Lilly(Eli) & Company (LLY) — Q2 2015 Earnings Call Transcript

Good morning. Thank you for joining us for Eli Lilly & Company's second quarter 2015 earnings conference call. I'm John Lechleiter, Lilly's Chairman, President, and CEO. Joining me on today's call are Derica Rice, our Chief Financial Officer; Dr. Jan Lundberg, President of Lilly Research Laboratories; Dr. Sue Mahoney, President of Lilly Oncology; Enrique Conterno, President of Lilly Diabetes; Dave Ricks, President of Lilly Biomedicines; Chito Zulueta, President of Emerging Markets; Jeff Simmons, who is President of Elanco Animal Health; and Ilissa Rassner, Brad Robling, and Phil Johnson of Lilly's IR team. We're also joined by Dr. Eric Siemers. Eric is a distinguished medical fellow for our Alzheimer's disease team. He is dialing in from Washington where he is attending the Alzheimer's Association International Conference. During this conference call we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors including those listed on slide three and those outlined in our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions. Lilly's positive momentum continued in the second quarter as we delivered solid underlying business performance with productivity improvements driving bottom line leverage with double-digit operating income and EPS growth. And we again saw significant pipeline progress including multiple regulatory approvals and submissions along with positive Phase II and Phase III data readouts. As usual I will begin today's call by highlighting key events that have occurred since our first quarter earnings call in late April. We've seen advances on a number of fronts. Starting with commercial milestones. In Japan, we began promotion of Cyramza for gastric cancer. The gastric cancer indication in this market represents a significant opportunity for this product. Here in the U.S., we began a promotion of Cyramza for second line metastatic colorectal cancer following FDA approval of this indication the day after our last earnings call. On the regulatory front, we achieved a number of milestones. In diabetes, we received approval in Japan for Trulicity, our once-weekly GLP-1 receptor agonist for the treatment of Type II diabetes. We also received FDA approval for Humalog U-200 KwikPen for the treatment of Type I and Type II diabetes. In collaboration with Boehringer Ingelheim, we received European Commission approval for Synjardy. This is a single-pill therapy that combines empagliflozin and metformin for the treatment of adults with Type II diabetes. Here in the U.S., the FDA issued a complete response letter for Synjardy and Boehringer Ingelheim has already submitted their response. We're pleased the resubmission was granted a two-month review and we're hopeful we'll be able to bring this product to market in the U.S. yet this year. Moving to oncology as I mentioned a moment ago we received FDA approval for Cyramza in second line metastatic colorectal cancer. We also completed our submission for the same indication in Japan. In addition, the FDA Oncologic Drugs Advisory Committee, ODAC, reviewed the data supporting our submission for necitumumab in combination with gemcitabine and cisplatin for first-line treatment of patients with advanced squamous non-small cell lung cancer. We were encouraged by the constructive discussion on the benefit-risk profile of necitumumab. We believe necitumumab represents a meaningful advancement in treatment. Additionally, we submitted Ixekizumab in Europe for the treatment of moderate to severe plaque psoriasis following our U.S. submission in the first quarter. Clearly this continues to be an exciting and busy time for our regulatory colleagues across the globe. On the clinical front, we presented detailed Phase III data on three different molecules and highlighted these data on investor calls. First was the presentation of Phase III data for basal insulin PEG lispro in patients with Type I and Type II diabetes at the ADA meeting. As we've stated in the past, we decided to delay regulatory submission to generate additional safety-related data. Next was the presentation of data from the first two of our four pivotal trials for baricitinib in rheumatoid arthritis at the U.R. in Rome. We are encouraged by the Phase III data we've seen to date and we look forward to the data readouts from the final two pivotal trials later this year. Lastly was the presentation of Phase III data for Ixekizumab in moderate to severe plaque psoriasis at the World Congress of Dermatology meeting. We believe Ixekizumab has demonstrated a compelling risk profile in clinical work to date and that Ixekizumab could help patients with moderate to severe plaque psoriasis better manage their disease and improve their quality of life. Further, we believe that the level of efficacy and the safety profile demonstrated by biologic agents targeting IL-17A in psoriasis represents a meaningful improvement to currently available therapeutic options and could be a catalyst for greater use of biologics in the treatment of this disease. Just yesterday at the Alzheimer's Association International Conference, we presented two-year extension data from the Expedition Ext trial. We believe the data are consistent with a potential disease-modifying effect of solanezumab on underlying disease progression and we look forward to completion of the Expedition 3 study in late 2016. Apart from these Phase III data disclosures, we also had some earlier data presentations that garnered investor interest. Specifically, at the ASCO meeting we presented Phase II data for Olaratumab in soft tissue sarcoma. While at the American Headache Society meeting, we presented initial Phase IIb data on our CGRP monoclonal antibody in episodic migraine. We're enthusiastic about the opportunity for both of these molecules. Derica will provide an important update on Olaratumab later in the call. On the business development front, we announced five oncology deals spanning collaborations with AstraZeneca, BioNTech, Dana-Farber Cancer Institute, Sarah Cannon Research Institute, and Immunocore. This is consistent with comments that we made earlier this year that you should expect to see us increase the level of our business development activity through partnerships, licensing, and acquisitions at ever earlier stages of development. In addition, we struck a deal with Sanford-Burnham Medical Research Institute in the area of immunology and we announced a sales collaboration in Japan with Dainippon Sumitomo Pharma for Trulicity. In other news, we received a positive ruling from the U.K. Court of Appeal, which held that the Alimta vitamin regimen patent would be indirectly infringed by a generic competitor. This ruling reversed the initial U.K. court's decision granting declarations of non-infringement in France, Italy, and Spain. We announced plans to establish a new drug delivery and device innovation center in Cambridge, Massachusetts. The Lilly Cambridge Innovation Center in Kendall Square will help attract top scientists and bioengineers as well as enhance our business development presence in the Boston area. Just this morning, we announced plans to effectively double our research presence at our Lilly Biotechnology Center in San Diego, California. On the financial side, we took advantage of very low European interest rates to issue €2.1 billion of debt while retiring $1.65 billion of higher coupon U.S. debt. Finally, in the second quarter, we repurchased $125 million of stock, leaving $3.3 billion remaining on our $5 billion plan. In addition, during the second quarter, we distributed over $500 million to shareholders via our dividend. We remain committed to providing a robust dividend and to returning excess cash to shareholders via share repurchase. And now I'll turn the call over to Phil for a discussion of our financial performance for the quarter.

Thanks, John. Before I discuss our Q2 results, it may be helpful to review some key features of our presentation of GAAP results and non-GAAP measures. When interpreting our GAAP results and the growth rates versus 2014, keep in mind that 2014 does not include Novartis Animal Health, while 2015 includes the operating results of this business as well as all the costs associated with the acquisition. For our non-GAAP measures, we now exclude amortization of intangibles and to provide you a better idea of the underlying trends in our business, we've adjusted our non-GAAP measures for 2014 to exclude the expense associated with amortization of intangibles and to include Novartis Animal Health as if we had closed the acquisition on January 1 of 2014. This places 2014 on the same basis upon which we're reporting financials this year. Now let's look at our results for the quarter. Slide eight provides a summary of our GAAP results. I'll focus my comments on our non-GAAP adjusted measures to provide insights into the underlying trends in our business please. So please refer to today's earnings press release for a detailed description of the year-on-year changes in our second quarter GAAP results. Moving to slide nine, you can see that Q2 revenue was nearly $5 billion. The decrease of 4% compared to Q2 2014 reflects significant foreign exchange headwinds. Excluding FX, our Q2 revenue grew on a non-GAAP basis. As we discussed before, this year we will feel the negative effect of the loss of U.S. exclusivity for Cymbalta and Evista. This quarter, sales of those two products in the U.S. declined by over $110 million. Excluding the unfavorable impact of foreign exchange rates and Cymbalta and Evista in the U.S., the rest of our worldwide revenue increased 6% this quarter. Gross margin as a percent of revenue increased 2.5 percentage points going from 76.7% to 79.2%. This increase was driven by the favorable impact of foreign exchange rates on international inventories sold, which increased cost of sales in Q2 last year but decreased cost of sales in Q2 this year. Excluding this FX effect, our gross margin percent declined by one percentage point going from 77.2% in last year's quarter to 76.2% this quarter. As on prior calls, you'll see a supplementary slide providing our gross margin percent for the last 10 quarters with and without this FX effect. We continue to drive productivity improvements across our business. Total operating expense defined as the sum of R&D and SG&A declined by 7% or over $200 million compared to Q2 2014. Marketing, selling and administrative expenses declined 8% while R&D declined 5%. The reduction in marketing, selling and administrative expenses was due to the favorable impact of foreign exchange rates, cost reductions in the combined Animal Health organization, and ongoing cost containment efforts across Lilly partially offset by marketing expenses to support recent product launches. The reduction in R&D expense was driven primarily by the favorable impact of foreign exchange rates. As implied by our full-year guidance, we do expect the level of R&D spend to be higher for the remainder of the year as we start Phase II trials for tonizimab, our CGRP monoclonal antibody, olaratumab, and additional indications for Cyramza. Other income and expense was income of $29 million this quarter and our tax rate was 20.8%, a decrease of 2.3 percentage points compared to the same quarter last year. This decrease is primarily due to a discrete tax benefit realized this quarter. Also, our tax rate in both periods did not include the benefit of certain U.S. tax provisions including the R&D Tax Credit as those provisions had lapsed. At the bottom line, net income increased 20% while earnings per share increased 22% reflecting the benefit of our share repurchase. Slide 10 contains non-GAAP adjusted information for the first half of the year while slide 11 provides a reconciliation between reported and non-GAAP EPS and you'll find additional details on these adjustments on slide 21. Now let's take a look at the effect of price rate and volume on revenue. On slide 12 in the yellow box at the bottom of the page you'll see the total revenue decline of 4% on a non-GAAP basis that I mentioned earlier. The significant strengthening of the U.S. dollar against many foreign currencies drove this decline as you see the 8% negative effect from FX this quarter with a favorable volume effect of 3% and favorable price effect of 1%. By geography you'll notice that U.S. pharma revenue increased 3% driven by price, partially offset by volume. And international operations Australia, Canada, and Europe or ACE you'll see that there was a decline in revenue of 19% that was almost entirely driven by the negative effect of foreign exchange while on a constant currency or performance basis ACE revenue decreased just 1%. This decrease was driven by a substantial reduction in European Cymbalta sales resulting from a loss of data package exclusivity. In Japan, pharma revenue increased 14% in total while on a constant currency or performance basis increased 37%. The size of this increase was influenced by a weak comparison period. Recall that in Q1 2014 we experienced substantial wholesaler buying in advance of an increase in the local consumption tax, which led to corresponding reduction in wholesaler buying in Q2 2014. Consequently the performance growth of 10% for the first half of this year is more reflective of the underlying trends in Japan. Turning to emerging markets, we saw a revenue decline of 15% driven by a negative foreign exchange effect of 12%. On a performance basis emerging market sales declined 4% driven by lower sales in China and the negative effect of the Brazil Humulin tender we had last year. This quarter our pharma revenue in China declined 16% driven by lower volume. On a non-GAAP basis, which adjusts 2014 as if we'd completed the Novartis Animal Health acquisition on January 1 of that year, Alanco Animal Health declined 4%. Excluding the negative effect of foreign exchange, Alanco revenue increased 3%. Moving to slide 14 you'll see the effective changes in foreign exchange rates on our Q2 2015 results. This quarter, as mentioned earlier, FX was a top line headwind reducing revenue in U.S. dollars by eight percentage points. In terms of cost of goods sold, however, FX provided a substantial benefit, which led to FX having essentially no impact on operating income and EPS. At the bottom of the slide you can see that our non-GAAP EPS in the second quarter grew 22% with and without FX. Slide 15 shows our pipeline as of July 20 with changes since our last earnings call highlighted, green arrows showing progression and red arrows showing attrition. In terms of advancement you'll see that our CGRP monoclonal antibody has moved into Phase III with the initiation of pivotal trials in cluster headache. And we initiated Phase II testing for an oncology molecule. We also terminated elements of our oral glucagon receptor antagonist for diabetes in Phase II as well as for five Phase I molecules. With that update, I'll now turn the call over to Derica.

Thanks, Phil. As on our prior calls, I'll recap the progress we've made on the key events we've projected for 2015 and then review our 2015 financial guidance. Turning to slide 16 you'll see that a majority of events anticipated for 2015 have already occurred in the first six months of the year with the vast majority being positive. Since our last earnings call, we've achieved a number of additional milestones. We initiated Phase III trials for Cyramza in both first-line EGFR mutation positive non-small cell lung cancer and in second-line urothelial cancer as well as for our CGRP monoclonal antibody in cluster headache. As John mentioned earlier we had a number of detailed disclosures at medical meetings for basal insulin PEG lispro, baricitinib, ixekizumab, and solanezumab. You will also see that we updated the regulatory submissions category to reflect Japanese submission for ramucirumab for second-line metastatic colorectal cancer and European submission of ixekizumab for psoriasis. As we announced on our ixekizumab investor call, we've added an event to our key event list for the simultaneous submission of ixekizumab in Japan for both psoriasis and psoriatic arthritis. Earlier John mentioned the presentation at ASCO of the Phase II for Olaratumab in soft tissue sarcoma. These data were compelling and included a 10-month overall survival benefit in patients in the treatment arm that received Olaratumab. I'm pleased to announce that based on the ongoing discussions with the FDA we intend to submit U.S. and European regulatory applications for Olaratumab in soft tissue sarcoma based on these Phase II data. We hope to complete the U.S. submission before the end of 2015. As a result, you'll see a new item on our list of key events to reflect this positive development. In addition, the FDA has granted Olaratumab breakthrough designation. We're pleased that Olaratumab is the third in-clone molecule following Cyramza and ixekizumab that has generated promising clinical data and that could help patients with cancer live longer. You will also see new checkmarks to reflect three approvals John discussed earlier: Japanese approval for ramucirumab in second-line gastric cancer and dulaglutide Type II diabetes. And in the U.S. approval for Humalog U-200 KwikPen. Finally, in the other section, you'll see the green checkmarks for the positive Alimta ruling from the U.K. Court of Appeal and we now have a date in mid-November for the appeals hearing at the European patent office. We noted in the past that 2015 is another year where we're focused on demonstrating successful execution of our innovation-based strategy. We're pleased with the progress we made in the past few years and so far this year and believe this progress solidifies our near to medium-term growth prospects. Turning to our 2015 financial guidance, we've raised the bottom end of our revenue range to reflect the solid underlying performance for the first six months of the year and the launch trajectories of Jardiance, Trulicity, and Cyramza. We've also modestly increased the range for our non-GAAP other income to reflect net gains on investments realized to date and added a new line for GAAP other income that reflects the debt repurchase charge. To reflect the discrete tax benefit booked in Q2 we've reduced our non-GAAP tax rate by about 50 basis points. And our GAAP tax rate also reflects the impact of the debt repurchase and the BioNTech charges. At the bottom line, we've raised our non-GAAP EPS range by $0.10 and now forecast full-year non-GAAP EPS to be in the range of $3.20 to $3.30 per share. Our new GAAP EPS range of $2.20 to $2.30 per share has been updated for this same $0.10 increase as well as the Q2 charges we booked for the debt repurchase and the BioNTech deal. Finally, I want to point out that we own shares of Receptos and you've undoubtedly seen Celgene's offer to buy receptors for $232 per share. At this time, it is not clear to us when a deal may get done and we've not made a determination of what we will do with our shares. We'll monitor this situation and we will incorporate any necessary changes into our future guidance updates. In summary, while our second quarter revenue reflects the impact of foreign exchange headwinds and the lingering effects of U.S. patent expirations for Cymbalta and Evista, we remain on track to return to growth in 2015 driven by excellent progress in our innovation-based strategy. We had solid underlying business performance and our continued focus on productivity and cost controls drove strong leverage at the bottom line while providing the capacity to fully invest in our new product launches and to pursue additional promising pipeline opportunities. This solid business performance was the primary driver for increasing our non-GAAP EPS guidance. With tangible results from our innovation-based strategy, we aim to drive revenue growth and expand margins throughout the balance of this decade. As we discussed in the past, you'll see sharpen our focus on areas where we're best positioned to compete and win and we'll continue to find ways to increase productivity and do the work of pharmaceutical R&D better. This concludes our prepared remarks and I'll turn the call over to Phil to moderate the Q&A session.

Great. Thank you, Derica. Leah, if you could provide instructions for the Q&A session we'll get started with caller's questions.

Thanks for the question. So congratulations on a strong quarter. Derica, maybe you can just or overall if you guys can give us your thoughts on how you see the progression of Alimta sales outside of the U.S. going forward? Sort of if we just kind of exclude the competitive landscape and think about it independent just with the court rulings how you see that going forward and what amount of sales is actually reflected and represented by that, how durable you think that is? The second question, so as we think about the evacetrapib opportunity if you guys could give us any additional color you could provide on the number of events, the powering of the study? I know you said 15% power in the past, but historically when we've seen studies like this it's conservatively powered. So 15% at 95% or 98% reduction would imply somewhere between 1,400 and 1,600 events. So it would be really helpful to understand how conservatively powered your 15 assumption is on evacetrapib? And then lastly on Olaratumab just in terms of the market opportunity in soft tissue sarcoma, can you just give us a quick update on your thoughts there in terms of the patient size in the U.S. and then also globally? Thanks a lot.

Great, Seamus. Thank you for the questions. I'll go ahead and actually provide some context on your first question on Alimta O-U.S. and some of the exposures there. And then, Dave, if you'll talk about the second question for that evacetrapib powering? And then, Sue, if you'll handle the Olaratumab question? So, Seamus, for O-U.S. if we go back to the guidance call early January, we had mentioned that last year we had about $880 million in Alimta sales in Europe. We'd indicated that about $80 million of that amount would already be subject to loss of exclusivity in markets where we did not have the compound patent or the longer dated vitamin dose regimen patent. Of the remaining $800 million, about $175 million was represented by Germany with the rest being the other European countries, of which France is the largest by far followed by Germany and then Italy and Spain with U.K. being clearly the smallest of them. So hopefully as you're thinking about rulings we've had so far in Germany and rulings out of the U.K. court that provides you some basis to understand the level of exposure that's there. For Japan, I don't have last year's number but I do have this quarter's number in front of me since we also have litigation ongoing in Japan. We have $67 million in Q2. We had $57 million of Alimta revenue in Japan in Q1. The emerging markets business is a similar size to Japan where we had about $63 million in revenue this quarter and about $63 million last quarter as well. So the major exposure really is for O-U.S. the European both litigation in specific countries that's ongoing and as mentioned on the call earlier the outcome of the European patent office appeal hearing that will occur in November. Dave?

Sure. Yeah, Seamus, thanks for the question on evacetrapib. What we've said in the past is we're powered to show the effect size on LDL alone. And so your range there is about right. I don't think we've got into the exact number of events, and I would remind the investors we extended the trial by six months, which is part of our Q1 communication, which actually adds to the event total that we'll see. So in a sense that may increase the powering of the study although not markedly. So the study was designed to show an effect on LDL alone. Using the Oxford curve that we've seen play out through time, we estimate about a 30% reduction in LDL so thus the mid-teens outcome and that is looking at the quintuple endpoint. We also have a minimal threshold for the triple hard endpoints of death, MI, and stroke. And we believe we have ample events now as we look at the data coming in mid-next year.

Sue?

Yeah. And with regards to Olaratumab, so the size of the market, it's about 11,900 patients who are diagnosed with soft tissue sarcoma in the U.S. For drug treatment, there's about 5,800 in the U.S., and then O-U.S. about 5,000 again. I think the important thing here is that there really hasn't been anything approved or shown an overall survival advantage in about three decades in this tumor type. So it's a big unmet need and we're very excited by the data that we have and the opportunity to bring Olaratumab hopefully to patients. So we have announced that we'll be filing based on discussions with the FDA in the U.S. and we also anticipate doing that in Europe too. We also are planning to initiate a Phase III study over the next few months in Q3 and to do some pediatric studies. So I have to say we're excited about the opportunity with this molecule.

Yeah. Just a real quick add-on to that, Seamus. I think clearly and for good reason there's been a lot of interest in the investment community on immune-oncology agents that have shown durable responses for a number of patients. While this is not in that nice shiny penny of immune-oncology, the kind of benefit that we saw for overall survival is quite striking. You're talking about 25 months of overall survival compared to 15 months on the comparator arm. So while this is a smaller patient population, an orphan drug essentially type of patient population, we're very enthusiastic about the data we've shown to date. Leah, next caller please?

Yes. Thank you. A few questions. On solanezumab, obviously the AAIC data presented yesterday. I'm wondering if you can talk about that in the context of Expedition 3 and how you will be, I should say, how or whether you will be incorporating a delayed start design into that trial. And really is that something that you would likely need for approval? Or is that something that could come later? In other words, is it a regulatory necessity to show results on a delayed start design? Or is it more of a labeling matter? Second question is on Amyvid, your AD imaging agent. Kind of a rounding error commercially but it seems that PET imaging in the future could have some real value when it helps, when it comes to kind of helping rule in Alzheimer's disease. Is there an unappreciated commercial opportunity at some point in the future with the product? And then last question just on diabetes. If I look at sales levels of various products, it seemed to track below what I would have expected in different geographies and I'm wondering if that speaks to an increased level of price erosion that might have impacted results?

Great, Tim. Thanks for the questions. Dave, if you can handle the solanezumab Expedition 3 and Amyvid questions? And then, Enrique, the diabetes question. And obviously, Chito, if you want to make any comments on the growth in emerging markets with diabetes products, please do chime in. Dave?

Great. Thanks, Tim, for the questions. I'll try to handle these and if I get in trouble my experts also online can help. First, regarding the data we showed yesterday on the Expedition Ext or extension study, this is a very long-term set of data with the drug effect in Alzheimer's. And I think we're pleased to see that the safety of the product continues to look very good in this population. We're happy that the delayed start impact we had hoped to see was displayed and that the later patients coming on to sola after the 18-month blinded period did in fact not catch up as tested statistically but also numerically visible and that the treatment effect appeared to persist. So on the back of that though it's important to note that this is only important if Expedition 3 is positive. This does not represent a basis for submission or because it's not a blinded assessment. But I think those are encouraging signs for us. And as you know and we've said many times on calls like this, we think included a number of features in Expedition 3, which give us a good shot to really thoroughly test the question of solanezumab in mild patients including your question on PET screening. So I'll jump to that, which is we believe it's essential to eliminate from these studies and in clinical practice to screen for amyloid in patients who have dementia to really define the underlying cause. Of course that's consistent with Alzheimer's disease versus other types of dementia. Right now, Amyvid is available commercially in the U.S. and many European markets. It is not a major product for us today. As you know it's not reimbursed by CMS in the U.S. for instance. I would frame this I guess in three ways. It's useful for patients, for treaters, and for our company. Why is - sales would be expected to increase of Amyvid should disease-modifying agents become available including solanezumab because I expect most of those labels and/or payer requirements will force patients to have confirmed amyloidosis to be eligible. That's good news, but probably still wouldn't be a massive undertaking in terms of revenue impact for the company. But it's also important to look at the PET capabilities we have in two other frames. One is as a drug development tool. And really operationally being able to manage a clinical network a site that has ready access to the Amyvid PET has really helped us enroll studies quickly and make sure that we can scan patients in a timely way, keep them in the study, and synchronize that complicated machine that allows us to get Expedition 3 done for instance, and future studies like the base program with AZ. And then finally, and particularly for something like our Tau Tracer, which is in Phase II, these are very useful drug discovery and scientific tools to help us accelerate and make good decisions about earlier phase Alzheimer's programs. So these are really essential parts of our total Alzheimer's vision and we'll talk more about that in December at our Investor Meeting focused on Alzheimer's.

Great. Thank you. Enrique?

Sure. As we look at our diabetes business, there were a number of one-time events that are impacting the quarter-to-quarter results and I thought first I would say that the underlying business fundamentals are good, not just when it comes to volume. But we've not seen any significant changes when it comes to contracting or additional price pressures over and above what we're seeing before. Let me speak to Humalog for a second. In Q2 of last year, we had a significant adjustment related to, positive adjustment related to managed Medicaid. That was about five points in terms of the impact when we look at the compare of Q2 of 2015 versus Q2 of 2014. We had a little bit of de-stocking also in the U.S. as we look at Q2. But as we look at the business fundamentals, we continue to feel good about our prospects. We also have some anomalies when it comes to Tradjenta and in this particular case there were two important adjustments that have been made over the last year or so. We made an adjustment in Q3 of 2014 that basically, a negative adjustment in Q3 of 2014 for Tradjenta sales because we had not accrued enough when it comes to our rebates. We were getting more of our business coming from Medicare than we had initially estimated. And then in Q2 of 2015, we had a negative adjustment. In essence, we had overstated some of our sales in the first half of 2014 and we have in a certain way understated our sales in the first half of 2015. To make this simpler the bottom line is if we were to normalize for some of these one-time effects and we were to reassign the accruals to the right quarter, our net sales would be growing in the case of Tradjenta in the U.S. about 15%. Clearly we have a very significant volume growth.

Great. Leah, next caller, please.

Thanks for taking the questions. With the commercial launch activity heightened in Japan, can you maybe just walk us through the opportunities for Cyramza, Trulicity there and the type of pricing if you've received any innovation type pricing on Cyramza for gastric cancer there? Any relationship with Sumitomo with Trulicity and how you'll launch there? Second question on the CGRP antibody, can you maybe just walk through what the significant points of differentiation are relative to the other competitive antibodies here? And with the rollout of this earlier than anticipated in cluster headaches, just your thoughts on when you might be in a position to compete those clinicals? And then the third and final question for John Lechleiter just on the political front, can you maybe address two issues that seem to be taking center stage in Washington, most notably repatriation and your thoughts whether we're going to see something that happens their along with tax reform going forward? Thanks.

Great, John. Thanks for the questions. You got a good smattering of the management team involved here so let's see, Sue, if you'll start off talking about Japan, Cyramza, how we'll proceed in that, any update we've got on pricing there? We'll stick with Japan and move over to Enrique for comments on Trulicity including the recently announced partnership for the commercialization of the product there. Dave, for the CGRP monoclonal antibody questions and then John for the two last questions on repatriation and tax reform. So, Sue, please start.

Yeah. Sure. Okay. With Cyramza we actually launched Cyramza on the 22nd of June and we do see this as a really good opportunity for Cyramza given the unmet need there is in Japan and given the number of patients who are treated in Japan with gastric cancer. We estimate about 16,000 patients in Japan are treated in the second line gastric versus about 6,000, 4,000 to 6,000 in the U.S. So the opportunity there is great. The feedback that we've got from thought leaders is good and the initial feedback from the sales force again is very positive. So it's early days, 22nd of June launch. We did get a slight sales buy-in but clearly we'll be tracking the sales going forward. From a price perspective, yes, we have got the price. The bar price for the 500-milligram is ¥355,000 and for the 100-milligram is about ¥75,000. So we'll give you the exact details on that but we feel good about the price we've got in Japan.

Great. Enrique?

Sure. As we have said before when it comes to Trulicity overall expansion of the GLP-1 class is critical for us. Just to quote a few numbers in the U.S. when we look at new patient growth that number is now close to 50%, year-on-year or 13 weeks year-on-year. So we're clearly very pleased with that. When it comes to Japan, this is even more true just because in Japan the GLP-1 class has the lowest penetration in Type II diabetes of any major market. Now, for us to accomplish this we have decided to partner with Dainippon Sumitomo in order to give us to have the appropriate reach when it comes to the small clinics. And this is going to be critical for us.

Great. Thank you. Dave?

Yeah. So on CGRP we're excited about this program. As was announced today we did initiate the cluster programs in both chronic and episodic in Q2. We don't have an exact timing at this point for the readout. It's enrollment dependent, John. But we would hope to be able to enroll those studies rapidly given the unmet need and then be able to submit those to regulators as quickly as possible. We'll give updates as we begin to see a little bit more rate on that and you can look at ClinicalTrials.gov, which we update religiously on these points. That is one of the sources of differentiation we might see for our program versus others, which is indications. At this point I just want to emphasize that there's a big market. There's about 14 million migrainers who could benefit from a preventative just in the U.S. and CGRP neutralization appears to have a very profound and so far looks relatively safe method for alleviating the suffering from this condition. So there's probably room for a number of players. Really we're going to have to wait to see the Phase III programs play out and often things like dose selection and frequency, et cetera will be different. And we'll see who comes up with the best data package at the end. Right now we're focused on execution and getting in the clinic with the Phase III program in the coming months and are excited by the recent Phase II readout we saw.

Great. Thank you. John?

John, thanks for your question. I think speaking for Lilly in terms of the potential for tax reform, we're encouraged by many of the recent soundings that have come from Washington. We've been for as long as I've been CEO and I'm sure before that advocating for corporate tax reform. We have an uncompetitive tax system in this country. It puts American companies at a disadvantage. It actually discourages investment in the United States. So we would be very anxious to see a system that takes a territorial approach to taxation and as part of that if we enable some repatriation, obviously we would be broadly in favor of that. The devil is always in the details but we're hopeful that short of comprehensive tax reform that current events and the impetus for the Highway Trust Fund, et cetera, might spur action here. And we're more than ready and willing to participate in a constructive discussion.

Great. Thanks, John. Leah, if we can go to the next caller.

Thank you. John, just a quick question for you. You had mentioned in your prepared remarks your growing interest in deal activity but mostly confined to partnerships, licensing deals, et cetera. Can you elaborate a little further on that? And in your mind, is there a limit as to how big you would go? And would you consider using your equity? Just given where your multiple is I would think that that would be something that would be advantageous to you now. And then a question for you, Derica. You've previously guided to the FX benefit on gross margin this year to unwind next year assuming exchange rates remain constant. Can you update us on what to expect in terms of the magnitude of that impact? Thanks very much.

Okay. Jami, I'll start off. Thanks for the question. I think what we called out at the beginning of the year was our sentiment favoring deals done at ever earlier stages. I think this is not inconsistent with the trend you see in the industry. I think in terms of later-stage deals or maybe even larger-size deals, we're going to be guided first and foremost by the therapeutic categories where we've chosen to compete. And again I think we sort of outlined that quite distinctly at the beginning of the year. That would be diabetes, oncology, and neurodegeneration with emerging interest and presence in pain and in autoimmune disease, again depending on the outcomes of clinical studies. Obviously we filed ixekizumab. We fully intend to move into that psoriasis angle from an autoimmune perspective once we gain approval for that molecule. So if you go back and you look at the deals we've done since I became CEO in 2008, the ones that stand out obviously are ImClone. We think we can have as many as three molecules from that then existing ImClone portfolio that will eventually be on the pharmacy shelf that augmented and supplemented a presence we already had in oncology. The second biggest deal in that period of time was the Novartis Animal Health. We have been buyers, obviously, on the animal health side going back at least to the deal with Monsanto to acquire BST in the middle of the last decade. We very clearly aim to continue to build that business both through organic and inorganic means. I mean in between you have a variety of smaller deals. Abbott is a good example is a good example of a unique opportunity we saw to acquire technology that as Dave said earlier gives us a real boost and I think a competitive advantage in the Alzheimer's space. I think in terms of thinking about what the magnitude of something Lilly might consider, I think the Novartis ImClone deals kind of define that. At the same time we're not anxious to go out and pay inflated prices for the hot property of the moment. There's a bit of a, I think, a bit of a bubble right now with respect to valuations on some of the smaller companies or the smaller entities in biotech. And I think it's better use of our shareholders' equity to focus and foremost on our internal efforts, which are quite strong and I think quite robust in all these therapeutic areas and which we'll continue to augment and supplement aggressively by these earlier stage partnerships.

Jami, in regards to gross margin we've said that each quarter we try to neutralize the impact of FX in gross margin by the additional slide that we provide that kind of shows you the normal run rate. And obviously this year we're running slightly above the mid-seventies. But we said when we think towards 2016 to focus you all, you should be thinking about that 75% range of gross margin being net of FX.

Great, Thanks, Derica. Leah, next call please.

Hey, John. Hey, guys. Congratulations on the stock this year, by the way. I was intrigued by John's comments that there's a bit of a biotech bubble since I cover biotech as well. That scared me. You ruined my day. But anyway actually I do have a question for John kind of building on John Boris' question. Just and I know you're very tuned into Washington. Just this general question, this comes up all the time but I feel like the volumes just turned up a little bit on the price point for cancer drugs given the pace of innovation there. I'd like to hear you kind of talk about your long-term view on that. Not your one or two-year kind of view but maybe put on your 10-year cap and just kind of ask the question are the current price points for cancer drugs sustainable if the current pace of innovation continues? And how you think the industry is going to react to any pricing pressure you might see? And then just on ixekizumab, the IL-17 antibody clearly the AstraZeneca Amgen announcement on - Amgen announced they were waiting for AstraZeneca. But on their decision to pull out of the partnership because the side effect profile is a big positive for you guys. I was just wondering if you could speak, if you would be willing to speak in more quantitative terms of what that might mean. Kind of how many patients you think will ultimately be on the drug, et cetera? This looks to me like it could be a multi-billion-dollar addition to your out year numbers. I just kind of want to know if I'm totally on the wrong track or not. Thank you very much.

Thanks for the question. So, John, if you'll start off and then we'll go to Dave for the ixekizumab question.

Hi, Mark. I'm sorry if I ruined your day. I'll try to make it up in some way. Okay. With respect to a lot of media attention and political kind of attention to the price point for cancer drugs, look, I think first and foremost up to the point where we have data, which does not include this year, we did a study that dates back to last year looking at the proportion of drug spend as part of total, the cost of total cancer care. It's remained remarkably consistent over a long period of time. So put another way, while today we hear a lot about the cost of cancer medicine, I'm not sure I've ever heard anybody complain about the cost of that long stay in the hospital that many of our drugs, these cancer drugs, help to minimize or to eliminate and that's because hospital stays are covered by insurance. I think the question is what's the cost to the patient and how can we ensure that more patients have access, affordable access, to cancer medicine just like they've got through their insurance policies affordable access today to other forms of care that are required for people with cancer. In terms of how we look at this in the long haul, I think we're going to have to wait and see how this plays out. We're already seeing in many of these classes two or more competitors emerging. We know in other classes of medicines, the diabetes would be one example we're familiar with, we see intense competition that has resulted in lower net effective prices based on negotiations that we must undertake with payers and insurers in that space. Obviously we haven't sort of seen that play out in quite the same way in oncology, but I think we should be encouraging innovation because innovation begets competition rather than discouraging innovation by threatening things like price cap, etc. For a cancer patient, cancer medicines, particularly some of these new what you might call breakthrough therapies that we all know about, represent the highest quality and most medically effective approach we have in our material of any other intervention. So calling these out for being simply based on price fails to look at the incredible value that these drugs bring, not in terms of avoiding or minimizing other system costs, but in terms of getting patients that precious additional time and quality of life that is so important.

Great. Thanks, John. Dave?

Yeah. So Mark, thanks for the question on ixekizumab. It was mentioned in the call text we submitted in the U.S. and Europe and shortly in Japan and other major markets. We're excited about the program. In terms of our assets, that's what we're focused on, which is we see a drug here that is providing a whole new threshold of efficacy for patients suffering from moderate to severe plaque psoriasis. We've reported PAZ-100 as high as 40% and PAZ-90 in sort of unprecedented range as well. So we think we've got a great asset and we had a special call in June about this and answered a number of questions about the psychiatric safety and as we said then, we don't see an imbalance numerically or statistically across arms, whether they be active comparators or the two doses of ixekizumab. So we're proceeding through the regulatory process. Of course, we need to get through that with all the caveats. In terms of the market opportunity in psoriasis, depending on how you count it with PSA or not, I think people would say there's a $4 billion to $6 billion opportunity right now globally and I would just point out that in our estimates less than the treatment rate with biologics in moderate to severe plaque psoriasis is probably less than half of rheumatoid arthritis. So there's just a huge amount of possibility for growth of biologics as a class in the space. Our vision for that is that the newer, more effective therapies will be a great way to drive interesting greater treatment in dermatology community. We think patients will demand it through time and the caveat there is of course the normal access and regulatory processes are what stands between us and that opportunity. We don't know what will happen with the former Amgen asset. We're focused on our program and we think there's ample growth for a number of assets in psoriasis and we like our product.

Thanks, Dave. Leah, if we can go to the next caller.

Great. Thanks very much for the questions. Maybe the first one on solanezumab and more broadly in Alzheimer's. I guess coming back from AAIC, some of the feedback from the meeting is that the ARIA signal seen in some competitive products is largely asymptomatic and maybe able to be treated through. I guess just being sure of your thoughts on ARIA and what that could mean for the competitive landscape. And maybe just part of that answer, if you could just talk a little bit more about you guys targeting monomer A-beta versus plaque given that you do have products going after both in the pipeline. Second question was a longer-term question on diabetes. There's been some market concern that this category only becomes more competitive over time and gets even more price pressure going forward. You guys obviously have a differentiated portfolio but how do you think about the risk of an even more conservative payer environment in this category going forever? Thanks very much.

Great, Chris. Thanks for the question. So first for the Alzheimer's disease, the ARIA signal and is this treatable. Jan, if you want to start out off with a few comments and, Eric, we may see if you have additional comments that you would like to add to that. Jan, certainly if you want to talk about sort of the plaque-specific approach that we've got in the clinic and then Enrique for the price pressure in diabetes segment. Jan?

Yeah. Well in relation to the ARIA signal that was reported, I think first it's clear that Biogen has much more of that than solanezumab, which I think is a key difference right now. Secondly, it was claimed that you can treat through it. On the other hand, Biogen also had dropouts I think to a large extent in the trial so it still needs to be seen in a larger situation than in phase 3 whether it really holds true and my view is that if you have an agent that doesn't have very much of this, that's a competitive advantage for solanezumab. If you look at the types then of monomer A-beta antibodies versus plaque antibodies, we have both two selective agents in Lilly. Solanezumab targets then the monomer A-beta which is then a precursor in a way to the plaque. We have an agent in phase 1 called N3pG which is a pyroglutamate plaque-specific antibody. And in preclinical experiments, we have seen as a monotherapy for N3pG very good clearance of amyloid deposits in transgenic models of Alzheimer's disease in mice and it's even more efficacious if you combine it with an oral base inhibitor while you more or less have a total clearance of amyloid from these mice brains. What we also have seen in the preclinical experiments for N3pG, the plaque-specific antibody did not give micro hemorrhage which is kind of related to the ARIA signal out to brain edema that the Alzheimer patients have. So we hope that we could have a plaque-specific antibody with less impact on the brain edema than what we currently see with a Biogen molecule.

Great. And, Eric, do you have anything that you like to add for the discussion around the asymptomatic nature of our ability to treat, et cetera, that you feel has been adequately covered?

Yeah. Well I just briefly mention that I think these are relatively early days in terms of the field sort of understanding how that may be managed. Fortunately with solanezumab we really haven't had to deal with the issue too much because it's just a half a percent in placebo treated and 1% in solanezumab treated without really any associated symptoms. But for other molecules where you do have ARIA that may be asymptomatic in two-thirds of people but it's so asymptomatic in one-third of the people. So that's something that I think broadly in the field we'll just need to get more experience with.

Great, Thanks, Eric. Enrique?

Sure. It's difficult to speculate when it comes to the payer environment on diabetes but I think it's helpful for us to be able to look back because that means, because that was the first class in diabetes that was under pressure when it comes to the narrowing of formularies. And that started sometime in 2009. Through this period from 2009 to today what we have been able to see is that Humalog, we've been able to have fairly stable net prices for Humalog over this period. If anything, they are slightly up but clearly not much. So I would say that, yes, it is likely that there's going to be narrowing of formularies in other segments in the diabetes space. But I do not expect a significantly different behavior when it comes to some of the net prices and Humulin insulin actually behaved. So that's basically what I would offer there.

Great. Thank you. Leah, can we move to the next caller, please.

Thanks for taking the questions. With the commercial launch activity heightened in Japan, can you maybe just walk us through the opportunities for Cyramza, Trulicity there and the type of pricing if you've received any innovation type pricing on Cyramza for gastric cancer there? Any relationship with Sumitomo with Trulicity and how you'll launch there? Second question on the CGRP antibody, can you maybe just walk through what the significant points of differentiation are relative to the other competitive antibodies here? And with the rollout of this earlier than anticipated in cluster headaches, just your thoughts on when you might be in a position to complete those clinicals? And then the third and final question for John Lechleiter just on the political front, can you maybe address two issues that seem to be taking center stage in Washington, most notably repatriation and your thoughts whether we're going to see something that happens their along with tax reform going forward? Thanks.

Great, John. Thanks for the questions. You got a good smattering of the management team involved here so let's see, Sue, if you'll start off talking about Japan, Cyramza, how we'll proceed in that, any update we've got on pricing there? We'll stick with Japan and move over to Enrique for comments on Trulicity including the recently announced partnership for the commercialization of the product there. Dave, for the CGRP monoclonal antibody questions and then John for the two last questions on repatriation and tax reform. So, Sue, please start.

With Cyramza we actually launched Cyramza on the 22nd of June and we do see this as a really good opportunity for Cyramza given the unmet need there is in Japan and given the number of patients who are treated in Japan with gastric cancer. We estimate about 16,000 patients in Japan are treated in the second line gastric versus about 6,000, 4,000 to 6,000 in the U.S. So the opportunity there is great. The feedback that we've got from thought leaders is good and the initial feedback from the sales force again is very positive. So it's early days, 22nd of June launch. We did get a slight sales buy-in but clearly we'll be tracking the sales going forward. From a price perspective, yes, we have got the price. The bar price for the 500-milligram is ¥355,000 and for the 100-milligram is about ¥75,000. So we'll give you the exact details on that but we feel good about the price we've got in Japan.