Lilly(Eli) & Company (LLY) — Q4 2015 Earnings Call Transcript

Good morning, everybody, and thanks for joining us for Eli Lilly and Company's fourth quarter 2015 earnings call. I'm John Lechleiter, Lilly's Chairman, President, and CEO. Joining me here on the call today are: Derica Rice, our Chief Financial Officer; Dr. Jan Lundberg, President of Lilly Research Laboratories; Sue Mahony, President of Lilly Oncology; Enrique Conterno, President of Lilly Diabetes; Dave Ricks, President of Lilly Bio-Medicines; Chito Zulueta, President of Emerging Markets; Jeff Simmons, President of Elanco Animal Health; and Ilissa Rassner, Brad Robling, and Phil Johnson of Lilly's IR team. 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 3 and those outlined in our latest Forms 10-K and 10-Q filed with the SEC. The information we provide about our products and pipeline is for the benefit of the investment community. It's not intended to be promotional and is not sufficient for prescribing decisions. So let me begin by recapping key events since our last earnings call in October. On the commercial front, we have received approval for and launched Portrazza in combination with gemcitabine and cisplatin in the United States for first-line squamous non-small-cell lung cancer. On the regulatory front, just last week, along with Incyte, we announced FDA submission of once-daily baricitinib for the treatment of moderately to severely active rheumatoid arthritis. We also submitted baricitinib to the European Medicines Agency for the same indication. Along with Boehringer Ingelheim, we received final U.S. approval for our insulin glargine product, Basaglar, with launch set for December 15 this year. We also submitted an 80-unit Basaglar pen for FDA review. We announced that FDA accepted the filing of data from EMPA-REG OUTCOME, the Jardiance cardiovascular outcomes trial. The data were also submitted to European regulators. As you may recall, Jardiance is the only diabetes medicine to have demonstrated a significant reduction in both cardiovascular risk and cardiovascular death in a dedicated outcomes trial. And finally, we submitted the fixed-dose combination tablet containing empagliflozin and linagliptin to European regulators. We also received FDA approval for the Humulin Regular U-500 KwikPen. We received European Commission approval following positive CHMP recommendations for Cyramza for both second-line non-small-cell lung cancer and second-line metastatic colorectal cancer. And Europe's CHMP issued a positive recommendation for approval of Portrazza in first-line EGFR-expressing squamous non-small-cell lung cancer. On the clinical front, we had a number of notable developments. Along with Boehringer Ingelheim, we presented additional data from the EMPA-REG OUTCOME study. At the American Society of Nephrology, initial renal outcomes data were presented that showed empagliflozin, when used in addition to standard of care, significantly improved renal outcomes compared to standard of care alone. And we expect more comprehensive renal results to be published in a peer-reviewed scientific journal this year. And at the American Heart Association, further data related to the reduction of heart failure and cardiovascular death were presented. And earlier this week, European Heart Journal published comprehensive heart failure results. At the World Diabetes Congress, we presented data from the AWARD-8 study showing that treatment with Trulicity plus a sulfonylurea produced greater reductions in HbA1c than treatment with a sulfonylurea alone. Along with Incyte, we presented data at the ACR meeting from the baricitinib Phase 3 rheumatoid arthritis program, including data from the RA-BEGIN study that showed baricitinib was superior to methotrexate in improving multiple measures of the signs and symptoms of RA in treatment-naive patients, and data from the RA-BEAM study that showed baricitinib was superior to adalimumab in improving multiple measures of the signs and symptoms of RA in patients who had an inadequate response to methotrexate. At the ACR annual meeting, we presented data from the Phase 3 SPIRIT-P1 ixekizumab study showing that patients with active psoriatic arthritis treated with ixekizumab for 24 weeks achieved significant improvements in signs and symptoms of their disease when compared to placebo. They also experienced significantly less progression of radiographic structural joint damage, reduced disability when performing certain physical functions, and improved skin clearance of plaque psoriasis. Finally, we terminated the development of basal insulin peglispro. On the business development front, we extended our agreement with Merck to evaluate Alimta in combination with Keytruda in a Phase 3 study in first-line non-squamous non-small cell lung cancer. We also announced a collaboration with Merck to evaluate our CDK-4 and CDK-6 inhibitor, abemaciclib, in combination with Keytruda in multiple tumor types. And we announced an agreement with Roche Diagnostics related to Roche's ongoing development of a commercially scalable cerebral spinal fluid assay for amyloid-beta 1-42. In other news, we announced an expansion of our R&D facilities here in Indianapolis. We also announced that we will close our Animal Health manufacturing facility in Sligo, Ireland. Manufacturing operations and commercialization activity will conclude this quarter, with full closure targeted by year-end. As a result of this decision, the company will recognize a charge in the first quarter of approximately $100 million. In addition, we decided to exit ownership of our Animal Health manufacturing site in Dundee, Scotland. In the fourth quarter we repurchased roughly $250 million of stock, leaving $2.95 billion remaining on our $5 billion plan. In addition, during the fourth quarter we distributed over $500 million to shareholders via our dividend. And in December we announced a 2% increase in the dividend for 2016. We remain committed to providing a robust dividend and to returning excess cash to shareholders via share repurchase. 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 Q4 results, it may be helpful to review 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 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, 2014. This places 2014 on the same basis upon which we are reporting our financials this year. Now let's look at our results for the quarter. Slide 9 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. So please refer to today's earnings release for a detailed description of the year-on-year changes in our fourth-quarter reported results. Moving to slide 10, you can see that Q4 2015 revenue was relatively flat compared to Q4 of 2014 at just under $5.4 billion. FX continued to provide a significant top line headwind. Excluding FX, our Q4 revenue increased 5% on a non-GAAP basis, driven by higher volume for Trulicity, Cyramza, Humalog, and Trajenta, the takeback of North American rights for Erbitux, and U.S. prices. Gross margin as a percent of revenue increased 1 percentage point to 77.3%. This increase was driven by productivity improvements from our diabetes manufacturing technical agenda, efficiencies in other manufacturing processes, and increased prices in the U.S. This quarter the gross margin percent was not affected by changes in foreign exchange rates on international inventories sold, as the benefit realized in this year's Q4 was very similar to that realized in Q4 last year. Excluding this FX effect, our gross margin percent increased by 1 percentage point, going from 74.7% in last year's quarter to 75.7% this quarter. As on prior calls, you'll find a supplementary slide providing our gross margin percent for the last 10 quarters with and without this FX effect. Total operating expense, defined as the sum of R&D and SG&A, increased 5% compared to Q4 of 2014. Breaking this into its component parts, marketing, selling and administrative expenses declined 3%, while research and development expenses increased 19%. The reduction in marketing, selling and administrative expenses was due to the favorable impact of foreign exchange rates and continued expense control, partially offset by expenses to support recent product launches. The increase in R&D expense was driven primarily by charges associated with the termination of evacetrapib and basal insulin peglispro and by higher late-stage clinical development costs. Excluding the termination charges, R&D expense increased 8%. Other income and expense was income of $45 million this quarter. This represents an improvement of $33 million compared to Q4 2014, primarily due to lower net interest expense. Our tax rate was 13.5%, a decrease of 2.9 percentage points compared to the same quarter last year. This decrease is primarily due to a discrete tax benefit recognized this quarter. Also, our tax rate in both periods included the full-year benefit of the extension of certain U.S. tax provisions, including the R&D tax credit. At the bottom line, net income decreased 6% and earnings per share decreased 5%. As I'll discuss in a few moments, net income and EPS actually increased when excluding the effect of FX. And R&D termination charges mentioned earlier were also a headwind. Slide 11 contains non-GAAP adjusted information for the full year. At a high level, you'll see that full-year revenue decreased 4%, as did operating expenses, and the gross margin percent grew substantially, leading to double-digit EPS growth. As with the quarter, FX was a big factor on a number of line items. In a few moments I'll cover our full-year results on a performance basis excluding the effect of foreign exchange. Slide 12 provides a reconciliation between reported and non-GAAP EPS, and you'll find additional details on these adjustments on slides 24 and 25. Now let's take a look at the effect of price, rate, and volume on Q4 revenue growth. On slide 13 in the yellow box at the bottom of the page, you'll see the flat non-GAAP revenue I mentioned earlier. The significant strengthening of the U.S. dollar against many foreign currencies drove this decline, as you see the 6% negative effect from FX this quarter. On a performance basis, our worldwide revenue grew 5% this quarter, with price growth of 3 percentage points and volume growth of 2 percentage points. By geography, you'll note that U.S. pharma revenue increased 14%, driven by price and to a lesser extent volume. Humalog, Trulicity, Cialis, Cyramza, and Strattera all made substantial contributions to U.S. pharma revenue growth. Having completed the takeback of North American rights for Erbitux on October 1, we also benefited from booking a full quarter's end sales of Erbitux. The decline in EuCan revenue of 17% was primarily driven by the negative effect of foreign exchange, while on a constant currency or performance basis, EuCan revenue decreased 6%. This decrease was driven by a substantial reduction in European Cymbalta sales resulting from the loss of data-package exclusivity late in 2014. Excluding European Cymbalta, EuCan sales increased about 3.5% in constant currency terms. In Japan, pharma revenue increased 8% in total, driven by mid-teens volume growth, while on a constant currency or performance basis, Japan revenue increased 16%. This performance growth is attributable to a number of products, chief among them Cyramza and Cymbalta. Turning to emerging markets, we saw revenue decline 12%, driven entirely by the negative effect of FX. On a performance basis, emerging markets revenue increased 1%, or 4% when adjusting for the Brazil Humulin tender that we had in 2014 but not in 2015. Also this quarter, our pharma revenue in China increased 2%, with a volume increase of 5%, partially offset by FX. On a non-GAAP basis, again, which adjusts 2014 as if we had completed the Novartis Animal Health acquisition on January 1 of that year, Elanco Animal Health revenue declined 11%. Excluding the negative effect of foreign exchange, Elanco revenue decreased 5%. This performance decrease was primarily driven by OUS products. Turning to slide 14, you can see that FX trimmed full-year non-GAAP revenue growth by 7 percentage points, or nearly $1.5 billion. Excluding FX, worldwide revenue grew 4%, primarily driven by volume, with significant contributions from the U.S. and Japan. Moving to slide 15, you'll see the effect of changes in foreign exchange rates on our Q4 and full-year 2015 results. As mentioned earlier, this quarter FX was a top line headwind, reducing revenue in U.S. dollars by over five percentage points. Excluding FX, revenue grew nearly 5.5% on a non-GAAP basis. In performance terms, we saw slightly slower growth in cost of sales, resulting in somewhat faster growth in gross margin. Unlike prior quarters this year, operating expenses grew a bit faster than revenue on a performance basis this quarter. Much of the OpEx increase is due to the R&D charges for the termination of evacetrapib and basal insulin peglispro. Excluding these charges, on a performance basis, non-GAAP OpEx grew about 4%, or roughly 125 basis points slower than revenue. Excluding FX, operating income declined 2%, while slightly higher other income and a slightly lower tax rate led to non-GAAP EPS increasing 5%. Turning to the full year, we delivered strong leverage on an operating basis. Excluding the negative effect of foreign exchange, revenue grew 4% on a non-GAAP basis, while our operating expenses were flat, and EPS increased 14%. These are outstanding results. And with that, now let me turn the call over to Derica.

Thanks, Phil. Moving on to our pipeline update, slide 16 shows our pipeline as of January 25. Changes since our last earnings call are highlighted, with green arrows showing progression and red arrows showing movement out of the portfolio. In terms of advancement, you'll see that necitumumab was approved by the U.S. FDA for first-line squamous non-small-cell lung cancer. Baricitinib was submitted in both the U.S. and Europe for RA, and we advanced two biologics and one small molecule into Phase 2, and three biologics began Phase 1 testing. Since our last update, we also terminated development of basal insulin peglispro. And two Phase 2 molecules exited our portfolio, one for termination and one for out-licensing. You may also have noticed that we provided the mechanism of action for a number of our Phase 1 assets to give you better visibility into where we are focusing our early-stage development work. The positive pipeline progress we've had over the past few years has brought a number of significant opportunities for lifecycle investments in new indications and line extensions. Going forward, we'll be including a slide like slide 17 in today's presentation that details select new indications and line extensions, or NILEX, including movement and attrition as we do for our NME pipeline. We hope this provides you and the investment community with greater visibility into the future potential of our pipeline investments. As on prior calls, I'll recap the progress we've made on the key events we projected for 2015, briefly discuss the key events you should monitor during 2016, and then review our 2016 financial guidance. Turning to slide 18, we're pleased with the positive progress we've made on the key events we laid out for 2015. This progress is represented by the large number of green checkmarks you see. In yellow boxes, we've highlighted key events that have occurred since our last earnings call. We've already discussed many of these earlier in this call. So let me draw your attention to olaratumab, for which we've initiated our FDA rolling submission. We expect to complete the submission during the first half of the year. Now reflecting on 2015, it was a landmark year for our innovation efforts. Among the year's achievements, I'd highlight: the reduction in CV risk, CV death, and all-cause mortality shown by Jardiance in the EMPA-REG OUTCOME study; baricitinib showing superiority to Humira and to methotrexate on many measures of the signs and symptoms of RA; and both olaratumab and abemaciclib receiving Breakthrough Therapy designation from the FDA. Slide 19 lists key events to watch for in 2016, and we'll update this list on each of our quarterly calls to help you monitor our progress. Since I discussed this list in detail on our January 5 call, I won't go through each item again today. However, I do want to draw your attention to those key events that occurred in the past few weeks. Specifically, we began Phase 3 testing of our CGRP monoclonal antibody for migraine prevention, and we submitted baricitinib for rheumatoid arthritis in both the U.S. and Europe. In the coming months, we look forward to submitting baricitinib also to the Japanese regulators. We are very pleased with the data generated in the baricitinib Phase 3 RA program. We believe baricitinib, if approved, could be best-in-class medicine and could help improve outcomes for patients living with RA. Now turning to our 2016 financial guidance, we are reconfirming the non-GAAP guidance we provided just a few weeks ago on January 5. We are, however, updating our GAAP guidance to reflect the decision to close our Animal Health manufacturing facility in Sligo, Ireland. Consequently, our GAAP tax rate guidance has been raised by 50 basis points to roughly 21%, and our GAAP EPS guidance range has been lowered to a range of $2.83 to $2.93. In summary, 2015 was a strong year, both for our underlying financial performance and for continued positive movement of our pipeline. On a non-GAAP basis, excluding FX, we drove revenue growth of 4%, with growing contributions from recently launched products. On this same basis, our focus on improving productivity resulted in flat operating expenses compared to 2014, which drove 14% EPS growth. We have strong momentum behind our innovation-based strategy. Continued execution of this strategy should position us to drive revenue growth and expand margins throughout the balance of this decade and make major contributions to medical progress. In 2015, we've made steady progress against our strategic objectives, driving revenue growth, expanding margins, sustaining the flow of innovation, and deploying capital to create value. As reflected in our 2016 financial guidance and the key events on tap for the year, we expect to make continued progress against each of these goals this year as well. We entered this post-patent period in a position of strength, with launches underway and important science being done in our labs. And we are very optimistic about the opportunity before us to improve patient lives and create value for shareholders. Now this concludes our prepared remarks. I'll now turn the call over to Phil to moderate our Q&A session. Okay, Phil.

Thank you, Derica. And based on feedback we received on the last couple of calls, those of you who are in the Q&A queue, if you could, please limit your questions to two or a single two-part question. And we'll rapidly go through as quickly as we can the questions and hopefully exhaust the queue during the Q&A time. So with that, Val, if you can, please provide the instructions to the callers for the Q&A session, and then we can go to the first caller, please.

Thank you, a couple of pipeline questions. On abemaciclib, on slide 19 you mention the Phase 2 single-arm readout underneath this category of Phase 3 readouts on the slide. I think that's the MONARCH 1 trial, Phase 2 single-arm, not likely to be a registration trial. But can you tell us how important those findings are in your opinion towards informing the future outlook for that product and how we should think about those results? And then second question on your BACE inhibitor for Alzheimer's, still on track to make a go decision in Q2? And would it be safe to assume that a go decision is more likely than a no-go decision, or is it really still very much up in the air?

Great. Tim, thank you for the questions and thanks for limiting them to two. I appreciate that. So, Sue, if you'd like to take the question on abemaciclib, and then, Dave, on the BACE inhibitor, please. Sue?

Yes, Tim, thanks for the question. With regards to the MONARCH 1 trial, which as you say is the single-arm, single-agent abemaciclib study, we should get the data on that mid this year, final data with some interim data earlier. As you know, we've also got the two Phase 3 studies, the MONARCH 2 and MONARCH 3 as well that are in combinations, and we should get that data next year with potential interims this year. We do believe that the single-agent data is an important part. It's not the whole, of course. We'll be interested in seeing all of the data in breast as well as our lung trial, which is ongoing. But this is specifically looking at abemaciclib as a single-agent. We've seen robust single-agent activity in our early-phase data, our Phase 1 data that we presented previously. And clearly, if we replicate that, we think that this could differentiate this product from an efficacy perspective. So we're excited to see the data, and we would hope that we would be able to present that data at a scientific meeting this year.

Great. Thanks, Sue. Dave?

Yes, Tim. On the BACE inhibitor, I think it would be just pure speculation to guess on what the outcome of the interim safety readout is. Again, we're blinded to those events, and safety is a difficult thing to predict. This class has had some issues, although some molecules go forward, so we're hopeful. But one thing I can assure you is we will have an announcement in Q2. I think we have enough patients enrolled in the study, and we're looking for exposures to get to that trigger to expand to a Phase 3 for the AMARANTH study.

Thank you, Dave, and then just one thing, Tim, to keep in mind. During 2015 we did get two different of our oncology drugs granted Breakthrough designation. One of those is olaratumab. The other, in fact, was abemaciclib, and that was based on the Phase 1b study that was largely monotherapy study. So again, the Phase 3 program should serve as the basis for registration. And if we do get very strong results in the Phase 2 study, as we said before, we absolutely would discuss those with the regulators and believe they would be interested in seeing those data. Val, if we can, go to the next caller, please.

Thank you. I'm going to make this two questions. On Jardiance sales, which I believe also included Glyxambi, sales were $15 million this quarter, actually I think a step down from the previous quarter, $60 million for the year. I'm just surprised that we haven't seen – certainly I would have expected to see some sequential improvement just given all the positive publicity. And while I understand that the label does not yet include the data from EMPA-REG, I'm just wondering what you guys are seeing out there. Are physicians looking at EMPA-REG as a class effect? Could it be that the SGLT-2 is facing class action lawsuits related to side effects? If you could, just talk about what's going on there because I'm surprised that we haven't seen a bigger pickup. And then just secondly, in terms of the label that you expect to get from the FDA, what are the scenarios that you see? What is a base case scenario? What is the best case scenario? And what do you think we need to see to drive numbers to reach consensus numbers by 2020? Thanks very much.

Great. Thank you, Jami. Enrique, those are right up your alley.

Very good. So, Jami, you are absolutely right. Our U.S. Jardiance revenue is not consistent with the sequential TRx growth that we're basically observing for the overall franchise, with just basically 30%. I had mentioned that before we disclosed the top line results for EMPA-REG OUTCOME. The franchise was capturing about 15% of the new patients in the SGLT-2 class. Right now, that is the franchise. As we look at the latest weeks, it's capturing over 26% of the new patients. The reason of the lack of consistency, we had a one-time adjustment due to changes in assumptions when it comes to the accrual for the inventory that we have in the channel. Without that accrual, you would have seen revenue growth or sequential revenue growth consistent with the TRx growth. Now as it relates to when do we expect the new label, clearly we have now shared that the FDA has designated this to be a standard review, which basically means that we would be launching in the second half of this year. I'm not in a position to speculate in terms of what the label would read like. But we clearly are bullish on our data, the consistency and the strength of the data. And we do believe that this is going to have, when the FDA takes action, this will have a very significant impact on the overall trend of Jardiance and the class in general.

And just can I ask a follow-up? What are you hearing from physicians in terms of interpreting this data as a class effect or applying just to Jardiance? And is this class action lawsuit something we need to be paying attention to? We've seen these class action lawsuits having impacts on other categories of drugs. So I'm just curious about that. Thanks.

We are not promoting the new label, so it's difficult to say what the reaction from the broad physician population would be. But we do conduct some targeted market research. And it is pretty clear to us I think based on the research that we basically have that about half of the physicians believe that this has been proved to be a class effect. Let's keep in mind, there's no evidence of that. And half believe that this might be a Jardiance type of effect. So I think the jury is clearly out for the other products, but we do have the evidence for Jardiance. And we think that is going make a huge difference when we basically have the label. We are seeing actually strength in the overall class. So I would say that probably the biggest event that we saw impacting the overall growth of the class was some of the warnings when it comes to diabetes ketoacidosis. So we saw stabilization somewhere in September – October when the EMPA-REG OUTCOME data came out. And now we're basically seeing class growth. So I do not believe in any way that – my bullishness in the overall growth of the class continues to be very, very high.

Thank you very much.

One real quick comment. So in the EMPA-REG OUTCOME study as well, the incidence of diabetic ketoacidosis was very low and was actually consistent across the arms as well, so I think another data point to add to the discussion for that particular potential side effect. Val, if we can go to the next caller, please.

Great, thanks for the questions, just two here. First, maybe a question for John, just updated thoughts on the M&A landscape. I guess specifically, do you see this market volatility as creating some opportunities for Lilly to get more aggressive and look at some assets? And just what's the focus when we think about business development? My second question was on the BACE inhibitors. And just elaborate a little bit more about how you think about the tradeoff of I guess time to market versus the level of BACE inhibition and dosing when you look at prioritizing the Astra BACE versus the internal low-dose BACE that you have as well. Thanks very much.

Great, Chris. Thank you for the questions. John, you for the M&A. And then, Dave, do you want to take the BACE question, please? John?

Chris, I think the current volatility and generally lower valuations in the biotech sector doesn't change our basic strategy. We continue to look for small to midsized opportunities that complement the therapeutic areas that we're already in that we know well, so I don't think that has changed. We're certainly not interested in any large-scale M&A. At the same time, there's no question that valuations are more attractive today. There are some different dynamics going on. As you know, biotech is not biotech. There's big biotech. There's medium size, and there's nascent or smaller. And so we're looking across that whole spectrum. And if opportunity presents itself based on attractive valuation and what we think would represent good value for the company, we have the wherewithal to move on that.

Great. Dave, on the BACE?

Yeah, so I think your question is how are we thinking about the two programs and decision-making. I think you were there on December 8, Chris, and we spoke about the theoretical differences in the projects. We do know that the AZ BACE and the Lilly BACE that's in the clinic have different chemistry. We really like this target because it's rare to find a genetic validation like this in any disease, let alone Alzheimer's, which has so much unmet need. And so we're investing in two different ways to get there. At the end of the day, the decision-making, though, is going to have to be based on empirical data, because the theoretical differences need to play out in man. So we're collecting those data. A part of that is the AMARANTH Phase 2 program we're running now and the Phase 1 effort on our own BACE. And we'll have to see the data before we make a final determination.

Great, thank you, Dave. Val, next caller, please.

Yes, thanks very much, two questions again on Jardiance. J&J made comments about changes in the ADA guidelines to include the class. And I know you've spoken in the past about changes in guidelines as I guess it relates to medical treatment guidelines overall. So I wondered if you could separate the two and how meaningful one may be over the other. And then separately on the nephrology data that we will get more readouts later, is that package included in the CV outcomes data set, or would it be potentially something that is added after regulatory action on the CV outcomes data set for EMPA-REG? Thanks very much.

Great, Tony. Thanks for the questions. Enrique, so the two questions will be on the ADA guidelines, are there guidelines for Jardiance, and the second one is if the nephrology data that we alluded to that was presented in 2015 was part of the submission of the EMPA-REG OUTCOME data.

So let me start with your second question first. Clearly as part of our submission, we really focused on the CV outcomes. We will be disclosing the outcomes that we saw when it comes to renal outcomes in the very near future. There is a publication that we're targeting. We think that the results are also very impressive, so we look forward for the possibilities that that may give us when it comes to the future. As far as guidelines, and I really cannot comment on other companies' statements. But what I can basically say is that we today do not see any significant changes in the treatment guidelines for Type 2 diabetes coming from any of the major societies or associations, whether it's ADA or EASD. Clearly, the AACE issued new guidelines, but they really did not fully incorporate the EMPA-REG OUTCOME data as they were looking at those guidelines – and this package of those – some of those guidelines in early January. I am pretty confident that the different societies will have a thorough review of the different treatment guidelines. And I expect, as I have mentioned before, that that will happen once we basically have a label change in the U.S. market or in Europe.

Thanks, Enrique. Val, next caller, please.

Thank you. I have two questions. First, Novartis said yesterday that when comparing Cosentyx to ixekizumab, ixekizumab has higher rates of immunogenicity, more injection site reactions, and only one or two indications upon approval versus their three. I'm just wondering what Lilly's rebuttal to Novartis would be. And then secondly, Novartis also said yesterday that its Phase 3 study of ribociclib is quite likely to stop early based on modeling the company has done versus palbociclib. I imagine Lilly has done similar modeling. So I'm wondering, is Lilly willing to say that there's a good chance that MONARCH 1 stops in the first half of this year when you take the interim look? Thank you.

Steve, thanks for the questions. Dave, if you'll take the first one, please, on some of the Novartis comments around Cosentyx and ixekizumab; and then, Sue, on the ribociclib question.

Sure. As you know, we're in the final stages of regulatory review on ixekizumab and preparing for launch later this year. I'm not surprised to hear what they said on their call, Steve, but I think we can only say for certain that the third one might be true. Clearly, we will launch with psoriasis first. And we're pursuing psoriatic arthritis, as was mentioned on this call, as well as ankylosing spondylitis. Those indications will come later. That said, I think there's really no direct comparisons between the molecules on immunogenicity. And if you study this issue, you'd learn that the assay cut points, which are proprietary to each molecule, there's really no standard for setting those. So there's no basis to compare products within a class or even outside the classes on immunogenicity. I think the most important thing is at the end of the long-term studies, how many patients develop neutralizing antibodies to the medicine. And in the case of ixekizumab, that number is around 1% after one year, which is very low relative to other immuno-therapies for conditions like psoriasis. As it relates to injection site reactions, you have a similar comparison problem. There were reported injection site reactions. It was one of the most frequent issues in our studies, but they were mostly mild, they were transient, and we have good data that shows after the second and third injection those rates drop significantly. It's important to note that ixekizumab also has far fewer injections than Cosentyx in an annual dosing regimen, so fewer opportunities to get that kind of reaction. So we're confident about our posture as we go to market. We feel good about our data, and the primary basis for that statement is the efficacy we see with ixekizumab, which we see as breakthrough and best-in-class.

Thanks, Dave. Sue?

Yeah, with regard to abemaciclib, we will see the data on MONARCH 1 by mid this year, the final data, with interim data earlier. Again, that is the single-agent data. That, as we mentioned earlier, is the data that we got Breakthrough Therapy on. And depending on what that data looks like, we will go to regulatory authorities. The other two studies are the combination studies, and I think they're more comparable. We will have – or we plan to have final data on those studies next year, but we do have interims. They're high-bar interims. And clearly depending on what we see there, we'll take action accordingly. I think it's key to note, as we see things, single-agent activity is important. We have not seen that kind of robust single-agent activity with other CDK 4/6 inhibitors. We believe that is due to the relative contribution between the activity against CDK 4 and CDK 6. The other thing is the continuous dosing. These are cell cycle inhibitors, and so you would hope that you would be able to continuously dose these. And we have seen that we are able to continuously dose this agent. So again, that's where we will see – we believe could potentially differentiate this from the other two CDK 4/6 inhibitors going forward.

Great. Thank you, Sue. Val, next caller, please.

Hey, guys. Thanks for taking the question. I was just wondering. if Donald Trump is elected, would that impact your long-term margin guidance, Derica? That's not a serious question. But I've enjoyed John's comments about biotech valuations. And Chris already got your thoughts on that, John, but I've also enjoyed following your comments over time on the drug pricing debate. I think on the last call, you said that the industry was preparing to begin to defend itself, and I'd just be curious to know if that effort has happened yet and how you see this playing out. What do you think will actually happen over the next call it two to four years, if anything? And then more of a housekeeping question; on Forteo, I'd love to know what your longer-term outlook on Forteo is given the dynamics in that market, assuming Amgen's sclerostin antibody launches in a year or so and the Radius's PTH-based analog launches. Should we be thinking about this as a declining asset, or are you confident you can hang on to it? And is this still an area of strategic interest for Lilly, or is this something that's more secondary? Thank you.

Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John?

Okay, Mark. Thanks for your question. I think yes, M&A from within our major trade organizations, so this would be pharma and bio, there have been, certainly since the last time we discussed this, I think a number of initiatives aimed at putting prices in perspective and then also providing the kind of information that policymakers and key advocacy groups need to have, we believe, to make sure that this debate remains balanced, and that this industry, which we all hope in the future can provide cures for things like Alzheimer's, cancer, and other diseases, remains strong and viable in this country. I think that when you look at it from that aspect, the old saying goes, facts are stubborn things. I think when you look at the comparison year that in many cases is being used as ammunition in this debate, 2014, as all of you know, was a breakout year in terms of pricing, driven by the launch of the hep C drugs, which in some cases cure up to 90% of the people that take those medicines, and the warehousing and in other words the inventory of patients waiting to receive those medicines. If you go back and look at 2009 to 2013, these are not Lilly's numbers. This data is from CMS, that the overall price of drugs, retail and non-retail, the price increases in that period lagged significantly overall healthcare inflation. We felt the pain, obviously, by the fact that we lost patents on four of our biggest products during that period. CMS projections out to 2024 show that, based on everything we know and everything they can see, that the rate of increase in drug prices is going to fall roughly within the same line as the rate of increases in overall healthcare. So yes, I think that's one side of the equation. The second side of the equation is the consumer aspect. It's great to talk facts and figures with policymakers. But if they're hearing from consumers that they got walloped with a huge copay or that they're not able to access medicines they need, obviously we're sympathetic and empathetic to that and tuned into that with various patient assistance programs, copay assistance, et cetera, but also I think a continuing push to ensure that everybody in this country has access to quality insurance. Medicines, after all, help prevent disease in many cases or treat disease and avoid higher downstream costs. This is well documented. I think we've got to keep that in perspective as well. In terms of what we can expect after the election, anybody that thinks they can predict the nomination, much less the election right now, I'd love to talk to them. But I think this is going to continue to be an issue or it's going continue to be on the radar screen because of demographics. And to some extent, as people get older, they're going to be more and more reliant on our medicines. I think we've got to continue to demonstrate that there's value in the medicines we bring. Yes, they can be expensive, but disease is a lot more expensive, and emphasize the fact that low-cost generics, which account for over four out of five prescriptions today, represent ultimately the legacy of these investment efforts on our part and provide the American consumer with tremendous value. So I think you can assume the industry is going to continue to maintain an active dialogue with each of the candidates and to work across party lines to make sure that the views that ultimately translate into policy – and that's what we've really got be focused on – remain balanced and factual over time. So I don't think there's – while I think we are and should be concerned about the rhetoric, I think the facts of the underlying story remain very strong. And I think in surveys of consumers that we've done, I think the interest is just as keen in what we can do to prevent or slow down the progression of diseases like Alzheimer's, how we gain more incremental – incrementally take more steps in treating and curing cancer. And even with diabetes, what can we do there to go from in essence slowing down the progression of the disease today to perhaps someday abating the complications altogether? Clearly, we're working on all of those things, and I think that's what people expect us – the research-based industry to do. And we've got to distinguish the research-based industry from other aspects of this price debate.

Great, John.

Sure, Mark, thanks for the question on Forteo, not one we always get here, but Forteo has been a great product for the company. We launched it more than 13 years ago. We're still growing this product really in every geography in the world. Notably in Asia now, we're in double-digit growth in both emerging markets and Japan, and in performance terms 5% last quarter. As we look ahead, I would say three things. First, this is a disease that has tremendous under-treatment. So today in the U.S., if you have a fracture, an osteoporotic fracture, less than one in ten women receive an anabolic therapy, which is really a problem. So there's a lot of room for new voices and new mechanisms to improve treatment for severe osteoporosis. I think sclerostins as a target is a great target. We have our own asset in the space, although moved back to Phase 1 as we look for an acceptable commercial formulation. Risk/benefit has to be borne out in the larger trials, and we'll look forward to seeing that from the competitive program. But I think there's room for more than one mechanism to build bone in people who suffer from severe osteoporosis, and frankly the patients probably need choices. That all said, as we think about our midterm, Mark, it's important to note that, as I'm sure you've already researched, the IP on Forteo in the U.S. and in other major markets really begins to expire at the end of this decade. So although we would expect continued good performance through the end of the decade, around 2019 – 2020 we would expect to see some form of biosimilar or generic competition, depending on the geography we're talking about.

Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John? Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John?

Okay, Mark. Thanks for your question. I think yes, M&A from within our major trade organizations, so this would be pharma and bio, there have been, certainly since the last time we discussed this, I think a number of initiatives aimed at putting prices in perspective and then also providing the kind of information that policymakers and key advocacy groups need to have, we believe, to make sure that this debate remains balanced, and that this industry, which we all hope in the future can provide cures for things like Alzheimer's, cancer, and other diseases, remains strong and viable in this country. I think that when you look at it from that aspect, the old saying goes, facts are stubborn things. I think when you look at the comparison year that in many cases is being used as ammunition in this debate, 2014, as all of you know, was a breakout year in terms of pricing, driven by the launch of the hep C drugs, which in some cases cure up to 90% of the people that take those medicines, and the warehousing and in other words the inventory of patients waiting to receive those medicines. If you go back and look at 2009 to 2013, these are not Lilly's numbers. This data is from CMS, that the overall price of drugs, retail and non-retail, the price increases in that period lagged significantly overall healthcare inflation. We felt the pain, obviously, by the fact that we lost patents on four of our biggest products during that period. CMS projections out to 2024 show that, based on everything we know and everything they can see, that the rate of increase in drug prices is going to fall roughly within the same line as the rate of increases in overall healthcare. So yes, I think that's one side of the equation. The second side of the equation is the consumer aspect. It's great to talk facts and figures with policymakers. But if they're hearing from consumers that they got walloped with a huge copay or that they're not able to access medicines they need, obviously we're sympathetic and empathetic to that and tuned into that with various patient assistance programs, copay assistance, et cetera, but also I think a continuing push to ensure that everybody in this country has access to quality insurance. Medicines, after all, help prevent disease in many cases or treat disease and avoid higher downstream costs. This is well documented. I think we've got to keep that in perspective as well. In terms of what we can expect after the election, anybody that thinks they can predict the nomination, much less the election right now, I'd love to talk to them. But I think this is going to continue to be an issue or it's going continue to be on the radar screen because of demographics. And to some extent, as people get older, they're going to be more and more reliant on our medicines. I think we've got to continue to demonstrate that there's value in the medicines we bring. Yes, they can be expensive, but disease is a lot more expensive, and emphasize the fact that low-cost generics, which account for over four out of five prescriptions today, represent ultimately the legacy of these investment efforts on our part and provide the American consumer with tremendous value. So I think you can assume the industry is going to continue to maintain an active dialogue with each of the candidates and to work across party lines to make sure that the views that ultimately translate into policy – and that's what we've really got be focused on – remain balanced and factual over time. So I don't think there's – while I think we are and should be concerned about the rhetoric, I think the facts of the underlying story remain very strong. And I think in surveys of consumers that we've done, I think the interest is just as keen in what we can do to prevent or slow down the progression of diseases like Alzheimer's, how we gain more incremental – incrementally take more steps in treating and curing cancer. And even with diabetes, what can we do there to go from in essence slowing down the progression of the disease today to perhaps someday abating the complications altogether? Clearly, we're working on all of those things, and I think that's what people expect us – the research-based industry to do. And we've got to distinguish the research-based industry from other aspects of this price debate.

Great, John.

Sure, Mark, thanks for the question on Forteo, not one we always get here, but Forteo has been a great product for the company. We launched it more than 13 years ago. We're still growing this product really in every geography in the world. Notably in Asia now, we're in double-digit growth in both emerging markets and Japan, and in performance terms 5% last quarter. As we look ahead, I would say three things. First, this is a disease that has tremendous under-treatment. So today in the U.S., if you have a fracture, an osteoporotic fracture, less than one in ten women receive an anabolic therapy, which is really a problem. So there's a lot of room for new voices and new mechanisms to improve treatment for severe osteoporosis. I think sclerostins as a target is a great target. We have our own asset in the space, although moved back to Phase 1 as we look for an acceptable commercial formulation. Risk/benefit has to be borne out in the larger trials, and we'll look forward to seeing that from the competitive program. But I think there's room for more than one mechanism to build bone in people who suffer from severe osteoporosis, and frankly the patients probably need choices. That all said, as we think about our midterm, Mark, it's important to note that, as I'm sure you've already researched, the IP on Forteo in the U.S. and in other major markets really begins to expire at the end of this decade. So although we would expect continued good performance through the end of the decade, around 2019 – 2020 we would expect to see some form of biosimilar or generic competition, depending on the geography we're talking about.

Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John? Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John? Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John? Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John? Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John? Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John? Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John? Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John? Great, Mark. Thanks for the questions. So, John, on the industry's actions on the pricing front and how you see this playing out in the next few years. And then, Dave, if you'd like to take the question on Forteo, please. John?

Okay, Mark. Thanks for your question. I think yes, M&A from within our major trade organizations, so this would be pharma and bio, there have been, certainly since the last time we discussed this, I think a number of initiatives aimed at putting prices in perspective and then also providing the kind of information that policymakers and key advocacy groups need to have, we believe, to make sure that this debate remains balanced, and that this industry, which we all hope in the future can provide cures for things like Alzheimer's, cancer, and other diseases, remains strong and viable in this country. I think that when you look at it from that aspect, the old saying goes, facts are stubborn things. I think when you look at the comparison year that in many cases is being used as ammunition in this debate, 2014, as all of you know, was a breakout year in terms of pricing, driven by the launch of the hep C drugs, which in some cases cure up to 90% of the people that take those medicines, and the warehousing and in other words the inventory of patients waiting to receive those medicines. If you go back and look at 2009 to 2013, these are not Lilly's numbers. This data is from CMS, that the overall price of drugs, retail and non-retail, the price increases in that period lagged significantly overall healthcare inflation. We felt the pain, obviously, by the fact that we lost patents on four of our biggest products during that period. CMS projections out to 2024 show that, based on everything we know and everything they can see, that the rate of increase in drug prices is going to fall roughly within the same line as the rate of increases in overall healthcare. So yes, I think that's one side of the equation. The second side of the equation is the consumer aspect. It's great to talk facts and figures with policymakers. But if they're hearing from consumers that they got walloped with a huge copay or that they're not able to access medicines they need, obviously we're sympathetic and empathetic to that and tuned into that with various patient assistance programs, copay assistance, et cetera, but also I think a continuing push to ensure that everybody in this country has access to quality insurance. Medicines, after all, help prevent disease in many cases or treat disease and avoid higher downstream costs. This is well documented. I think we've got to keep that in perspective as well. In terms of what we can expect after the election, anybody that thinks they can predict the nomination, much less the election right now, I'd love to talk to them. But I think this is going to continue to be an issue or it's going continue to be on the radar screen because of demographics. And to some extent, as people get older, they're going to be more and more reliant on our medicines. I think we've got to continue to demonstrate that there's value in the medicines we bring. Yes, they can be expensive, but disease is a lot more expensive, and emphasize the fact that low-cost generics, which account for over four out of five prescriptions today, represent ultimately the legacy of these investment efforts on our part and provide the American consumer with tremendous value. So I think you can assume the industry is going to continue to maintain an active dialogue with each of the candidates and to work across party lines to make sure that the views that ultimately translate into policy – and that's what we've really got be focused on – remain balanced and factual over time. So I don't think there's – while I think we are and should be concerned about the rhetoric, I think the facts of the underlying story remain very strong. And I think in surveys of consumers that we've done, I think the interest is just as keen in what we can do to prevent or slow down the progression of diseases like Alzheimer's, how we gain more incremental – incrementally take more steps in treating and curing cancer. And even with diabetes, what can we do there to go from in essence slowing down the progression of the disease today to perhaps someday abating the complications altogether? Clearly, we're working on all of those things, and I think that's what people expect us – the research-based industry to do. And we've got to distinguish the research-based industry from other aspects of this price debate.