Eli Lilly Q3 2007 Earnings Call Transcript

| About: Eli Lilly (LLY)

Eli Lilly & Co. (NYSE:LLY)

Q3 2007 Earnings Call

October 18, 2007 9:00 am ET


Phil Johnson - ED of IR

John Lechleiter - President and COO

Derica Rice - CFO

Jim Greffet - Manager of IR


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


Ladies and gentlemen, thank you for standing by. And welcometo the Q3 2007 Earnings Conference Call. At this time, all participants are ina listen-only mode. Later, there will be an opportunity for questions andanswers and instructions will be given at that time. (Operator Instructions) Asa 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 JohnLechleiter, Lilly's President and COO; Derica Rice, Lilly's CFO; and JimGreffet, Manager of Investor Relations.

You can access the earnings press release and supportingmaterials, a live web cast and an Internet based replay of this conference callat lilly.com. The replay and supporting materials will be available on ourwebsite through November 19th, 2007.

During this conference call, we anticipate makingprojections and forward-looking statements that are based on management'scurrent expectations but actual results may differ materially due to variousfactors.

For example, our results may be affected by competitivedevelopments, the timing and success of new product launches, regulatory andlegal matters, patent disputes, government investigations, governmental actionsregarding pricing, importation and reimbursement, change in tax law,acquisitions, business development transactions, and the impact of exchangerates. 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 productsand pipeline is for the benefit of the investment community. It is not intendedto be promotional and is not sufficient for prescribing decisions.

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

John Lechleiter

Thanks Phil. We are very pleased with our results in thethird quarter. Before we go into the detailed results for the quarter, let meprovide an overview of some key themes. I will focus my comments on the proforma adjusted results, which we believe provide insights into the underlyingtrends in the business.

This view assumes we owned ICOS, as of January 1, 2006 andit excludes some items. Later in the call, Phil and Jim will provide details onthe specific items excluded, as well as reconciliations between reported andpro forma adjusted results. Consistent with our approach in earlier calls thisyear, slide two summarizes achievements with financial results andfundamentals. To begin, let me recap the financials.

Third quarter sales again, grew by double-digits, and at arate faster than our operating expenses, resulting in pro forma adjustedearnings 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 ourearnings guidance for the year. We will give the full guidance at the end ofthe call, but our revised pro forma adjusted EPS guidance is increased $0.05cents from the top end of the prior guidance to a range of $3.50 to $3.55. Thiswould represent growth of 16% to 17%.

Let me visit two key fundamentals; sales volume trends and thegrowth in total sales, compared to the growth in operating expenses. We havesolid delivery on both in the third quarter. Strong volume trends continue andworldwide 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 thesecond and third quarters is the best we’ve seen since the year 2001.

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

Nonetheless the leverage we generated at the operatingexpense line drove operating income to grow faster than sales. Finally theMacroGenics deal announced this morning underscores our commitment to usestrengthening cash flow to acquire promising technology from outside thecompany.

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

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

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

Slide four, provides additional detail on volume trend. The8% total volume growth is the strongest it has been in some time and all of ourkey products are contributing. The graph on the right shows the relativecontribution of each product to the overall volume growth. As an example of howto 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 volumegrowth and we have yet to launch in several of the major OUS markets such as France, Canadaand Australia.Beyond Cymbalta several other products are growing very well relative to theirsize. Alimta and Byetta volume grew more than 30% in the third quarter andCialis grew in the mid-teens. In the U.S. we are very pleased with thestrong volume growth of Cymbalta, Alimta and Cialis, but we are also focusingon accelerating the trends on other key brands like Byetta, Humalog and Forteo.

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

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

Our third quarter results continue the trend we highlightedlast quarter, while we saw an expected decline in gross margin in the thirdquarter, our year-to-date gross margin remains an improvement from last year.Furthermore, we continue to see a positive spread between sales growth and OpExgrowth. This trend is in contrast to the other period shown, in which either orboth of the elements, gross margin or sale to OpEx spread, were notcontributing to accelerated income growth.

Keep in mind that we will make investments in our keybrands. So the relationship of sales growth to OpEx growth may vary inindividual quarters. However, as we have done over the past few quarters, ourintent is to continue to grow sales faster than costs and expenses. Thesepositive results reflect the numerous efforts we put forth over the pastseveral years, including the stemming of the erosion of Zyprexa, acceleratingthe uptake of Cymbalta, changing the sales trend on Humalog, maximizing othergrowth drivers, like Alimta, Cialis and Byetta, aggressively reducing globalheadcount, increasing manufacturing efficiencies and implementing Six Sigma.

Before Phil and Jim provide the details of our third quarterresults, let me give a quick update on three of our key products. In the U.S., Cymbaltacontinues to show strong growth, gaining both new prescription and totalprescription market share. With the start of the Fall TV Season, we havelaunched 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. Onthe access front, Cymbalta had solid tier-2 unrestricted access on commercialformularies. On part with or even better than our branded competitors, ourmarket research has recently identified that Cymbalta's formulary access isbetter than many positions perceive it to be. With the significant number ofgeneric options in the antidepressant category, formulary access is animportant factor in the prescribing decision. Having identified this perceptiongap, we are communicating the broad tier-2 coverage to positions so that thisperception is not a barrier to use.

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

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

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

Product innovation is only part of the equation. We believeour focus on providing solutions beyond therapy alone, such as superior diseaseeducation and a new customer centric approach to form a true partnership withphysicians will differentiate LillyDiabetes in the market and contribute togrowth for Humalog.

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

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

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

Phil Johnson

Thanks, John. Slide seven, shows key events over the lastthree months. On the business development front we announced this morning thatLilly will acquire the exclusive rights to teplizumab, a humanized anti-CD3monoclonal antibody from MacroGenics. In addition, the two companies haveentered into a global strategic alliance to develop and commercializeteplizumab as well as other potential next generation molecules for use in thetreatment of autoimmune diseases. Teplizumab is currently being studied in thePROTEGE trial, a global pivotal Phase II/III clinical trial for individualswith 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 reducethe risk of invasive breast cancer in two populations; postmenopausal womenwith osteoporosis and postmenopausal women at high risk for invasive breastcancer.

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

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

In September, we announced the submission with the EuropeanMedicines Agency for centralized review of Alimta, in combination withcisplatin, for the, for the first-line treatment of advanced non-small celllung 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. productlabels. Specifically, the changes include new warnings for weight gain andhyperlipidemia and updated information in the warning for hyperglycemia. Thelabel also states that while relative risk estimates are inconsistent, theassociation between atypical anti-psychotics and increases in glucose levelsappears to fall on a continuum and olanzapine appears to have a greaterassociation than some other atypical anti-psychotics.

Also in October an upcoming update to the Byetta U.S. labelwas announced. The precaution section of the label is being updated withinformation about acute pancreatitis, including additional guidance regardingthe symptoms that may be suggestive of acute pancreatitis and subsequentpatient management.

Finally on the patent front, in October, the United StatesSupreme Court denied the petitions for certiorari that were filed by TevaPharmaceuticals and Dr. Reddy's Laboratories regarding their challenges to thevalidity 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 ofsales performance of selected products and then discuss the other lines of theincome 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 bylower demand. International sales increased 11% to $626 million, due to increaseddemand and the favorable impact of exchange rates.

Slide nine, shows the progress made in stemming the erosionof U.S. Zyprexa volume. Total retail prescription volume continues to trackclosely 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. salesincreased 45% percent, to $444 million, due to strong demand. Internationalsales 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 worldwidesales between Q2 and Q3. While Cymbalta demand increased sequentially, U.S. rebateadjustments made in Q3 was a primary driver for the sequential decline inworldwide sales.

Recall that for any product when a shipment is made and thegross sale is recorded discounts are recorded for the expected channels throughwhich that sale will travel. The discounts vary by channel based on thecontracting arrangements in each. Adjustments are subsequently made to reflectthe actual channel distribution. For newer products like Cymbalta, there can bemore variability in the channel especially as new access wins are gained orformulary during changes. The underlying sequential demand trends for Cymbaltareflect 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 grossmargin 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, a40% increase.

On slide 12, Humalog sales grew 12% to $363 million. U.S. salesincreased 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 favorableimpact of foreign exchange rates, offset in part by declining prices.

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

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 foreignexchange 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 saleswere up 27% to $311 million in the quarter, reflecting both strong demand andincreased 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 $181million, up 21% over Q3 of last year. U.S. sales were up 20% to $125million, primarily due to higher net effective prices and increased volume.International sales of Forteo were up 24% to $56 million due to higher demandand 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 $111million, due primarily to increased demand. Sales outside the U.S. were up55% to $104 million, due to increased demand. Jim?

Jim Greffet

Slide 18 shows the revenues from the products Lilly haslaunched 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 theseproducts grew 56% in Q3.

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

For the quarter, Lilly sales growth of 13% was driven by avolume impact of 8%, a favorable exchange rate impact of 3% and a favorableprice 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% wasdriven by a volume impact of 14%, a favorable exchange rate impact of 3% and afavorable price impact of 2%.

Now, let's look at the rest of the income statement. Theacquisition of ICOS creates some complexities when comparing financial dataacross years. Consistent with the approach used in Q1 and Q2, we will providetwo views of the results to facilitate analysis. Slide 21 provides a summary ofthese views.

The reported results for each year include all financialresults as reported according to generally accepted accounting principles.Consequently, the impact of the ICOS acquisition appears in reported results asof the acquisition date. Up to and including January 2007 reported resultsreflect our earnings from the Lilly-ICOS joint venture in other income anddeductions net of tax. Subsequent to the ICOS acquisition, so beginning inFebruary 2007 all ICOS and Cialis related revenue and expenses are shown intheir 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 toprovide comparable data across years. The pro forma adjusted results reflect areported income statement adjusted to exclude charges such as the restructuringof our manufacturing operations and the 2007 in-process R&D charges fromthe acquisition of ICOS, Hypnion and Ivy and in-licensing deal with OSI.

Reported results are also restated utilizing GAAPmethodology as if Lilly owned ICOS for the entirety of each comparison period.By incorporating the impact of the ICOS acquisition into both periods, we areable to better gauge performance across time. We will focus on pro formaadjusted results as we feel it provides better insight into the underlyingtrends 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%, adecrease of 70 basis points compared to Q3 2006. This decrease was primarilydue to planned third quarter shutdowns of certain manufacturing facilities andthe impact of foreign exchange rates offset in part by manufacturing expensesgrowing 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 primarilydue to increased marketing expenses in support of key products, primarilyCymbalta and the diabetes care products.

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

For information, we've provided a reported earning statementof slide 23. Details about our reported earnings are available in our earningspress 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 netinterest expense and increased business development income, resulting fromout-licensing of legacy and development stage products. The adjusted effectivetax rate was 20.9% for the quarter.

To help investors better understand the underlying trends inour business, slide 25 shows the adjustments made to the reported earnings pershare in order to arrive at pro forma adjusted earnings per share. To calculatepro forma adjusted earnings, Q3 2007 reported earnings has been adjusted for,the $81.3 million charge to reduce expected product liability insurancerecoveries, following a settlement with one of our insurance carriers overZyprexa product liability claims. No pro forma adjustments are required to Q32007 results, as we owned ICOS for the entire period.

The year-to-date 2007 reported earnings have also beenadjusted for the following charges taken in the first half of the year, a $123million for asset impairments, restructuring and other special charges, the$656.6 million in charges for in process research and development related tothe acquisitions of ICOS, Hypnion, Ivy and the in-licensing agreement with OSI.

Finally, year-to-date 2007 results are adjusted to show thepro forma impact as if we owned ICOS for the entire period. Now, let me turnthe call back to John to update you on our financial guidance.

John Lechleiter

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

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

As I mentioned earlier, we are raising pro forma adjustedearnings per share guidance to a range $3.50 to $3.55 per share, from ourprevious guidance range of $3.40 to $3.50 per share. This guidance reflectsgrowth of 16% to 17% viewed by pro forma sales growing at a faster rate thanpro forma operating expenses.

We continue to expect strong cash flow in 2007 and capitalexpenditures of approximately $1.1 billion. For the fourth quarter 2007 weexpect EPS of $0.86 to $0.91 per share. As we stated on the second quarterearnings call, beginning in 2008 we will no longer provide quarterly EPSguidance. We will continue to provide yearly EPS guidance supported by guidancefor line items such as sales, gross margins, operating expenses, tax rate andcapital expenditures. We will update guidance when we announce quarterlyresults and if necessary throughout the year. Based on our research thisapproach is more consistent with our pharma peers and still provides anappropriate level of detail to our investors.

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



(Operator Instructions) Our first question comes RoopeshPatel 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 fivemonths, I was just wondering, John if you expect any meaningful change intrends as you look forward, and if so what's going to spark that? And then justseparately I was just wondering if you could update us on your patientassistance program. I am curious on what level the current enrollment hasreached relative to levels before this program was stopped before 2006. And howmuch further enrollment you expect and what sort of impact that might havelooking forward, specifically on Zyprexa and Forteo? Thanks.

John Lechleiter

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

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

Phil Johnson

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

Roopesh Patel - UBS

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

John Lechleiter

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

Phil Johnson

Next caller please.


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

Jim Kelly - GoldmanSachs

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

Derica Rice

Hi Jim this is Derica, let me take those two questions ifyou 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 onDecember 6th, at our analyst meeting. If you take a look at our operatingexpense growth this year, one of the commitments that we had was that we shouldsee positive operating leverage in our P&L meaning that our sales growthshould outpace our operating expense growth, and we have seen that for thefirst nine months of this year. And I anticipate that being through, also tomaintain that for the total year. We’ve been able to do that while at the sametime making the appropriate investment in the business such as funding ourcontract sales organization in the U.S. for diabetes, which we did inthe first quarter.

We launched the Byetta DTC campaign in September. So you sawa 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 buildingaround 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 improvingoperating leverage. We've paid down Jim, $3 billon of debt since the thirdquarter of 2006, $1 billion in Q3, $1 billion in Q4 and an additional $1billion in the first quarter of this year.

As we look forward in terms of how we look to utilize ourstrengthening balance sheet, our first objective is really to invest back in tothe organic growth of the business. And I think most recently that has beenexemplified by our alliance with MacroGenic. And that is just one of the sixdeals that we have done thus far this year. We began the year with theacquisition 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 ourbalance sheet. And with regards to share repurchase things of that nature, ifwe shall get to a point sometime in the future where we see that we’veexhausted all investment opportunities, and we still are sitting with excesscash, then that’s the time that we would consider doing some type of additionaldistribution to shareholders.

Phil Johnson

Next caller please.


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

David Risinger -Merrill Lynch

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

John Lechleiter

David, this is John Lechleiter. I will take part one, andthen Phil and Jim, part two. With respect to Byetta LAR, I think it’s importantto recognize that the FDA is looking at an entity here, namely Exenatide themolecule that's already out there. And in the first two years of marketing, Ithink 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 fora product that has a track record in the marketplace.

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

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

Jim Greffet

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

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

Phil Johnson

Next caller please.


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

Chris Schott - Bancof 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 youcomment specifically on U.S. Zyprexa kind of year-over-year price versus volumetrends? It does seem like you are still getting pretty strong price benefithere, I think you had pointed towards those gains slowing in the second half ofthe 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 thensecondly when look out towards next year in the Zyprexa depot, if we look atgrowth towards this franchise, do you expect that depot is going to helpincrease patient share in the market, or is this an issue of higher compliancefor patients who might have otherwise done all Zyprexa, and just not complaintand (inaudible)? Thanks.

Jim Greffet

Chris this is Jim, I'll start with the first one on theyear-on-year comparison. So as you can see from the IMS data, as wellyear-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 Q3we're seeing the price benefit overall really reflect more of the underlyingdynamics in the business. We will absorb this one time step-up in the benefitsof MMA. And in the case as of Zyprexa, one another nuance to observe, the IMSdata that is visible to all of us is really that retail segment and it includeslong term period as well. It does not capture the institutional segment, whichwe think is about 25% of the picture for Zyprexa. The performance in theinstitutional segment is actually more flat in volume terms than we see in thebroader segment. So hopefully that provides a little bit of color where we seethe overall performance is up in the U.S. reflecting a price benefit anda 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 salesresults for the U.S. you'llwant to know as well that there was some level of wholesaler de-stocking in theU.S.in Q3 relative to Q2, as well as in the normal levels of variability of changesin wholesaler inventory levels. And it did have a negative impact on thatsequential growth rate. We also had one fewer shipping day in Q3 as opposed to Q2as well. John?

John Lechleiter

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

Phil Johnson

Next caller please.


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

Tony Butler - LehmanBrothers

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

John Lechleiter

Tony, I will try to tackle all of these. First of all, withByetta LAR, I don’t think it’s at all obvious that the LAR preparation is goingto in anyway have an impact on the rate at which pancreatitis might be observedor reported, while this is a larger dose administered it pays out slowly over aperiod of time. Keep in mind that pancreatitis has been in our label since2006. The announcement we made the other day elevates it to a level of aprecaution, and this is obviously something that we think is in the bestinterest of patients based on our post marketing experience. Keep in mind,during the clinical trials the observed rate of pancreatitis in the controlledtrails for Byetta was actually less. Approved number of patients years treatedthen either the insulin that control arm or the placebo control arms. So thisis 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 thatAmylin addressed with LAR in their call yesterday; one that the plasmaconcentrations of the active the patients get on the LAR formulation is nogreater than what they have on the twice daily formulation. And secondly in the300 patients Phase II/III study ongoing right now, there has been no report forpancreatitis in that study.

John Lechleiter

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

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

Phil Johnson

Operator next caller.


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

Jami Rubin - Morgan Stanley

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

My second question relates to Zyprexain Canada, and I apologizeif I missed this, but what impact was Canada and international sales thisquarter. And is it felt generically throughout all of the provinces or justpart of the country and how will they play out in the fourth quarter? And mylast question relates to Gemzar, can you remind me when Gemzar goes genericinternationally? Thanks.

John Lechleiter

Okay, Jami we are going to tagteam, I am going to take the first question, and Derica the second and Jim and Philthe third. Well we were surprised as you were this morning to get theannouncement about Pfizer withdrawing their Exubera. I think this does not --it really doesn’t diminish our enthusiasm for our product, we believe there isplace for more convenient new tight administration of insulin. As we have saidall along that device the technology behind the approach that we are taking, wethink is going to be more convenient for patients easier to use. We are notbacking away an inch from either the program that we've got currently now inthe 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 thisis a signal necessarily that there is not a big opportunity there for the firstthey can come along and the company that can come along with the right product.

Derica Rice

And Jami, this is Derica. I willtake 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 complementthe product. In addition to a more convenient device, which we think will helpas well. And we also are not changing in terms of the doses; we will still bedosing insulin units. So, we believe that we have been able to leverage some ofthe learning's from the Pfizer Exubera experience as well.

In regards to your questionaround Canada; and theimpact that we did see the generic olanzapine in Canada in the Q3. Primarily we haveseen it [thus far] in the Ontario and presentwith [our own] provinces in Canada,we do anticipate in the fourth quarter that we will see additional provincesand introduce generically entity. In addition to that, we also anticipate,while we did not see it in Q3, we would anticipate seeing generic olanzapine inGermanyas well.

John Lechleiter

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

Jim Greffet

Jami, on the Gemzar patents, soin the US, we expect to maintain exclusivity until the middle of 2013, with theIT portfolio we have, major Europe, we are looking at a 2009 timing, and 2009for 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 intime, but in places like Spain,for example, since late '05, we could have seen introduction in generic, andhave not yet seen it.

Phil Johnson

Next caller, please.


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

Steve Scala - Cowen

Thank you. If Lilly is to meetits commitment of filing the NDA for project where all by year end. I wouldimagine that efforts are well underway. Can you tell us if the NDA has been, iscurrently, 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 tobe not the best use of resources.

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

John Lechleiter

Steve, this is John. I'll do partone 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 themiddle of the year and I think if you go and look at the way any companyapproaches an NDA filings, the question here is, how long does it take for anyNDA from the point which you get that last bit of information in essence fromthe clinical until you can file. And I think when we said we have a filing atarget date by the end of year that's a pretty compressed the timeframe sixmonths from the last patients visit until filings and what it means, Steve, isthat we had set up and anticipate without knowing the results of the trial aframework in which we could accomplish that regardless of the outcome. So, wecan't afford to sit back and wait until we know the results of TRITON TIMI-38 todecide 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 ago-forward basis once we get the data we are prepared to submit, so we areobviously taking that path as we give you that date relative to the way thetrial enrolls.

Jim Greffet

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

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

Phil Johnson

Next caller please.


Thank you. We will go to the lineof 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, haveyou reached the number of outcomes you need, and has the data already beenlocked down? I’m just trying to get a sense if there is any risk that the datamight 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 beencommenting on the status of data lock or data analysis, but we have confirmedthat we will be presenting at AHA and that's whether the positive or negativeresults come out. So that's our latest data.

Scott Henry - Oppenheimer

Thank you.

Phil Johnson

Next caller please.


Thank you. We will now go to theline of Seamus Fernandez with Leerink Swann. Please go ahead. Mr. Fernandezyour line is open. Please go ahead. Thank you. We will go to the line of JohnBoris with Bear Stearns. Please go ahead.

John Boris - Bear Stearns

Okay, thanks for taking thequestion. 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 justtalk about contingency plans around prasugrel in superiority has hit, what youand your partner Daiichi Sankyo think you plan on doing in terms of ruling outadditional clinical plan, and what that plan might look like. And then, on thenegative side, if you don’t hit statistical superiority, what’s yourcontingency plan, going forward from a negative outcome? Thanks.

Phil Johnson

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

Jim Greffet

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

John Lechleiter

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

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

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

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

Plan to join us for the Decembermeeting to learn additional details about some of these molecules. Likewise weexpect an additional 15 entities to enter the clinic in 2008.

At Lilly we have a sense ofurgency to deliver strong results today while also reshaping our company to winfor the benefit of patients and shareholders alike. Thanks again for yourattention.


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