Lilly(Eli) & Company (LLY) — Q3 2016 Earnings Call Transcript

Thank you. Good morning, everybody. Thanks for joining us for Eli Lilly & Company's third quarter 2016 earnings call. I'm John Lechleiter, Lilly's Chairman, President, and CEO. Joining me here in Indianapolis 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, President of Elanco Animal Health; and Kristina Wright, Brad Robling, Chris Ogden, and Phil Johnson of Lilly's IR team. During this 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 SEC. 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. Before discussing key events for the quarter, I'll start, as usual, with a summary of our progress since the second quarter earnings call in late July and I'll use our strategic objectives framework for this discussion. Our first strategic objective, grow revenue. Q3 revenue increased 4% on a constant currency or performance basis, driven by 7% pharmaceutical volume growth. Consistent with previous quarters, this year our new products, Trulicity, CYRAMZA, Jardiance, Basaglar, PORTRAZZA, and Taltz accounted for nearly all of that growth. On our strategic objective, expand margins, our non-GAAP OpEx as a percentage of revenue declined 20 basis points compared to the third quarter 2015. We expect continued progress in the fourth quarter, as our full-year guidance at the midpoint of our ranges implies an improvement of about 200 basis points to 250 basis points in OpEx as a percent of revenue for the year. Under the heading of sustaining a flow of innovation, olaratumab was approved in the U.S. last week for soft tissue sarcoma and will be sold under the trade name Lartruvo. Europe's CHMP provided positive opinions, recommending approval of olaratumab for soft tissue sarcoma and of GLXAMBI for type 2 diabetes. Along with AstraZeneca, we received Fast Track designation from the U.S. FDA for AZD3293, the oral BACE inhibitor for Alzheimer's disease. On our strategic objective deploy capital to create value, we announced an agreement to acquire Boehringer Ingelheim U.S. Animal Health vaccines business, filling a key strategic need in our companion animal portfolio. In both human pharma and animal health, we will continue to actively pursue external opportunities to enhance our future growth prospects. Finally, during the quarter, we returned over $500 million to shareholders through our dividend. In summary, the progress we're making in 2016 places us on track to achieve each of our strategic objectives through 2020. Now, let's move on to a review of the key events that occurred since our last earnings call. We continue to make progress on the regulatory front. As I just mentioned, here in the U.S., the FDA approved Lartruvo in combination with doxorubicin for the treatment of adults with soft tissue sarcoma with a histologic subtype for which an anthracycline-containing regimen is appropriate and which is not amenable to curative treatment with radiotherapy or surgery. This is the first FDA-approved front-line therapy for soft tissue sarcoma in four decades. It also marks the third product from our ImClone acquisition to receive regulatory approval. This is an accelerated approval based on data from our Phase II trial. Continued approval for this indication may be contingent upon verification and description of clinical benefit in a confirmatory study. The Phase III announced study is fully enrolled and is currently expected to complete in late 2018. In Europe, we received a pair of recommendations for approval from the CHMP. The first recommendation was for granting a conditional marketing authorization for Lartruvo in combination with doxorubicin for the treatment of adults with advanced soft tissue sarcoma not amenable to curative treatment with radiotherapy or surgery and who have not been previously treated with doxorubicin. Similar to the U.S., Lartruvo was reviewed under the EMA's Accelerated Assessment program. As part of the conditional marketing authorization, we will need to provide results from our ongoing Phase III study. Until availability of the full data, the CHMP will review the benefits and risks of Lartruvo annually to determine whether the conditional marketing authorization can be maintained. The second recommendation was for GLYXAMBI, a single tablet combining Jardiance, our SGLT-2 inhibitor, and TRADJENTA, a DPP-4 inhibitor. The specific recommendation was for use in adults 18 years and older with type 2 diabetes to improve glycemic control when metformin and/or sulfonylurea and one of the individual components of GLYXAMBI do not provide adequate glycemic control or when a patient is already being treated with the free combination of Jardiance and TRADJENTA. GLYXAMBI, Jardiance, and TRADJENTA are products of the Boehringer Ingelheim and Lilly diabetes alliance. Finally, along with AstraZeneca, we received Fast Track designation from the FDA for AZD3293, an oral Beta-secretase cleaving enzyme, or BACE inhibitor, being studied in Phase III trials for Alzheimer's disease. On the clinical front, we announced that following a pre-planned interim analysis for MONARCH 2, an independent data monitoring committee provided the recommendation to continue the study without modification, as the interim efficacy criteria were not met. The MONARCH 2 trial compares abemaciclib with fulvestrant versus placebo with fulvestrant in women with hormone receptor positive human epidermal growth factor receptor 2 negative locally advanced or metastatic breast cancer. The trial will continue to completion in the first half of 2017. At the European Society for Medical Oncology meeting, early data in lung cancer were presented on the combinations of KEYTRUDA with ALIMTA and of KEYTRUDA with CYRAMZA. KEYNOTE-021, a randomized Phase II study, included Cohort G studying KEYTRUDA added to ALIMTA plus carboplatin versus ALIMTA plus carboplatin in first-line non-squamous non-small cell lung cancer patients regardless of PD-L1 expression level. The combination of KEYTRUDA and ALIMTA carbo nearly doubled the response rate compared to ALIMTA carbo alone. There's been considerable focus within the investment community on the durability of responses. In this study, we were very pleased that patients on the KEYTRUDA ALIMTA carbo arm experienced progression-free survival of 13 months. While the overall survival data were not yet mature, roughly 75% of patients on both arms were still alive at one year. This is at the top end of results we've seen for any combination trial in a broad population of first-line non-squamous non-small cell lung cancer patients, and we look forward to the presentation of additional data from this trial at future medical conferences. Updated data were also presented from the KEYNOTE-098 study evaluating KEYTRUDA with CYRAMZA in second- to fourth-line non-small cell lung cancer. Here, too, we observed promising clinical activity, including durable responses. 80% of patients experienced a decrease in target lesions, spanning the spectrum of PD-L1 status, while the objective response rate was 30% with responses seen in both non-squamous and squamous non-small cell lung cancer patients. In addition, the disease control rate was 85% and median progression-free survival was not yet reached. The data from both KEYNOTE-021-G and KEYNOTE-098 provide proof points for how we intend to deploy our diverse oncology portfolio across the three platforms of cell signaling, tumor microenvironment, and immuno-oncology to pursue a rational and differentiated combination strategy across our diverse oncology portfolio in order to improve outcomes for patients. Shifting to immunology, I'm pleased to report that we achieved the primary endpoint in the SPIRIT-P2 study of ixekizumab in patients with active psoriatic arthritis who had been treated with one or more conventional DMARDs as well as had an inadequate response to one or two TNF inhibitors or intolerance to a TNF inhibitor. The results of SPIRIT-P2 further build on the existing benefit-risk profile Taltz obtained from a very large clinical program. With this second positive psoriatic arthritis study, we plan to submit ixekizumab for psoriatic arthritis in the U.S. in the first half of next year, followed by submissions in Europe and other geographies, and we plan to present the data at a medical meeting in 2017. Keep in mind that psoriatic arthritis has already been approved in Japan. At the EADV meeting in Vienna, we also presented initial data on our head-to-head study called IXORA-S of Taltz versus Stelara in patients with moderate to severe plaque psoriasis. The primary endpoint of the study was met, as Taltz demonstrated superiority to Stelara on the PASI 90 score at 12 weeks. These data reinforced the strong clinical profile of Taltz, and we look forward to presenting additional data from this study next year. As expected, earlier this month, we achieved the last patient visit in the Expedition 3 trial of solanezumab in patients with mild dementia due to Alzheimer's disease. As a result, we plan to issue a top-line press release before the end of the year. In other news, we announced the retirement of yours truly as President and Chief Executive Officer effective December 31 of this year. I will continue on Lilly's Board of Directors until the end of May, serving as non-Executive Chairman. Dave Ricks, currently President of Lilly Biomedicines, will assume the role of President and Chief Executive Officer and join the board on January 1. Dave will become Chairman of the Board on June 1. We announced an agreement to acquire Boehringer Ingelheim Vetmedica U.S. feline, canine, and rabies vaccines portfolio, as well as a fully integrated manufacturing and R&D site and a number of pipeline assets for approximately $885 million, including the estimated cost of acquired inventory. This innovative platform of companion animal vaccines has high brand awareness and an established loyal customer base. The addition of these assets advances our strategy of offering a balanced portfolio to both prevent and treat disease. This acquisition is subject to FTC approval and closing of the BI-Sanofi asset swap. We expect to close the deal early next year. The U.S. District Court for the Southern District of Indiana ruled against Lilly and its partner Acrux in a patent case for the testosterone treatment AXIRON, ruling that AXIRON's formulation and axilla application patents are invalid, and the applicator patent, although valid, would not be infringed by generic competitors. We have appealed the ruling. The formulation patent expires in February 2017, while the axilla application and applicator patents expire in 2027. The U.S. Patent and Trademark Office determined that the method of use patents for Effient are invalid. Lilly, Daiichi Sankyo, and Ube strongly disagree with the PTO's ruling regarding the validity of the Effient method of use patent and have appealed the ruling. Separately, next steps are being discussed with the District Court in ongoing litigation on both the method of use patents and the compound patent. As a reminder, the method of use patents expire in 2023, while the compound patent expires in April of 2017, and we are entitled to pediatric exclusivity until October of 2017. Finally, we distributed over $500 million to shareholders via our dividend. During the quarter we did not repurchase any stock, leaving $2.65 billion remaining on our $5 billion plan. As we announced on our second quarter earnings call, we do expect to provide annual increases in our dividend and will continue to balance share repurchase with external opportunities to enhance our future growth prospects. And now I'll turn the call over to Phil for a discussion of our financial performance for the quarter.

Great. Thank you, John. Slide seven summarizes our presentation of GAAP results and non-GAAP measures, while slide eight provides a summary of our GAAP results. I'll focus my comments this morning on our non-GAAP adjusted measures to provide insights into the underlying trends in our business, so please refer to today's earnings press release for a detailed description of the year-on-year changes in our third quarter GAAP results. Looking at the non-GAAP measures on slide nine, you can see the Q3 2016 revenue increased 5% compared to Q3 2015, reaching $5.2 billion. Gross margin as a percent of revenue decreased 1.4 percentage points to 76.4%. This decrease was driven by the effect of foreign exchange rates on international inventories sold. This effect resulted in a benefit to both this quarter and last year's quarter, but the benefit this year was substantially smaller than the benefit realized last year. Excluding this FX effect, our gross margin percent increased by 30 basis points, going from 75.2% in last year's quarter to 75.5% this quarter. Total operating expense, defined as the sum of R&D and SG&A, increased by 4% compared to Q3 of 2015. Breaking this into its component parts, marketing, selling and administrative expenses increased 2%, while R&D increased 8%. The slight increase in marketing, selling and administrative expenses was due to higher spending on new products largely offset by lower spending on late lifecycle products. The increase in R&D expense was driven primarily by higher late-stage clinical development costs. Other income and expense was income of $27 million this quarter, compared to the $87 million reported in last year's quarter. Our tax rate was 22%. This is a decrease of 290 basis points compared with the same quarter last year. This decrease was primarily due to certain U.S. tax provisions, including the R&D Tax Credit, that are in force in 2016 but had lapsed during last year's third quarter. At the bottom line, net income decreased 2% and earnings per share decreased 1%. Slide 10 contains non-GAAP adjusted information for the first nine months of the year, while slide 11 contains 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 revenue growth. On slide 12 in the yellow highlighted row at the bottom of the table, you'll see the 5% revenue growth I mentioned earlier. On a performance basis, our worldwide revenue grew 4% this quarter, driven entirely by volumes. By geography, you'll notice the U.S. pharma revenue increased 17%, driven primarily by volume. Trulicity was the main driver of U.S. volume growth, with meaningful contributions also coming from Humalog and Taltz. Having completed the takeback of North American rights for ERBITUX on October 1 last year, we also benefited from booking end sales of ERBITUX this quarter. As cited in our press release issued earlier this morning, we have experienced less product returns than anticipated for Cymbalta post its patent expiration, leading to a reduction in the returns reserve this quarter of approximately $145 million. Excluding this item, our U.S. pharma revenue grew 10% this quarter, with an 11% increase due to higher volume and a 1% decline due to lower realized prices. The decline in EUCAN revenue of 8% was driven by the negative effect of price and, to a lesser extent, lower volumes and unfavorable FX movements. On a constant currency or performance basis, EUCAN revenue decreased 6%. This decrease was driven primarily by lower volume and price for Cymbalta and ALIMTA following patent expirations, partially offset by the uptake of new products, including Trulicity, Basaglar, CYRAMZA, and Jardiance, as well as higher sales of Humalog, TRADJENTA, and CIALIS. In Japan, pharma revenue increased 15% in total, driven by an 18% benefit from a stronger yen and, to a lesser extent, increased volume partially offset by a 6% negative price effect from the latest biannual price cuts. On a constant currency basis, Japan pharma revenue decreased 3%. This performance decline was attributable to the entry of generic olanzapine this past June. Excluding Zyprexa, Japan pharma revenue in Q3 grew 6% on a constant currency basis, led by CYRAMZA, with additional contributions from Cymbalta, Strattera, Trulicity, Basaglar, and Jardiance. Turning to emerging markets, we saw revenue decline 8%, primarily driven by the negative effect of foreign exchange. On a performance basis, emerging markets revenue decreased 3% due to lower volumes for off-patent brands, including CIALIS, Zyprexa, ALIMTA, and Cymbalta, partially offset by higher volumes for Humulin, Trulicity, TRADJENTA, and CYRAMZA. Also this quarter, our pharma revenue in China decreased 7% due to foreign exchange while revenue was flat on a constant currency basis. Changes in order timing from our distributors negatively affected growth this quarter while positively affecting growth last quarter. We estimate the growth in underlying demand for our products in China this quarter was about 5%. Turning to Animal Health. This quarter, worldwide revenue decreased 9%, both in total and on a constant currency basis, including a 14% decline in companion animal and a 6% decline in food animal. Animal Health revenue was significantly impacted by distributor inventory destocking in the quarter following a changeover to SAP at the end of Q2. This inventory impact represented the majority of the decline in companion animal revenue in Q3 and has contributed to the volatility in our Animal Health results. In food animal, economic weakness in Latin America combined with market access pressures in the U.S. contributed to lower revenue in the quarter. Note that on a year-to-date basis, which includes the SAP inventory impact in both Q2 and Q3, Animal Health revenue is flat. On slide 13, you'll find the same price, rate and volume analysis, but on a year-to-date basis. As I mentioned earlier, excluding foreign exchange, our worldwide revenue grew 4% this quarter, with nearly all of that growth coming from higher volumes. In total, our new products, Trulicity, CYRAMZA, Jardiance, Taltz, Basaglar, and PORTRAZZA were the engine of our worldwide volume growth. Slide 14 shows that these products drove 6.6 percentage points of volume growth this quarter. The takeback of ERBITUX contributed nearly 2 percentage points to our volume growth, while Humalog contributed nearly 1 percentage point. You'll also see that the loss of exclusivity for Zyprexa, Cymbalta, and Evista, while largely in the rear-view mirror, still provided a drag of roughly 2 percentage points on our volume growth. Specifically on Humalog, you will see that U.S. sales this quarter are down 14%, as higher volume was more than offset by lower realized prices. This quarter's net realized price was negatively affected by changes in estimates for rebates and discounts. Normalizing for changes in estimates for rebates and December counts in both Q3 2016 and Q3 2015, the underlying U.S. sales trend for the quarter for Humalog was basically flat. Now let me turn the call over to Derica.

Thanks, Phil. As in prior quarters, I'll start by sharing some color on our new product launches. During the Q&A session, Sue, Enrique, and Dave can provide more details. As you can see on the graph on slide 15, our new products generated over $0.5 billion in revenue this quarter, led by Trulicity and CYRAMZA. This represents about 10% of our total worldwide revenue, up from 8% last quarter. As Phil mentioned earlier, these products drove over 6.5 percentage points of our worldwide volume growth this quarter. We continue to be pleased with the uptake of Trulicity. Here in the U.S., we're capturing nearly 30% of new patient starts in the GLP-1 class. In addition to our strong performance, we're benefiting from the strong growth of the class itself, with the U.S. GLP-1 market growing nearly 30%. As I mentioned last quarter, in many outside U.S. markets, we're seeing uptake comparable to that seen with the early uptake of Victoza. CYRAMZA continues to grow globally, driven largely by strong gastric cancer uptake in Japan. Outside U.S. markets now account for nearly 60% of our worldwide CYRAMZA sales, and we look forward to continued growth in these markets, not only in gastric cancer but also supported by the ongoing launches of the colorectal and lung cancer indications. U.S. CYRAMZA sales declined this quarter, largely as a result of competitive pressure from immuno-oncology therapies in non-small cell lung cancer, while our share of the market in gastric cancer has been relatively stable. Moving to Jardiance. While less than we expected, the SGLT-2 class in the U.S. is growing over 20%, and our new-to-therapy share with endocrinologists is now over 35%. Along with Boehringer Ingelheim, we expect FDA action on the EMPA-REG OUTCOME submission in early December and continue to see an update of the Jardiance label to reflect the compelling CV data for EMPA-REG OUTCOME as a catalyst for the growing of the class and Jardiance. Taltz, which launched in the U.S. in April, is off to an excellent start. We're seeing strong growth of the IL-17 class in psoriasis and are pleased that our new-to-brand share of market with dermatologists, a proxy for use in psoriasis, is already over 10%. While it's still early in our outside U.S. launches, feedback has been positive and we look forward to launching Taltz in Japan this fall for both psoriasis and psoriatic arthritis. The rollout of ABASAGLAR in outside U.S. countries continues, and we are preparing for our U.S. launch in mid-December. Finally, we continue to see strong uptake of IO agents in first-line squamous non-small cell lung cancer, which is clearly affecting use of PORTRAZZA. Moving to slide 16, you'll see the effective changes in foreign exchange rates on our 2016 results. This quarter, FX had a small positive impact on revenue growth. Excluding FX, worldwide revenue grew 4%. In performance terms, growth in non-GAAP cost of sales at 4% was in line with revenue growth, while non-GAAP operating expenses grew just slightly faster than revenue at 5%. Finally, excluding FX, non-GAAP operating income increased 2% and non-GAAP EPS increased 1%. Moving on to our pipeline update. Slide 17 shows our pipeline as of October 19. Changes since our last earnings call are highlighted, with green arrows showing progression and red arrows showing movement out of the portfolio. In our NME pipeline, you'll see the green arrow denoting FDA approval of Lartruvo in soft tissue sarcoma. We began Phase II testing of two molecules, the low-dose BACE inhibitor that we discussed at our Alzheimer's Disease meeting last December, and the BTK inhibitor in immunology we licensed with Hanmi. We also started Phase I testing for a small molecule cancer compound, and we terminated development of two Phase I oncology assets and of blosozumab, a sclerostin monoclonal antibody for osteoporosis. In our NILEX pipeline, as shown on slide 18, we began a Phase III study of solanezumab in prodromal Alzheimer's disease. Currently, we plan to recruit nearly 2,500 amyloid-positive patients for this study. The blinded treatment period will be 24 months, and we anticipate trial completion in mid-2021. On solanezumab, John mentioned earlier that we are on track to issue the top-line press release for EXPEDITION3 before the end of the year. I'd also note that we have a small number of investor interactions with management scheduled this quarter and all of these interactions will occur before management sees the EXPEDITION3 study results. If we hit the most aggressive timeline for moving from last patient visit to database lock, we may be able to present the EXPEDITION3 data at the CTAD meeting in December. However, it is also quite possible that we will not present the data at a medical meeting until next year. Should we present the EXPEDITION3 data at CTAD, the presentation will be made available via a live webcast open to the investment community, so live participation will not be required to access the information in real-time. Turning to slide 19. Let's recap the recent progress we've made on the key events we projected for 2016. Since our last call, we've added green check marks for the initiation of the Phase III study of solanezumab and prodromal Alzheimer's disease, the internal data readout that John mentioned earlier of the Phase III SPIRIT-P2 study of ixekizumab in psoriatic arthritis, the presentation at EADV of data from the IXORA-S study evaluating ixekizumab head-to-head against STELARA in psoriasis, and the U.S. approval of Lartruvo for soft tissue sarcoma. Also, one event we thought that might occur in 2016, which is now expected in 2017, action on Cialis pediatric exclusivity, while another is expected in 2018, the cluster headache readout for galcanezumab. Turning to our 2016 financial guidance on slide 20. At a high level, our expectations are largely unchanged. You'll see that our outlook for non-GAAP earnings per share is unchanged, while we've made small adjustments to our GAAP earnings per share guidance range, as well as to our line item guidance for revenue, SG&A expense, other income, and capital expenditures. In summary, our Q3 financial performance places us on track to achieve our full-year guidance. In the quarter, we posted revenue growth of 4% on a constant currency basis, driven by 7% pharmaceutical volume growth. We made progress on the pipeline, with the FDA approval of Lartruvo, recommendations for approval of olaratumab and GLYXAMBI in Europe and granting of FDA Fast Track status for our BACE inhibitor, AZD3293. We continue to have strong momentum behind our innovation-based strategy. As we transition to new leadership next year, our management team will remain focused on executing our strategy to create value for all stakeholders, including shareholders. We also remain firmly committed to achieving the mid-term financial goals we articulated on our earnings call in July, which included: driving a minimum of 5% compounded annual revenue growth from 2015 to 2020, even without solanezumab; reducing OPEX as a percent of revenue to 50% or less in 2018; increasing our gross margin as a percent of revenue in 2020 compared to 2015; launching 20 or more new products in the decade from 2014 through 2023 and providing annual dividend increases to our shareholders. This concludes our prepared remarks. Now I'll turn the call over to Phil to moderate the Q&A session. Phil?

Thank you, Derica. So we've got nearly an hour for the Q&A session. We would like to get as many of the callers on the line as possible, so if you would please limit your questions to your two most important ones or one with two parts, that would be very much appreciated. Mary Beth, if you could go ahead and give the instructions for the Q&A session then go to our first caller, please.

Wow. First time I've been asked first. Anyway, question. A couple of questions on Jardiance. My first question is, why did the FDA require three more months for review? Is this a positive? Is this a negative? And, Enrique, how are you feeling about getting the superior label in Jardiance? And what are the options? Is the option to get a superior label, i.e., an indication for CV risk reduction? Or is the other alternative to get no mention of that in the indication section but the EMPA-REG trial mentioned in the label somewhere? If you can talk about those two possible scenarios and what they mean in terms of consensus expectations. Secondly, just curious to know what's happening with pricing in diabetes because it does seem to be getting worse. You talked about rebates and discounts with Humalog, but it also seems that we're seeing some price discounting in SGLT-2 just based on INVOKANA's recent performance and their weakness due to discounting. So if you could talk about that as well. Thanks very much.

Great. Thank you for the questions, Jami. Enrique, those are all yours.

Very good. So when it comes to the Jardiance review by the FDA, we did get this three-month extension on the action date. The new action date is now December 4 of this year. It's difficult to say always what drives that, but the FDA considers some additional information analysis that we had provided, basically a major amendment, and they basically have the right to do so. I would highlight that this is not the only major amendment that has happened in the diabetes area. There have been a number of three-month extensions. But I don't think it will be appropriate to color this in any way, positive or negative. When it comes to the indication and the label, as you know, we have basically requested a separate, distinct indication for Jardiance, given the data from empiric outcome. Something along the lines of reducing the instance of cardiovascular death in patients with type 2 diabetes and established cardiovascular disease. We believe that the data warrants this type of indication. Clearly, there are a number of different potential outcomes when it comes to the label that we would get. The FDA is reviewing the label. And it's probably not appropriate for me to comment more at this stage, given that the action date is getting very near. I will continue to highlight that I believe that we have the strength of the evidence to be able to have a new indication. Clearly, whether we have – in particular in the U.S., having an indication does make an important difference. So we are seeking that. Of course, if the clinical data is included in the body of the label, yes, we could still make a claim, but the strength of the claim is not the same. So we view this as important for us and for Jardiance and for Lilly and BI. Let me answer your question on pricing in diabetes. First, as it was stated as part of the remarks by Phil, when we normalize for changes in the estimates of rebates and discounts for both Q3 and Q4, we basically see, in the case of Humalog, that our normalized sales would have been minus 1% instead of minus 14%. Now, minus 1% still implies a pretty important impact. It implies lower prices because we grew volume 10% with Humalog in the U.S. So that's basically minus 11 when it comes to price. What are we seeing? Well, we are seeing two things. Increased rebates across the board. But in particular, when it comes to Part D, at least from how Lilly views this business, and we basically see a significant more business flowing through less profitable books of business, less profitable channels, Medicare, Medicaid, chargebacks. So as we look at those books of business, there's been an acceleration of those books of business at the expense of commercial and cash. So those impacts are pretty significant. Now, you have seen that, in the case of Humalog, we have quite a bit of volatility. We expect for this volatility, unfortunately, to continue, given that we make estimates at the end of each quarter on those rebates and discounts, but we find out where the product flows through, which books of business, afterward and, in some cases, many quarters afterward. So the last point that I would make, because it's probably important, as you look at your different models and as we think about the Humalog and what is the ongoing growth strength for this product, as we look at the normalization that I referred to, one-third of that normalization refers to Q3 of 2016. Two-thirds is really related to Q3 of 2015.

Enrique, thank you very much for the comprehensive response. Mary Beth, if we can go to the next caller, please.

Thank you. A couple of questions. On solanezumab, I know, obviously, everyone's expecting and watching the results of EXPEDITION3. But if that trial is a total fail, what happens to the prodromal trial? Would that completely continue unchanged? Or could it potentially get scrapped? The second question was on baricitinib. I know there's a fair amount of excitement around the upcoming launch and the profile has looked promising. But I can't help but think that it's going get meaningfully sidelined by payers in the U.S., given how crowded this market is. I'm wondering if you can comment on this assessment.

Great, Tim. Thank you for the questions. Dave, we'll move over to you for these two.

Great, thanks, Tim. I think we've talked about the various scenarios with sola before. We continue to characterize it as a high-risk, high-reward program. The scenario you paint is what we think is the least probable, but it certainly could happen. In this scenario, sola would really not separate at all from placebo. I think we would be re-evaluating all of the sola programs, frankly, Tim. And the way we've set up the prodromal program, which we've just begun, is there's a recruitment start with a special cohort that we can also evaluate more information on. We're doing this for a couple of reasons. But one of the reasons is the ability to stop the trial should EXPEDITION3 be negative. So we've gated the investment in that way. As I said, we're not counting on that as the most probable scenario, but we're prepared for that contingency. We're excited about baricitinib, too. The profile from the Phase III program, four very large studies, is extremely positive. That drug is under review at the FDA and we're anticipating a launch sometime in 2017. You are identifying a key issue in that class. RA is crowded. It is heavily managed by payers. Lilly has a strategy on baricitinib to really focus on the differentiation of the product versus the standards of care of methotrexate and Humira. We want to position the product in really the pre-biologic setting. That may take some time to achieve, as you're pointing out. However, I would say there are all kinds of payers. And those that are more clinically-focused and focused on improving outcomes for a pretty significant condition, life-long condition for young people, RA, we think we can make early headway in those settings. Others which may be more sensitive to rebate flow, et cetera, obviously that's going to be more difficult. But I think Lilly's prepared to be patient and build out the product through time. Reminding everyone that the current IP is very long and we have a long time to fulfill full value for baricitinib. Thanks for the questions.

Great. Thank you, Dave. Mary Beth, if we can go to the next caller, please.

Yes, thank you very much. Dave, a question on Taltz and the anti-IL-17 class. I understand the commentary around the growing class. And clearly, if we listen to Novartis, they'll be quite enthusiastic. I'm just wondering, though, as we look quarter-to-quarter at the U.S. sales, while the rate's nice, the absolute numbers I guess one could say it's rather anemic. And so the real question is around payers, I guess, and whether or not the full channel opportunity is being utilized by Lilly and, more importantly, how you think you might be able to address that relative to Cosentyx or others that may enter that market in psoriasis. Thank you for your time.

Great, Tony. Thank you for the question. Dave?

Yeah, Tony. Thanks for the question. We are both excited about the uptake of the IL-17 class and Taltz within it. In fact, as we exited Q3, we're seeing Taltz new-to-brand share in dermatology, which is really our key leading indicator for performance, as peaking over 10% already, ahead of Enbrel, for instance, and at least at par with Cosentyx in that setting. So we're happy with the initial adoption and the breadth of trial and usage which are other key indicators for us. At this point in the launch cycle, I'm not sure net sales should be the absolute marker we'd be looking at, although of course we're looking forward to growing that quarter-on-quarter going forward. And you did see growth from Q2, which was, reminding everyone, just a few weeks of shipments in Q2. It wasn't a full quarter. Also, vis-a-vis Cosentyx, which enjoys three indications, we can only have the one in psoriasis, as was mentioned in the call text earlier. We do plan submissions now for PSA in the U.S. shortly. And we have an ongoing program. So net-net, I think we're happy with where we are. Global rollouts are beginning in the second half of the year as well in Europe and Japan, which are also significant opportunities. We've got a lifecycle coming. And where we are head-to-head against the incumbents of TNF, STELARA, and even Cosentyx within the class, which is the U.S. derm market, I think the early performance indicators are quite strong.

Great. Thanks, Dave. Mary Beth, if we can go to the next caller.

Thank you. I have a couple. Assuming solanezumab data is tracking toward CTAD presentation, would there be a top-line release? And, if so, when would that be issued? And externally, of course, we know nothing about what was seen in EXPEDITION3. Does Lilly also know absolutely nothing about what was seen in EXPEDITION3, or is some data being analyzed or already has been analyzed? So that's the first question. Second question is, Lilly seems to have done some opportunistic spending in Q3. Companies typically do this for various reasons, one of which is anticipation of positive upcoming developments. Certainly it would not be done when delay or disappointment is expected. So how should we interpret your opportunistic spending in the third quarter? Thank you.

Great, Steve. Thanks for the questions. It's always an exciting moment waiting to hear you give them. If we can go Dave for the sola questions on the CTAD and potential timing for a top-line press release issuance, as well as whether or not people have seen anything at Lilly on EXPEDITION3 to date. And then, Derica, if you'd like to handle the spending question, that would be great. Dave?

Yeah, let me answer the second – sola question first. Steve, we have seen nothing on EXPEDITION3. And that will remain true until literally a few days before your second question, which is a top-line press release, which we'll do with absolute urgency after management's had a chance to look at the data coming in. Reminding everyone that the period between last patient visit and that management review involves a lot of data cleansing, QA/QC effort to make sure what we're looking at is a true signal. And those are normal procedures that do need time and effort to make sure that the much-anticipated readout is accurate. Following a top-line release, probably by just a few days, would be CTAD, if we can make it. This will be a slide format of a summary of the top data points which would fill out things beyond what would be anticipated in a top-line release at that time. That's just reminding everyone a best-case scenario for us right now if everything goes smoothly operationally. And just to remind everyone, you do not need to register for CTAD. They've asked us to say that. And that it will be available from the comfort of your computer to view in real-time should that presentation occur in the first week in December.

Great. Thanks, Dave. Derica?

Hi, Steve. Good morning. In regards to our operating expense and spending in the third quarter, there was really nothing unusual. Our lack of transparency in terms of what we're doing behind the scenes is really driven by the new product launches and our support of that. You've probably seen some of our new DTC ads that we've launched in quarter as well. That's driving the spend, as well as our launch prep. We talked about the recent approval of Lartruvo, and we've been anticipating that for some time. In addition, you also see that we continue to invest in our pipeline. And if you look at our total operating expenses for the quarter, our biggest growth was in that realm in terms of R&D, and it really is progressing our pipeline, and to pursue the opportunities that we have embedded there that we believe still keeps us on track to achieving that potential of 20 launches in a 10-year span. So whether you call it opportunistic, we see it more in a sustained fashion that this is what we've been geared up to do.

Great. Thanks, Derica. Mary Beth, if we can go to the next caller, please.

Great. Thanks for taking my questions. So first just on the diabetes side for Trulicity and Jardiance. Can you provide a little more color in terms of how much of the sales is coming for, I guess, the classes as a whole, and also your products from specialists versus generalists? Just trying to see if they're getting better traction with the primary care physicians. And then second on Taltz, you mentioned psoriatic arthritis and also ankylosing spondylitis. Can you just give us a better sense there in terms of how you view the commercial opportunity for those two indications relative to the psoriasis indication? Thanks.

Great. Thanks, Vamil. Enrique, we'll go to you for the Trulicity and Jardiance question on specialist used versus PCP prescribing. And over to Dave for the psoriatic arthritis and ankylosing spondylitis opportunity. Enrique?

So I don't have the numbers in front of me, but when we think about specialists versus primary care, for this product to be successful, we have to be relevant when it comes to primary care. We expect long-term that over 80% of the volume will basically come from primary care as we think about these two products. Now, something that is encouraging about the uptick of both of these products is that our share with specialists is indeed higher with endocrinologists than with primary care physicians. This is important as a leading indicator as we look at the future and a great prognosticator of what is to come ahead.

Yes. Thanks for the question, Vamil. What I hear you asking about is as we look forward to the future indications, how do we think about the size of those markets? I would say on PSA, which would be the next one for us, based on differentiation we think we have versus standards of care like Humira, reminding everyone that IL-17s can be used without methotrexate, and you get sort of the stool, skin, and joint benefit that's at least as good on the joint. We're encouraged by what we see so far in our estimates. Our own estimates actually have gone up since we started the program because treatment rates for PSA appear to be quite a bit higher than psoriasis when it comes to using biologics. Just to give everyone a bit of frame on that, when you look at products that are indicated only for psoriasis and psoriatic arthritis, take Cosentyx, for instance, they usually have a little bit more volume coming out of non-derms than derms right now. I think that indicates that although the incidence rate is lower for PSA, rheumatologists are more comfortable with biologics. They're treating PSA at a higher rate. Ank spond is, I would say, even more of an underdeveloped opportunity. In particular, Lilly's program will feature the potential to be indicated in non-radiographic ank spond, so this is an absence of X-ray proof of the condition. This is a recognized indication in Europe, but not yet by the FDA. Should we achieve that, I think that presents a very significant market expansion opportunity for ank spond where the biologic basis of the condition is known to be quite similar to PSA and psoriasis. So there's a lot of promise being held out for the class in ank spond. We see some early data from Cosentyx in that regard. We're using even higher doses. So, I think we are optimistic on all those indications as being meaningful part of the ultimate success story of Taltz.

Great. Thank you, Dave. Mary Beth, next caller, please.

Thanks for taking the questions. First question just has to do with the pricing risk and election cycle. If you look at most of the election cycles historically, it would seem as though that if investors actually owned the group coming out of an election cycle, they'd be rewarded pretty handsomely. However, you do have some things that are being tossed about, most notably Proposition 61 that'll be on the ballot November 8, proposing a statute which could create a price ceiling on prescription drug costs by state programs. Just your thoughts about this election cycle and what might be different, and is there any silver lining on pricing coming out of that? The second question just has to do with Trulicity. Just an update on REWIND and thoughts around the upcoming interim analysis and stoppage of that trial?

Great, John. Thank you for the questions. John Lechleiter, if you'll take the first part of that question. And then we'll come over to Enrique for the REWIND question. John?

Yeah. Thanks, John. Prop 61, we're fighting that tooth and nail in California. It's not only bad legislation; it's bad for your health. And we're trying to impress that on the voters. What we've found is that the more people become aware of what's at stake here and what's the likely outcomes of Proposition 61, the more they're prone to vote against it and vote it down. So we have a pretty big campaign underway in California right now to increase that level of awareness and hopefully to continue to shift voters toward a position of being against it for a whole variety of reasons. It's difficult to say on the larger – are we going to see some price relief after the election? I think in terms of where drug pricing fits in what I'd call the rhetoric that you're always going to get in a campaign season, particularly one that's as polarized as this one. So I think there may be some acute relief. I think the bigger question is, if Hillary Clinton wins, what does she have in mind for health care? If Donald Trump wins, what's the direction going to be? It's pretty clear, whether you say you want to repeal and replace the Affordable Care Act, something needs to be done if we're going to render health insurance availability for everybody in this country sustainable on an ongoing basis. So I think that's going to be the bigger focus for the industry is what happens in those probably critical first two years of the first term, which we know what happened in 2008 and 2009. And I think that's what the industry has to be prepared for. At the same time, I think that, frankly, if we're successful with sola, the outcome of sola, and there's hope for Alzheimer's – keep in mind that the top 10 causes of death in this country, I think I heard the other day, Alzheimer's is the only one where we continue to see increases in the rate of mortality. So I think if the industry can demonstrate, once again, like we did with HIV/AIDS, like we did with hepatitis C and so many other diseases, that we can make an impact on something that increasingly everybody is fearful of and concerned about, I think that changes the dynamic, too. We don't know what that outcome's going to be, but it's going to be a very interesting mix come January 1. And I'm sure Dave Ricks is ready to jump all over it.

Thank you, John. Enrique, for the REWIND update?

Sure. So our REWIND trial with Trulicity is scheduled for completion in July of 2018. We expect the interim later this quarter. We already had the number of events to be able to reach the interim. But the DMC will be meeting later this quarter. Clearly, we've learned a lot from both the LEADER and the SUSTAIN trials. I think it's important to remind everyone that given the number of events that we have in interim is significantly lower than what Victoza had with LEADER, so the hazard ratio for us to be significant will have to be quite impressive. We will see what the data says once we have the readout.

Great. Thank you, Enrique. Mary Beth, next caller, please?

Yes. (1:03:00).

Hey, Marc. If you can hear us, it sounds like we lost you. Yes, we can hear you now.

Thanks, Phil. Enrique, first, can you help explain why GLYXAMBI is not doing better? We look at the prescription trends, and I would have thought that this product would have taken off much better. Second question is, can we get a little more color on Animal Health and just what happened in the quarter and what's going on there? And third, you mentioned the CGRP headache cluster. Can you just talk about the timeline change there and what happened and if there's been any other timeline changes to that program? Thanks.

Great, Marc. Thank you for the questions. We'll go around the table here. We'll start with Enrique on the GLYXAMBI question. Over to Jeff for more color on what's going on with the Animal Health business. And then back over to Dave for the CGRP timeline question. Enrique?

Sure. So the strategy we had for GLYXAMBI was a different one prior to the readout of the EMPA-REG OUTCOME trial. As we see it today, we need to make sure that we are positioned in Jardiance as standard of care, and we need the new indication to truly do so and really reinvigorate the growth of the SGLT2 class. We believe that GLYXAMBI will have very significant benefit once this happens. But investing today in a really big way in GLYXAMBI really doesn't make sense, whether it's access or promotional investment. GLYXAMBI has today fairly low access. We are in the 20s when we look at commercial access, and it's even lower than that in Part D. We need to retake that once we get the new label for Jardiance.

Great. Thank you, Enrique. Jeff?

Yeah, Marc, thanks for the question on Animal Health. Bottom line, our Animal Health quarterly results have been more volatile this year, as you know. Inventory destocking was a significant event in Q3, and it contributed to the revenue decline this quarter. We don't see these results as a trend. Just as we enjoyed the benefits, as you recall, of the distributor purchases in Q2 ahead of our SAP cutover in the U.S., inventories were depleted in Q3, which caused the majority of the decline in our Animal business. So I would note the SAP transition has gone very smoothly. On the companion animal side, our business is up 3% year-to-date, which really normalizes for the Q2 and the Q3 inventory impact. And what's driving this is, one, successful launches of some new innovation, as well as we believe our improved competitiveness with the combination of Novartis and Elanco. On the food animal side, food animal's down 1% year-to-date. And really, outside the U.S., we've experienced weakness in Latin America, and really this region represented the entire decline for our outside U.S. food animal in Q3. And then in the U.S., we face some market access challenges this quarter. In particular, Paylean, a product in our U.S. swine business, pork customers pursuing the China export market removed Paylean. They'll do that on and off. They'll come on and off the product depending on needing the export markets or not. So that in summary. As then as John noted, two weeks ago we announced the acquisition of BI's companion animal vaccine business, subject to the closing, again, of the BI-Sanofi asset swap. We see this as a tremendous complement to our companion animal business in the U.S.

Hey, Phil, just a clarification. The number I quoted for GLYXAMBI is as a preferred position, so lowest branded copay. The access is higher than that we look at overlaps.

Great. Thank you for the clarification, Enrique. Dave, on the CGRP timeline?

Yeah. So I think, Marc, you're asking about the push-out on cluster headache. This is for galcanezumab, reminding everyone that galcanezumab will be the first therapy in this class – actually the first therapy ever to our knowledge, to be approved with well-controlled studies in cluster, should those studies read out. We have pushed back the timeline into next year based on enrollment. And really, to clarify that, it's actually the ability to have subjects have cluster headaches. Some forms of the condition are episodic. So while we recruited well the number of people in the program, we're waiting for the cluster events to start which can demonstrate the value of the product. So it goes part and parcel with pushing into a new therapy area like this where studies haven't even been done before with medicines on a large scale. But we're excited about that part of the program. Again, it would be first with that indication to our knowledge. It gives us some, I think, credit with the neurologists for tackling a tough condition and potentially some value support as we go to market. Also, I'd say the migraine program is on track. We have communicated previously that that's a mid-2017 readout with potentially a submission by the end of 2017. So we're feeling good about galcanezumab overall.

Great. Thank you, Dave. Mary Beth, we can go to the next caller, please.

Great, thanks for taking my questions. So first just on the diabetes side for Trulicity and Jardiance. Can you provide a little more color in terms of how much of the sales is coming for, I guess, the classes as a whole, and also your products from specialists versus generalists? Just trying to see if they're getting better traction with the primary care physicians. And then second on Taltz, you mentioned psoriatic arthritis and also ankylosing spondylitis. Can you just give us a better sense there in terms of how you view the commercial opportunity for those two indications relative to the psoriasis indication? Thanks.

Feeling the pressure. Could you talk to the CDK4/6 category? Firstly, in relation to the competitive adverse event profiles of the particular drugs. I'm interested, obviously, in the commission feedback about the low-grade diarrhea versus the monitoring requirement that Novartis is going to face. And then second, should we expect that formularies are going to exercise pressure in this segment as well, given LB-3 drugs with very similar profiles in the way they're pulled to signal off the formularies that CVS in CML as well as other small molecular drugs, such as XTANDI? Is this the way the world will work within small molecule oncology drugs going forward?

Yeah, let me answer the second – sola question first. Steve, we have seen nothing on EXPEDITION3. And that will remain true until literally a few days before your second question, which is a top-line press release, which we'll do with absolute urgency after management's had a chance to look at the data coming in. Reminding everyone that the period between last patient visit and that management review involves a lot of data cleansing, QA/QC effort to make sure what we're looking at is a true signal. And those are normal procedures that do need time and effort to make sure that the much-anticipated readout is accurate. Following a top-line release, probably by just a few days, would be CTAD, if we can make it. This will be a slide format of a summary of the top data points which would fill out things beyond what would be anticipated in a top-line release at that time.

Great. Thank you, Dave. With that, we are approaching the end of our time. I want to ask anyone on the call, if you have additional questions, please reach out to our Investor Relations team. And we will look forward to talking with you again soon. Thank you.

Thanks, Phil. For those of you listening live or to the replay, we appreciate your interest in our company and your participation in today's call. Should you have any questions we didn't address, please contact our IR team and they'd be happy to help, as usual. This is Brad Robling's last earnings call, and we thank him for his support of our investors and wish him all the best in a new business development assignment. Thanks, Brad. Finally, I'd like to take the opportunity to thank John for his steady leadership during one of the most difficult periods of our company's 140-year history. Spurred on by John's vision and his commitment to innovation, Lilly is today in the midst of one of our most productive periods of new product launches, and we've achieved great progress building an R&D engine that has the potential to launch 20 new products in 10 years, beginning in 2014. John, many analysts and portfolio managers I've met with in recent weeks have expressed their sincere appreciation for your contributions to the company and to the sector. You've earned their praise. And we all owe you a debt of gratitude, and we wish you all the best in the next chapter of your life. Thanks, everyone. And look forward to talking to you in the near future.