foreign exchange rates.

Moving to slide 17, Alimta sales in the third quarter were $215 million, an increase of 37% over Q3 2006. U.S. sales increased 23% to $111 million, due primarily to increased demand. Sales outside the U.S. were up 55% to $104 million, due to increased demand. Jim?

Jim Greffet

Slide 18 shows the revenues from the products Lilly has launched this decade. Alimta, Byetta, Cialis, Cymbalta, Forteo, Strattera, Symbyax, Yentreve and Xigris. On a pro forma basis these products grew 30% reaching $1.5 billion or 33% of our sales. On a reported basis, sales of these products grew 56% in Q3.

Before looking at the rest of the income statement, let's look at the impact of price, exchange rate and volume on the sales results. A summary by geography on a pro forma adjusted basis is shown on slide 19.

For the quarter, Lilly sales growth of 13% was driven by a volume impact of 8%, a favorable exchange rate impact of 3% and a favorable price impact of 2%. For your information, slide 20 shows the impact of price, rate and volume on a reported basis.

For the quarter, Lilly's reported sales growth of 19% was driven by a volume impact of 14%, a favorable exchange rate impact of 3% and a favorable price impact of 2%.

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 used in Q1 and Q2, we will provide two views of the results to facilitate analysis. Slide 21 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 related revenue and expenses are shown in their respective lines of the income statement.

Another view of the results 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 a reported income statement adjusted to exclude charges such as the restructuring of our manufacturing operations and the 2007 in-process R&D charges from the acquisition of ICOS, Hypnion and Ivy and in-licensing deal with OSI.

Reported results are also restated utilizing 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 able to better gauge performance across time. We will focus on pro forma adjusted results as we feel it provides better insight into the underlying trends in our business.

Slide 22, shows the pro forma adjusted income statement. Gross margin as a percentage of sales in the third quarter was 77.0%, a decrease of 70 basis points compared to Q3 2006. This decrease was primarily due to planned third quarter shutdowns of certain manufacturing facilities and the impact of foreign exchange rates offset in part by manufacturing expenses growing at a slower rate than our sales.

Overall operating expenses increased 11% in the quarter. SG&A was up 13% to $1.5 billion for the quarter. The increase was primarily due to increased marketing expenses in support of key products, primarily Cymbalta and the diabetes care products.

R&D expense grew 7% to $844 million or 18% of sales. The increase was primarily due to increases in incentive compensation, discovery research and late stage clinical trial costs.

For information, we've provided a reported earning statement of slide 23. Details about our reported earnings are available in our earnings press release dated today, October 18, 2007.

Slide 24, shows third quarter other income and deductions, which contributed $50 million, an increase of $55 million, driven by lower net interest expense and increased business development income, resulting from out-licensing of legacy and development stage products. The adjusted effective tax rate was 20.9% for the quarter.

To help investors better understand the underlying trends in our business, slide 25 shows the adjustments made to the reported earnings per share in order to arrive at pro forma adjusted earnings per share. To calculate pro forma adjusted earnings, Q3 2007 reported earnings has been adjusted for, the $81.3 million charge to reduce expected product liability insurance recoveries, following a settlement with one of our insurance carriers over Zyprexa product liability claims. No pro forma adjustments are required to Q3 2007 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 the first half of the year, a $123 million for asset impairments, restructuring and other special charges, the $656.6 million in charges for in process research and development related to the acquisitions of ICOS, Hypnion, Ivy and the in-licensing agreement with OSI.

Finally, year-to-date 2007 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 John to update you on our financial guidance.

John Lechleiter

Thanks, Jim. Slide 26 provides a summary of financial guidance on a pro forma adjusted basis. We are raising earnings per share guidance and have changed guidance on other income. Other aspects of our guidance are unchanged. Here are the specifics.

Consistent with prior guidance, we expect sales growth in the low double-digits. Gross margin as a percentage of sales is expected to improve slightly compared with 2006. We expect total operating expenses to grow in the low double-digits. We now expect other income to be approximately $100 million. This is a slight increase from prior guidance of less than $100 million. While we saw a decrease in the effective tax rate in the third quarter, we continue to expect the effective tax rate for the year to be approximately 22%.

As I mentioned earlier, we are raising pro forma adjusted earnings per share guidance to a range $3.50 to $3.55 per share, from our previous guidance range of $3.40 to $3.50 per share. This guidance reflects growth of 16% to 17% viewed by pro forma sales growing at a faster rate than pro forma operating expenses.

We continue to expect strong cash flow in 2007 and capital expenditures of approximately $1.1 billion. For the fourth quarter 2007 we expect EPS of $0.86 to $0.91 per share. As we stated on the second quarter earnings call, 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 margins, operating expenses, tax rate and capital expenditures. We will update guidance when we announce quarterly results and if necessary throughout the year. Based on our research this approach is more consistent with our pharma peers and still provides an appropriate level of detail to our investors.

This concludes our review for the third quarter and we will now be happy to take your questions. Operator first caller please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes Roopesh Patel with UBS please go ahead.

Roopesh Patel - UBS

Thank you. I have a couple of questions, first on Cymbalta. In light of the recent slowdown in market share trends over the past five months, I was just wondering, John if you expect any meaningful change in trends as you look forward, and if so what's going to spark that? And then just separately I was just wondering if you could update us on your patient assistance program. I am curious on what level the current enrollment has reached relative to levels before this program was stopped before 2006. And how much further enrollment you expect and what sort of impact that might have looking forward, specifically on Zyprexa and Forteo? Thanks.

John Lechleiter

Roopesh this is John. I will answer your first question, and then maybe refer to Phil or Jim on the patient assistant question. First of all, as we indicated in the context, we continue to be pleased with the performance of Cymbalta, because we do see share growth and that’s really what we are focused on, and we also know we have got three, really three of our largest OUS markets yet to launch the product. We have another indication that's under review by the FDA right now, which is fibromyalgia, and we seen Lyrica do well in that space. We are competing successfully today against Lyrica and the DPMP indication, so that, obviously if approved, is going to provide another avenue for growth.

Cymbalta continues, really to perform very well in terms of the acceptance by physicians and patients. Keep in mind that we have also started a new DCCC campaign, built along the same theme. The depression hurt scene that's been out there for couple of seasons now. So, I think this is going to continue also to really support the product and to keep it, a significant contributor to our growth going forward.

Phil Johnson

Yeah, this is Phil. Second question you had. We continue to see a relatively slow ramp up of enrollments in the current programs, which as you are aware covers HGH, Zyprexa and Forteo. Forteo is the product that is getting the most usage, but we are at levels that would be a very small portion of the levels that we had last year.

Roopesh Patel - UBS

And just if I may follow up, do you expect that enrollment to get back to original status, and if so is there any material impact you might see that have on either Zyprexa or Forteo?

John Lechleiter

It’s hard for us to go ahead and predict where that program will head, given the ramp rates that we do not expect in the short-term, any kind of a significant increase in the levels that we've see in the first three quarters of this year.

Phil Johnson

Next caller please.

Operator

Thank you. Our next question comes from Jim Kelly with Goldman Sachs. Please go ahead.

Jim Kelly - Goldman Sachs

Good morning and thank you. I have two questions. First, if there any insight that you can give us on how operating expense growth should look relative to sales next year along the lines of any of the major push it and pull that we should think about here? Now that you have spent more this year in order to build infrastructure for showing us some franchises, how should we thinking about spend going into the next year on the major operating lines? And then secondly as cash flow has been improving, and your CapEx was reduced relative to earlier expectations that happened earlier this year, how should we be thinking about dividend policy and share repurchase policy in the next year or so? Thank you.

Derica Rice

Hi Jim this is Derica, let me take those two questions if you may. In regards to operating expense growth, and the projections for 2008, we have not provided any guidance for 2008. In fact we would do that on December 6th, at our analyst meeting. If you take a look at our operating expense growth this year, one of the commitments that we had was that we should see positive operating leverage in our P&L meaning that our sales growth should outpace our operating expense growth, and we have seen that for the first nine months of this year. And I anticipate that being through, also to maintain that for the total year. We’ve been able to do that while at the same time making the appropriate investment in the business such as funding our contract sales organization in the U.S. for diabetes, which we did in the first quarter.

We launched the Byetta DTC campaign in September. So you saw a partial effect which you see, you'll see full effect in the fourth quarter. So we still anticipate being able to properly invest in business and building around these types of program. In regards to the approving cash flow we've been -- with that type of performance that we've seen in terms of improving operating leverage. We've paid down Jim, $3 billon of debt since the third quarter of 2006, $1 billion in Q3, $1 billion in Q4 and an additional $1 billion in the first quarter of this year.

As we look forward in terms of how we look to utilize our strengthening balance sheet, our first objective is really to invest back in to the organic growth of the business. And I think most recently that has been exemplified by our alliance with MacroGenic. And that is just one of the six deals that we have done thus far this year. We began the year with the acquisition of ICOS, the acquisition of the OSI compound Ivy, as well as Hypnion, which was our insomnia compound.

So that is our first priory in it terms of utilizing our balance sheet. And with regards to share repurchase things of that nature, if we shall get to a point sometime in the future where we see that we’ve exhausted all investment opportunities, and we still are sitting with excess cash, then that’s the time that we would consider doing some type of additional distribution to shareholders.

Phil Johnson

Next caller please.

Operator

Thank you our next question comes from David Risinger with Merrill Lynch. Please go ahead.

David Risinger - Merrill Lynch

Yes, thanks very much, I have two questions first on Byetta LAR, could you just provide some color and comments; I am just curious given the increasingly safety conscious FDA, which is apparently scrutinizing post marketing data very closely these days. Just wondering, if you believe that a few hundred patient LAR exposure would be enough of a safety database for FDA to grant approval for LAR and apply the Byetta label to LAR? And second, if you could just provide your plans for prasugrel communication at AHA, and if you could provide any color on prasugrel, that would be helpful? Thank you.

John Lechleiter

David, this is John Lechleiter. I will take part one, and then Phil and Jim, part two. With respect to Byetta LAR, I think it’s important to recognize that the FDA is looking at an entity here, namely Exenatide the molecule that's already out there. And in the first two years of marketing, I think we have something in excess of 700,000 people, mainly in the U.S., who have used the product. So they are really looking at a different format for a product that has a track record in the marketplace.

Now that’s not to minimize the way in which the drug is going to be reviewed. It will be thoroughly reviewed, but we are confident that, in consent with Amylin, we have got a development program that's going to answer the questions that they will want to have answered in the course of looking at that once a week type of delivery.

So at this point in time, obviously, we need to see the data and get all the data and put this in perspective for the FDA, but I don’t think even in the phase of heightened -- to some degree in the phase of heightened scrutiny and requirements by the FDA, having a product that’s already approved and presented in a different format is going to be helpful, because we'll have that marketplace and adverse event reporting database that the FDA would be able to look at. It should provide greater confidence.

Jim Greffet

Dave, its Jim. I will talk about our communication plans for prasugrel at the AHA. So as you can see on the AHA website, our presentation time is 3:45 PM on Sunday, November 4th. We also understand there will be an AHA sponsored press conference that morning, that Sunday morning at 8:00 o'clock. So what we'll have is data that initially came out at 8:00 o'clock that morning, and then the study investigators will have the formal presentation at the session that afternoon.

We will be there, I will be there as well as Tony Ware, and the other folks from our prasugrel team. So we’ll want to be there to hear the data come out, and to be accessible for the questions that will unto, likewise we anticipate that we'll, given the importance of the data, we'll have questions coming after the facts, but off course we'll be accessible to address those questions while we are at the meeting itself as well as subsequently to make sure that investors are getting the answers to their questions they may have.

Phil Johnson

Next caller please.

Operator

Thank you. Our next question comes from Chris Schott with Banc of America. Please go ahead.

Chris Schott - Banc of America

Great, thank you. Just two quick question on the Zyprexa, and I apologize, I just missed this earlier in the call. And first on can you comment specifically on U.S. Zyprexa kind of year-over-year price versus volume trends? It does seem like you are still getting pretty strong price benefit here, I think you had pointed towards those gains slowing in the second half of the year. Trying to talk about and hear your thoughts on what's driving that, and should we expect that this continues into the fourth quarter? And then secondly when look out towards next year in the Zyprexa depot, if we look at growth towards this franchise, do you expect that depot is going to help increase patient share in the market, or is this an issue of higher compliance for patients who might have otherwise done all Zyprexa, and just not complaint and (inaudible)? Thanks.

Jim Greffet

Chris this is Jim, I'll start with the first one on the year-on-year comparison. So as you can see from the IMS data, as well year-on-year, we do see an overall decline in demand in the U.S. that's offset by the price benefit. And as we alluded to in our formal comments, that by the time we get to Q3 we're seeing the price benefit overall really reflect more of the underlying dynamics in the business. We will absorb this one time step-up in the benefits of MMA. And in the case as of Zyprexa, one another nuance to observe, the IMS data that is visible to all of us is really that retail segment and it includes long term period as well. It does not capture the institutional segment, which we think is about 25% of the picture for Zyprexa. The performance in the institutional segment is actually more flat in volume terms than we see in the broader segment. So hopefully that provides a little bit of color where we see the overall performance is up in the U.S. reflecting a price benefit and a demand decline.

One other thing really quickly on that John before you go; on to the second question. If you are looking at the quarter-on-quarter sales results for the U.S. you'll want to know as well that there was some level of wholesaler de-stocking in the U.S. in Q3 relative to Q2, as well as in the normal levels of variability of changes in wholesaler inventory levels. And it did have a negative impact on that sequential growth rate. We also had one fewer shipping day in Q3 as opposed to Q2 as well. John?

John Lechleiter

Chris in the second part of your question Zyprexa depot, I think they are clearly among us the broad population of people who have been treated for schizophrenia in particular there is a need for better compliance. And I think the success that Risperdol Consta has reinforced that. The Zyprexa depot product will be a four week long administration. It's difficult to say obviously the extent to which this is going to take share away from our oral versus taking share from other oral competitors. But I do think it will have a use broadly across the population in terms of people who may currently be taking Zyprexa or some other atypical antipsychotic. Especially in cases where physicians say I've got a patient here who really has not been compliant, for whom compliance is going to be a little problem, and this represents a really good alternative.

Phil Johnson

Next caller please.

Operator

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

Tony Butler - Lehman Brothers

Thanks very much. John, three really brief questions. One, again, back to Byetta LAR, with the change in that label for Byetta pancreatitis, would not a larger patient population with LAR only, be able to address the notion of perhaps some increased level of pancreatitis, given you give a larger dose of drug, even though it is only once a week. That’s question one. And then, question two and three, just very quickly, with the Zyprexa label change, does your message change at all? Is it really still about the severe patients, and really has this been counter detailed, sufficiently that it’s minor to the overall demand? And then thirdly, how is the sales force aimed or armed now with the Evista label changes with respect to invasive breast cancer? Is there additional material for which they are presenting to physicians? How are you dealing with that message? Thank you.

John Lechleiter

Tony, I will try to tackle all of these. First of all, with Byetta LAR, I don’t think it’s at all obvious that the LAR preparation is going to in anyway have an impact on the rate at which pancreatitis might be observed or reported, while this is a larger dose administered it pays out slowly over a period of time. Keep in mind that pancreatitis has been in our label since 2006. The announcement we made the other day elevates it to a level of a precaution, and this is obviously something that we think is in the best interest of patients based on our post marketing experience. Keep in mind, during the clinical trials the observed rate of pancreatitis in the controlled trails for Byetta was actually less. Approved number of patients years treated then either the insulin that control arm or the placebo control arms. So this is something we are going to watch very, very carefully going forward, but I…

Jim Greffet

John I had a little bit to that to echo. Two things that Amylin addressed with LAR in their call yesterday; one that the plasma concentrations of the active the patients get on the LAR formulation is no greater than what they have on the twice daily formulation. And secondly in the 300 patients Phase II/III study ongoing right now, there has been no report for pancreatitis in that study.

John Lechleiter

Thanks Jim. Tony your second question about the Zyprexa label, does it impact our message. Absolutely not, we are sharing the newly updated label with physicians currently via the Dear Healthcare Provider letter. But we’ve been really on target on message with the current approach that we are taking with Zyprexa for the last several years now for the urgent patient where symptom relief and response to drug therapy is urgent and necessary, and where Zyprexa as one way has all the benefits and the risks of any drug therapy presents itself as the best alternative. So that has not changed and will not change as we go forward and present this new information.

With respect to Evista about 10 days ago, we began to share the additional information for Evista, the impact of Evista on treating or reducing newly diagnosed invasive breast cancer in women with osteoporosis, and in the case of women who are at high risk of breast cancer. We have all the data supporting that assuring that with physicians currently and mainly that’s the established base of people that we’ve been calling on to promote Evista already, we are now able because of the approval to really highlight this additional benefit.

Phil Johnson

Operator next caller.

Operator

Thank you. Our next question comes from Jami Rubin with Morgan Stanley. Please go ahead.

Jami Rubin - Morgan Stanley

Thank you. John, I am curious to know your thoughts of Pfizer's decision this morning to not walk but run away from Exubera, what that means for your plans with AIR insulin; I mean the initial expectation with that Pfizer would be out there for several years to prime the marketplace drive education etcetera. So now that’s not happening how do you see AIR insulin rolling up for you?

My second question relates to Zyprexa in Canada, and I apologize if I missed this, but what impact was Canada and international sales this quarter. And is it felt generically throughout all of the provinces or just part of the country and how will they play out in the fourth quarter? And my last question relates to Gemzar, can you remind me when Gemzar goes generic internationally? Thanks.

John Lechleiter

Okay, Jami we are going to tag team, I am going to take the first question, and Derica the second and Jim and Phil the third. Well we were surprised as you were this morning to get the announcement about Pfizer withdrawing their Exubera. I think this does not -- it really doesn’t diminish our enthusiasm for our product, we believe there is place for more convenient new tight administration of insulin. As we have said all along that device the technology behind the approach that we are taking, we think is going to be more convenient for patients easier to use. We are not backing away an inch from either the program that we've got currently now in the middle of Phase III, or our plans to go forward and file I believe in 2009. So we are going to have to kind of see how this shakes out. I don’t think this is a signal necessarily that there is not a big opportunity there for the first they can come along and the company that can come along with the right product.

Derica Rice

And Jami, this is Derica. I will take the second question as even to John' point around our inhaled insulin. Recall that we expect the kind of law intact to help recon dated to complement the product. In addition to a more convenient device, which we think will help as well. And we also are not changing in terms of the doses; we will still be dosing insulin units. So, we believe that we have been able to leverage some of the learning's from the Pfizer Exubera experience as well.

In regards to your question around Canada; and the impact that we did see the generic olanzapine in Canada in the Q3. Primarily we have seen it [thus far] in the Ontario and present with [our own] provinces in Canada, we do anticipate in the fourth quarter that we will see additional provinces and introduce generically entity. In addition to that, we also anticipate, while we did not see it in Q3, we would anticipate seeing generic olanzapine in Germany as well.

John Lechleiter

Jami, real quick in Canada as well, essentially because that’s the second largest province has not yet cleared the way for generic to launch? However Alberta, which is the third largest province, has approved them, they are expected to launch in November.

Jim Greffet

Jami, on the Gemzar patents, so in the US, we expect to maintain exclusivity until the middle of 2013, with the IT portfolio we have, major Europe, we are looking at a 2009 timing, and 2009 for Japan as well.

John Lechleiter

There are selected markets in Europe for Gemzar, where we have been off patent already. We have not yet seen any generics introduced. They may come at any point in time, but in places like Spain, for example, since late '05, we could have seen introduction in generic, and have not yet seen it.

Phil Johnson

Next caller, please.

Operator

Thank you. We will go to the line of Steve Scala with Cowen. Please go ahead.

Steve Scala - Cowen

Thank you. If Lilly is to meet its commitment of filing the NDA for project where all by year end. I would imagine that efforts are well underway. Can you tell us if the NDA has been, is currently, and will continue to be worked on during the next couple of weeks? If the drug is not fileable then I will think such preparations would appear to be not the best use of resources.

And secondly, Lilly has said in the past that it has no A priority agreement with FDA to pursue an equivalence application as opposed to superiority for project growth, is that still true and can you tell us if there has been even a single conversation with FDA involving a filing based on our equivalence? Thank you.

John Lechleiter

Steve, this is John. I'll do part one and again Jim and Phil will talk about part two. The last patient enrolled, the last patient visit I should say we communicate it having occurred in the middle of the year and I think if you go and look at the way any company approaches an NDA filings, the question here is, how long does it take for any NDA from the point which you get that last bit of information in essence from the clinical until you can file. And I think when we said we have a filing a target date by the end of year that's a pretty compressed the timeframe six months from the last patients visit until filings and what it means, Steve, is that we had set up and anticipate without knowing the results of the trial a framework in which we could accomplish that regardless of the outcome. So, we can't afford to sit back and wait until we know the results of TRITON TIMI-38 to decide weather to apply resource or not. We got to have things in place, anticipating whatever comes out of that trial. So, that if we are on a go-forward basis once we get the data we are prepared to submit, so we are obviously taking that path as we give you that date relative to the way the trial enrolls.

Jim Greffet

On the discussions, Steve its Jim, on the discussions with the FDA so your recollection is correct. The TRITON head-to-head study against Clavis is a superiority design and that's the objective of the study and also even looking at the commercial opportunity Tony [Tony Wood], the leader of that program has a collaborative statement that if he was still practicing cardiologist, and someone came in and said I have a great new drug for you that's not inferior to Clavis. He said that's great I have already have it it's called Clavis.

So we think even from the commercial view of the world it's important to prove superiority. It is true that we don’t have a pre-existing agreement with the agency on a non-inferiority backup. But what we have also said is when the data comes in we are going to look at it from every angle possible and if subsequent conversations with the FDA are necessary we'll certainly have them. So that's the path one and we hope that as successful results.

Phil Johnson

Next caller please.

Operator

Thank you. We will go to the line of Scott Henry with Oppenheimer. Please go ahead.

Scott Henry - Oppenheimer

Thank you. Just a quick question. I don’t know if you mentioned this earlier. But with regards to prasugrel, have you reached the number of outcomes you need, and has the data already been locked down? I’m just trying to get a sense if there is any risk that the data might not be presented at the AHA.

Jim Greffet

The number of outcomes reached; yes we did reach the number of outcomes that are necessary. We have not been commenting on the status of data lock or data analysis, but we have confirmed that we will be presenting at AHA and that's whether the positive or negative results come out. So that's our latest data.

Scott Henry - Oppenheimer

Thank you.

Phil Johnson

Next caller please.

Operator

Thank you. We will now go to the line of Seamus Fernandez with Leerink Swann. Please go ahead. Mr. Fernandez your line is open. Please go ahead. Thank you. We will go to the line of John Boris with Bear Stearns. Please go ahead.

John Boris - Bear Stearns

Okay, thanks for taking the question. I think you mentioned the number of outcomes you reached in prasugrel. Can you just remind us what the number of outcomes were and then can you just talk about contingency plans around prasugrel in superiority has hit, what you and your partner Daiichi Sankyo think you plan on doing in terms of ruling out additional clinical plan, and what that plan might look like. And then, on the negative side, if you don’t hit statistical superiority, what’s your contingency plan, going forward from a negative outcome? Thanks.

Phil Johnson

John this is Phil. Let me go ahead and have the second one first. In terms of contingency, if things go well, what will we do for next trial, that’s likely something that in year's that we did have a positive result; we could be in a position in December to discuss it at the Analyst Meeting, but it’s premature for now? Jim are you going to handle this?

Jim Greffet

The number of events, John, I don’t have a protocol. Probably, I think that was 875 on that composite end point of major adverse cardiovascular events. But we can say that the trial is finished, it is completed and we are going to present it at the AHA. Okay. John?

John Lechleiter

Thank you for your time this morning and let me summarize a few of our key points. We are delivering on our priorities with solid financial performance in the third quarter, including strong sales volume and operating income growth.

We've again increased financial guidance for 2007 and are investing in the business to drive future growth. We had increasing cash flow and a strong balance sheet, which provides flexibility to execute on our business development strategy. And we have another example this quarter, with the MacroGenics deal that we announced this morning.

Coming in the forth quarter, we had a number of important events, including the release of the Phase III results on prasugrel at the American Heart Association meeting on November 4.

Top-line results on the Exenatide LAR Phase II/III study with the full dataset likely coming at the American Diabetes Association meeting next year. And our annual analyst meeting on December 6 in which we will provide an update on the broader pipeline, the state of our operations and financial guidance for 2008. As a preview, we are on-track to hit our goal of 15 new molecular entities entering the clinic this year.

Plan to join us for the December meeting to learn additional details about some of these molecules. Likewise we expect an additional 15 entities to enter the clinic in 2008.

At Lilly we have a sense of urgency to deliver strong results today while also reshaping our company to win for the benefit of patients and shareholders alike. Thanks again for your attention.

Operator

Ladies and gentlemen this conference will be made available for replay after 12:30 pm Eastern Time and running through October 25 at mid night. You may access the AT&T replay service by dialing 1-800-475-6701 and using the access code 888166. International callers may dial area code 320-365-3844. Once again those numbers are 1-800-475-6701 and area code 320-365-3844 using the access code 888166.

That does conclude our conference for today. Thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.

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Source: Eli Lilly Q3 2007 Earnings Call Transcript
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