Lilly(Eli) & Company (LLY) — Q3 2017 Earnings Call Transcript

Good morning. Thank you for joining us for Eli Lilly and Company's third quarter 2017 earnings call. I'm Dave Ricks, Lilly's Chairman and CEO. Joining me on the call today are Derica Rice, our Chief Financial Officer; Josh Smiley, currently our Treasurer and the CFO-elect; Dr. Jan Lundberg, President of Lilly Research Laboratories; Enrique Conterno, President of Lilly Diabetes and Lilly U.S.A.; Dr. Sue Mahony, President of Lilly Oncology; Christi Shaw, President of Lilly Bio-medicines; and Jeff Simmons, President of Elanco Animal Health. We're also joined by Kristina Wright, Chris Ogden, and Phil Johnson of the IR team. This will be the last earnings call for two senior executives that have been instrumental in our company's success. At the end of the year, Maria Crowe, President of Manufacturing Operations; and Derica Rice, our CFO, will retire. Maria has helped Lilly earn the trust of patients we serve by making medicines with the highest levels of quality and safety. Derica played a key role in leading Lilly through the challenging period of patent expirations we called years YZ, and emerging as a much stronger company. Both have built strong organizations that will carry on their work. So beginning here, please join me in a round of applause to thank both of them for their contributions to our company. 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 is not intended to be promotional and it's not sufficient for prescribing decisions. In Q3, we generated worldwide revenue growth of 9% driven by volume growth in our human pharmaceutical business, once again led by our newest products. I'd also highlight the outstanding performance of our diabetes product, which in total grew 39% this quarter. We also continued to expand our margins. Excluding the effects of foreign exchange on international inventory sold, gross margin as a percent of revenue increased by over 70 basis points, and total operating expenses as a percent of revenue declined by over 310 basis points to 50.8%. Our pipeline progress continued. Highlights include the FDA approval, and we launched Verzenio, the U.S. trade name for abemaciclib, for advanced breast cancer based on the MONARCH 1 and MONARCH 2 trials. We submitted the BLA for galcanezumab for migraine prevention, and we initiated the Phase 3 program for our ultra-rapid insulin. In terms of capital deployment, we entered into a global immuno-oncology collaboration with CureVac AG, focused on the development and commercialization of up to five cancer vaccine products based on CureVac's RNActive technology. And we returned over $500 million to our shareholders through our dividend. In other news, we received an important ruling upholding our Alimta method of use patent in the U.S. IPR proceeding. If upheld, through all remaining challenges, Alimta would maintain U.S. exclusivity until May 2022. Our performance in 2017 keeps us on track to achieve our midterm goals for each of our strategic objectives. Slides 5 and 6 contain more details on these events, as well as other key events since our July earnings call. I'd highlight that we've submitted abemaciclib for advanced breast cancer in Europe and Japan, and the U.S. FDA granted a Priority Review designation for the abemaciclib MONARCH 3 NDA. Along with Incyte, we announced that the NDA for baricitinib in RA will be resubmitted before the end of January 2018. After further discussions with the FDA, we've also submitted the sNDA to include the KEYNOTE-021G data in the Alimta label. We announced a series of actions to accelerate our efforts to focus our resources on developing new medicines and improve our cost structure. And earlier this morning, we announced that we are reviewing strategic alternatives for our Elanco Animal Health business, including an IPO, a merger, sale or retaining the business. Moving to our financial results, slide 7 summarizes our presentation of GAAP results and non-GAAP measures while slide 8 provides a summary of our GAAP results. I'll focus my comments on our non-GAAP adjusted measures to provide insight into the underlying trends in our business, so please refer to today's earnings press release for the detailed description of the year-on-year changes in our third quarter GAAP results. Looking at the non-GAAP measures on slide 9, you can see the revenue increase of 9% that I mentioned earlier. Gross margin as a percent of revenue decreased to 75.1%. This decrease was primarily driven by the effect of foreign exchange rates on international inventories sold and negative product mix, partially offset by manufacturing efficiencies. Excluding the effect of FX on international inventories sold, gross margin as a percent of revenue increased by over 70 basis points. Total operating expenses increased 3%, with marketing, selling and administrative expenses decreasing 1%, and R&D expenses increasing 7%. As mentioned earlier, as a percent of revenue, OpEx declined by over 310 basis points. The decrease in marketing, selling and administrative expenses was driven by lower spending on late lifecycle products, partially offset by higher spending on our new products. The increase in R&D expenses was driven by a milestone payment related to the BACE inhibitor we're developing in collaboration with AstraZeneca and to a lesser extent, higher late-stage clinical development costs. Other income and expense was an expense of $14 million this quarter compared to income of $27 million in last year's quarter. Our tax rate was 18.9%, a decrease of 310 basis points compared to the same quarter last year, primarily driven by a net discrete tax benefit this quarter of approximately $30 million. At the bottom line, net income and earnings per share both increased 19%. We achieved this significant earnings growth by delivering high single-digit, volume-based revenue growth while significantly reducing our OpEx ratio, creating positive leverage. Slide 10 details the same non-GAAP measures for September year-to-date while slide 11 provides a reconciliation between reported and non-GAAP EPS. You'll find additional details on these adjustments on slide 24 and slide 25. Moving to slide 12, let's take a look at the effects of price, rate, and volume on revenue growth. The effect of foreign exchange was minimal this quarter. Excluding the slight headwind from FX, our worldwide revenue growth on a performance basis was 9%, and was driven by volume, to a much lesser extent, by price. It's worth noting that in our human pharma business, each major geography drove volume growth again this quarter. By geography, you'll notice that U.S. pharma revenue increased 10% primarily driven by volume. Trulicity, Basaglar, and Taltz were the main drivers of this growth, with recent loss of exclusivity leading to large volume declines for both Strattera and Effient. It's also worth noting that last year's third quarter included a $145 million benefit from a Cymbalta returns reserve reversal. Excluding this from the base period, our U.S. product growth was 17%. Moving to Europe, pharma revenue grew 7%, excluding FX, driven almost entirely by volume despite headwinds on Alimta due to generic erosion in certain countries as well as competitive and pricing pressures. Excluding Alimta, the rest of our European pharma revenue grew 13% on a performance basis. This was led by Trulicity. In Japan, despite a large negative impact from the entry of generic Zyprexa last June, pharma revenue increased 13%, excluding FX. Excluding Zyprexa, the rest of our Japan pharma revenue grew 17% in performance terms this quarter led by Cyramza, Cymbalta, and Trulicity. Our pharma revenue in the rest of the world increased 9% on a performance basis this quarter led by Humalog and Trulicity. Turning to animal health. Excluding the impact of FX, worldwide revenue increased 4% driven by volume. Food animal product revenue declined by 7% while companion animal product revenue increased 34%. On a performance basis, excluding the BI U.S. vaccines acquisition and adjusting for last year's purchasing pattern, our animal health revenue decreased 10%, with food animal product revenue down 7% and companion animal product revenue down 17%. The food animal decline was driven primarily by market access pressure as well as by competitive pressure in U.S. cattle. While the companion animal decline was due to competitive pressures affecting Trifexis, our flea, heartworm, and intestinal parasite product. Slide 13 outlines the same information for our September year-to-date results. Now let's look at the drivers of our worldwide volume growth on slide 14. In total, our new products comprised of Trulicity, Basaglar, Taltz, Jardiance, Lartruvo, Cyramza, Olumiant, and Portrazza were the engine of our worldwide volume growth. You can see that these products drove 13.7 percentage points of volume growth over the same quarter last year. While the loss of exclusivity for Cymbalta, Strattera, Effient, Axiron, Zyprexa, and Evista provided a drag of 610 basis points. Slide 15 provides a view of our new product uptake. In total, these brands generated over $1.2 billion in revenue this quarter and now represent nearly 22% of our total worldwide revenue, up from just 18% last quarter. Moving to slide 16, as I mentioned earlier, changes in foreign exchange rates had essentially no effect on our Q3 2017 revenue growth. Similarly, FX had no meaningful impact on our operating expense growth. FX did, however, have a large effect on growth in cost of sales and, consequently, in operating income and EPS. For example, growth in non-GAAP EPS was 19%, including the effects of foreign exchange, and 30% in constant currency terms. This is consistent with the 28% growth we've seen year-to-date. Now, I'll turn the call over to Derica for a review of our overall corporate pipeline, progress on potential key events, and an update on our 2017 financial guidance.

Thanks, Dave. Slide 17 shows select NMEs as of October 17. Movements since our last earnings calls include the U.S. approval of abemaciclib for advanced breast cancer, the U.S. submission of galcanezumab for migraine prevention, the initiation of Phase 3 for our ultra-rapid acting insulin; the addition of a Phase 1 immunology asset from our recent collaboration with Nektar Therapeutics, and termination of development of two Phase 1 assets. Our select NILEX pipeline, shown on slide 18, reflects the 3 and 4.5-milligram dulaglutide study and the negative outcome of the abemaciclib lung cancer study, JUNIPER. Turning to slide 19, you can see the considerable progress we've made on the key events we projected for 2017. Dave and I have already mentioned many of the key events that occurred since our last earnings call, so I'll simply comment on just one change. Following the positive data presented at EADV, we now expect to begin the Phase 3 program for baricitinib in atopic dermatitis before the end of this year. Turning to our 2017 financial guidance on slide 20, you'll see that we've raised and narrowed the range for revenue to $22.4 billion to $22.7 billion, primarily due to the uptake trends we're seeing for our new pharmaceutical products and, to a lesser extent, to a stronger euro. We've also narrowed the range for full year R&D expense to a range of $5.1 billion to $5.2 billion. We've decreased our GAAP and non-GAAP tax rate to reflect the tax effect of this quarter's business development and restructuring charges as well as the discrete tax benefit mentioned earlier. For EPS, we've raised our non-GAAP EPS range by $0.05 to $4.15 to $4.25 per share, and we've reduced our GAAP EPS range to $1.73 to $1.83 per share. Before we go to the Q&A session, let me briefly sum up. We've delivered another strong quarter in Q3. Led by our new products, worldwide revenue grew 9%. By making disciplined investments in our business, we leveraged our top line growth into 19% non-GAAP EPS growth or 30% growth when excluding FX. We continue to have strong momentum behind our innovation-based strategy. Since our last earnings call, we received U.S. approval for and launched Verzenio. We've submitted galcanezumab for migraine prevention here in the U.S. We started Phase 3 for our next-generation mealtime insulin and we bolstered our pipeline with the CureVac deal. We also announced actions to focus our resources on developing new medicines and to improve the company's cost structure, as well as the review of strategic alternatives for our Elanco Animal Health business. Going forward, our management team will remain focused on launching new products with excellence, reloading our late-stage pipeline, driving increased productivity to expand our operating margins, and investing in our core drivers for our business – talent, scientific capabilities, and technology platforms – to ensure our future growth prospects. This concludes our prepared remarks. Now, I'll turn the call over to Phil to moderate the Q&A session. Phil?

Thank you, Derica. We would like to take questions from as many callers as possible, so we do ask that you limit your questions to two or one two-part question. Now, Alan, if you can go ahead and provide the instructions for the Q&A session. We're ready for the first caller.

Thank you. On Trulicity, an important growth driver, you guys called it out as a major future growth driver. I'm wondering if you can just give us your thoughts on the curve of that product as we go into 2018 because you are facing new branded competition from Novo's weekly product. I think they had some compelling head-to-head data. I'm wondering how you think that might impact your product. And equally importantly, they have their oral GLP-1, I think it was in several Phase 3 readouts coming in 2018, and I'm wondering if you can give us your opinion of the viability of that program. It seems that if they had a good clinical profile, that could be problematic for injectable GLP-1s. Reducing the clinical profile of that product will, in fact, be problematic. And then on Humalog, no biosimilar yet approved. You guys have I think a patent that you could potentially exert and leverage into a delay or maybe a settlement with Sanofi. Can you give us any update there?

Great. Tim, thank you for the question. So Enrique will go to you for the questions on Trulicity heading into 2018 with new branded competition coming and thoughts on the oral GLP-1 space. And then we do have our General Counsel, Mike Harrington, with us. So, Mike, if you'd like to give the update on litigation with Sanofi. Enrique?

Well, thank you for the question. And indeed, Trulicity is having a terrific year. It's a unique time when it comes to innovation in diabetes. Let me try to maybe frame some comments and provide some color as we think about Trulicity going forward. I will not provide an outlook for the product but some things to think about. The biggest opportunity for Trulicity is when we think about this class, and when we look at injectables, GLP-1 as a class still represent less than 30% of the basal insulin prescription. We see significant benefits when it comes to the GLP-1 class, so the opportunity for growth is very significant. Trulicity has an enviable position in this market by the benefit that it basically offers when it comes to the real-world efficacy of the product, of course the once-weekly dosing. And we have a single-dose pen that is ready to use and does not require basically managing or seeing the needle, which is so important for a patient that is transitioning, in many cases, from an oral medicine. Now, clearly, we do have competition, yes. But I think what we have to keep in mind too is that the competition is also going to help fuel the overall growth of the class. The class has very healthy growth and we expect that that's going to be a continued catalyst for Trulicity as we think about the growth of the class and the type of position that we have in the market. Our trends continue to be very solid for the product. Clearly, when it comes to sema, we'd like to see all of their data when it comes to SUSTAIN 7, but we feel good about the position that we basically have when we look at both the combination of our efficacy and the safety profile that our product offers. You asked about oral GLP-1s. That is an area of interest to us. We do see the innovation in the space as important, but we need to wait for all of their data to basically come out before I can make more comments. And then I believe that Mike is going to comment on Humalog.

Thanks, Tim, for your question. The deadline under the Hatch-Waxman Act for Lilly to challenge Sanofi has expired and we have not filed suit to challenge their follow-on biosimilar. As you know, Tim, the Hatch-Waxman Act notice process provides an opportunity for a company to carefully assess whether a follow-on product infringes patents listed in the Orange Book for a particular product. The only remaining Orange Book-listed patent that we have that is relevant to this discussion protects our KwikPen delivery device, and we have thoroughly analyzed both the Sanofi device and our own device. Lilly's KwikPen is an innovative device that offers a number of advantages for patients. But for purposes of analyzing the patents, it's a fundamentally different device than the Sanofi pen that they intend to use with their follow-on lispro. We always vigorously defend our intellectual property, and we'll continue to do so aggressively, but we don't engage in litigation to enforce patents unless there is a factual and legal base to do so. And here, we didn't have a factual and legal basis to support litigation.

Great. Mike, thank you for the update. Alan, if we can go to the next caller, please?

Sorry. My apologies. I had it on mute. So thanks very much for taking my questions. My first question is with respect to the animal health business. So you've announced that you're exploring strategic alternatives. Could you just provide a little bit more color on the timing? Why now? I know that this is something you've contemplated for years, but the business' organic growth hasn't been inspiring recently. And so it'd be helpful for you to just provide a little bit more color about why now and how you see the business' organic growth prospects going forward. And then second, with respect to Forteo, I believe there may potentially be generic entry in the U.S. and Europe in 2019, but it would be helpful to get your perspective on how investors should think about the generic threat to Forteo in 2019. Thank you.

Dave, thank you for the questions. So Dave Ricks, if we can have you answer the question on alternatives that are being explored and timing for the Elanco Animal Health review. And then Christi, if you want to comment on the outlook for Forteo post-generic entry?

Great. Thanks, Dave. We haven't touched on the short-term operational things, and we may get other calls on that. I mean, it is true. We've had some challenges in the business this year. We don't look at the question of how we should position Elanco in the short-term; we think of it as long-term. And we've been, as you point out, asked this question for a long time; it's a natural one to ask. I think where we think we are now, why now, is over the last many years we've grown this business rather substantially through acquisition but also through our own organic actions, and we now have a global business that's highly competitive. It's a top-tier animal health business, amongst the top five globally, and we participate in all of the relevant segments of animal health. Most recently, combining BI's vaccine business in North America coupled with Novartis, and it's taken some work to fully operationalize and get those companies pulled together in a way that we think where this company is poised to compete effectively and really grow aggressively ahead. And so now is a good time having completed those acquisitions and scale the business to reflect on the best posture for Elanco Animal Health. And as we said today, we're exploring options. We expect to be able to get back to investors by mid-2018 with the results of our analysis. And the full range of options are in scope: keeping the business, IPO or spin, or perhaps some other combination that we might determine as the best way to maximize the value to Lilly shareholders. So we'll follow-up with you as that process progresses but we think this is a good time to step back and look at this question.

Thanks, Dave. Christi?

Yes. On the Forteo question, we continue to be very pleased with the performance of Forteo, and the data continues to support how strong it is in the fracture prevention and treatment. And so as we look at Forteo in the future, we do have the same estimate as you do, which is the expiration of the patent being in 2019, and that's across U.S., major Europe, and Japan. Obviously, it is difficult to make Forteo; it's not easy. So that will really be the question mark, but our estimates are that 2019 is when we'll lose that intellectual property protection.

Great. Thank you, Christi. Alan, if we can go to the next caller?

Thanks. A couple of questions. I'm surprised you haven't seen Lilly use their balance sheet for any more substantial business development within oncology given the reshaping of the business. Could you just maybe share a little bit of color? Is that a question of the bid-ask spread? Is it available assets? Is it a clinical base that needs to be turned over? What is potentially delaying that? And the second, the relative performance of Taltz versus your competitor, Cosentyx, especially in the last quarter would seem to disfavor Lilly. Could you outline what are the in-market dynamics that are driving this disproportionate marketing and how you're thinking about adjusting going forward?

Great. Andrew, thank you for the questions. Derica, if you'll address the question on using our balance sheet for business development and oncology, and then the impediments we're seeing to actioning that. And then Christi to comment on dynamics with Taltz and Cosentyx in that market. Derica?

Sure. Hi, Andrew. Good morning. We have no apprehension or reservations about using our balance sheet to pursue our therapeutic goals, whether it's in oncology or across our other therapeutic segments in which we compete. And we do continuously look at the marketplace for external asset opportunities that we'd like to pursue. Most recently, you've seen just this year, three years, three deals in the area of oncology. Now, all of those are early-stage deals, and that's by design. That's the area that we've chosen to focus on. If we can find late-stage assets like we did with CoLucid at the beginning of this year, we'll pursue that as well. In regards to market prices, oncology is still a very expensive real estate, and one of the things we have to make sure that we do in protecting our shareholders is that we do good diligence on those opportunities we look at. And sometimes, it is tough finding value in some of the assets at the market prices at which they're being touted. So that's something we've been cognizant of and that's why we've chosen to look to go earlier rather than later if we can.

Great. Thanks, Derica. Christi?

Yes. Andrew, so on Taltz, we continue to be very pleased with the performance of Taltz, especially as we see patients with clear skin. And as you look at the dermatology office, defining our competitors, really is not the IL-17 versus the IL-17. What you see is really the TNFs really not reaching that clear status. And the more we have new agents like the IL-17s and the newer agents that are coming out, the more that we'll see the expectations of both physicians and patients increase. A couple of those details for you on what you're seeing in the numbers. If you look at the data, there's a couple of things. One is Cosentyx has added free goods to their NBRx data, so IMS tells us there's a lot of volatility in that data and it will take weeks or maybe even months for that to actually level out. So what we're looking at is actually the net sales. And if you look at net sales in the U.S., in the dermatology office, we are performing the same as Cosentyx was at the same period of time, which is pretty remarkable for a second entry into the market. And usually, if you got 80% that would be great. But for us to be able to do that, so we continue to feel very good about it. The other thing to note is we do see seasonality in the summer time. So as you look at it, specifically in the dermatology office with psoriasis, that's where you'll see the seasonality. You don't see that with psoriatic arthritis or ankylosing spondylitis, so that is another thing that's kind of clouding the numbers as you see the seasonality more affect our numbers because we're all in the derm office right now. And then as you look into the future, we're very excited to hear from the FDA by the end of the year, which is we continue to see the breadth and depth of prescribers continue to increase. We see our early adopters increasing their number of prescriptions. We see more physicians trying Taltz. With the psoriatic arthritis launch and our entry into the rheumatology office in December and January, given FDA approval, we should see another step level increase in Taltz. So we're very confident and continue to believe in the Taltz performance.

Great. Thank you, Christi. Alan, if we can go to the next caller, please?

Thank you. Just a couple of follow-up questions. First on DowElanco. Can you remind us, Dave, what the operating margin is on that business? I seem to recall that's a lower-margin business than your base business, but your overall operating margins, at around 22% or so, are well below the industry average. So if you contemplate spinning that business or selling that business, can you talk sort of generally about what impact you would see that having on your overall margins? And then secondly, just given the opportunity to take advantage of the risk of the P/E overcharge given where Zoetis is trading, what do you think you will do with those proceeds? And just if I can ask a question about the cost-cutting announcement that you made a couple of months ago, the 3,500 physicians that you are reducing. That has generated some debate among investors regarding your confidence and your ability to hit your sort of mid-single-digit top-line growth projection over the intermediate term. Can you shed a little bit of light on the reason for the additional cost-cutting program? I know that should lead to an improvement in operating margins. But should we think of this as an insurance policy against the top-line growth opportunity or should we look at this as above and beyond how the company expects to perform going forward? Thanks very much.

Okay. Jami, thank you for the question. If I can, I'm going to reorder our answers just to sort of get the flow going here. So Dave, if you wouldn't mind handling the headcount reduction question, the last one Jami had first. You're going to provide any comments on Elanco margins. Then Jeff, feel free to complement that answer if you'd like. And a little bit of Derica for the question around use of proceeds if we're having a transactions-yielding proceed in the future. Dave?

Sure. Yeah. Thanks, Jami. You used the DowElanco name. That's harkening back to the old days, so it's just Elanco now but appreciate the question. On the cost-cutting, so we announced this in early September. This has no relation to our belief about the revenue line, just to be clear. What we're looking at is looking beyond our long-held out, this 2018 target of 15% operating expense as a percent of sales, and we've said for some time qualitatively that that was a stepping stone on a way to a more productive, higher operating margin company. These actions put us further down that road. That's how we're thinking of them, both to become more competitive with our operating margins but also to free up cash flow and operating spend capacity to invest in R&D. We see a number of late-stage projects that have read out positively more than we expected. They're now launching but we need to invest behind those with important new indications and other uses, like Verzenio in an adjuvant setting, like Olumiant in atopic dermatitis like we spoke about today. So that's what it's for. It's about our quest to become even stronger for the future. Nothing to do with our conviction on the 5% revenue growth, which I remind investors we did 9% again this quarter. And we continue to trend above that CAGR we committed to. And although we know in 2018, we'll be facing some more generic events, we're very confident on the 5% by 2020. So with that, let me turn it over to Jeff on the Elanco operating margin story. We can compare that to Lilly afterward. And Derica can comment on the balance sheet.

Yeah. So Jami, just on our margin as we've shared pretty openly, as we've come to the integrations of Novartis as well as (35:10) and now BI, we've been hovering around 20% for the past two years. We feel good not only this assessment but our strategy going forward on our margin expansion opportunities, as we've been pretty open about. And we've got a pretty aggressive agenda. We announced two events this quarter that are a part of that agenda, that is well underway. And the first was our consolidation of our Larchwood, Iowa manufacturing facility into our Fort Dodge, the BI acquisition facility. As well as we're seeking options for rbST. The two big drivers that give us this current state are, no question, some of the forces in the lower sales and the other is product mix. And we're working aggressively not only to drive these margins closer, as we've said, to the 30% over time. That will not happen here in the short-term, but over time that will happen by both the margin expansion productivity agenda as well as the innovation that drives our product mix change.

Thanks, Jeff. Derica?

Jami, in regards to potential proceeds, we haven't gotten that far in our thinking. Right now, what we're really focused on is what's the best path forward in terms of maximizing the value of the animal health asset on behalf of the Lilly shareholders. That having been said, even back to the earlier question that Andrew asked, we have the balance sheet capacity today to pursue the types of opportunities that we're interested in. So while we're contemplating these strategic alternatives for Elanco, it is not inhibiting us or preventing us from moving forward with our current organic and inorganic strategy in terms of assets we want to pursue. So we're still moving full speed ahead. And as Dave highlighted earlier, back to your 5%, over the last three years, and recall when we gave the guidance in 2015, we've averaged, in terms of top line growth, somewhere between 7% to 9% in each year. And this year, as Dave said, we're tracking towards 9% growth. So we're very confident that we can meet that minimum threshold of 5% for the decade, which take us out through 2020, and we think we're actually well on track to achieve that.

Thanks, Derica. Jami, thanks for the question. Alan, if we can go to the next caller, please?

Hi, guys. Thank you so much for taking my questions. I wanted to focus on a couple of things. One, on baricitinib perhaps. Just curious what your confidence is on the 4-milligram dose in particular. And then secondly, just touching up again on lispro. Can you confirm – and I heard the prior comments – but can you confirm that there's no settlement at present between you and Sanofi on the lispro launch? And then also, how do you think about the lispro launch? And in theory, how should or shouldn't it be different than Basaglar versus Lantus? Thank you.

Great. Umer, thank you for the question. I assume with the 4-milligram, you're referring to the ongoing review at the FDA for our rheumatoid arthritis application. Is that correct?

Correct.

Okay. So Christi, we'll go to you for the question on baricitinib 4-milligram. Mike Harrington, if you'd like to comment on whether or not there's any kind of settlement with Sanofi. And then Enrique for the dynamics that you could might think about for the launch of lispro, whenever that occurs here in the future. Christi?

So I think it's important as we discuss the 4 milligrams of baricitinib to see, well, how is it doing, where we are commercializing the 4 milligrams. As we look at Europe, for example, specifically in Germany, the launch in Germany not only exceeds our internal expectations. But as you look at the five months in which it's been available, it has exceeded every rheumatoid arthritis launch in history, including Humira. So as we look at that uptake in the 4 milligrams is the majority of the use. And we see what the patients are seeing in coming back to their offices where they were debilitated. They've tried other agents and they've gone on baricitinib and, really, things like in Japan are now able to drive where they haven't been able to before. It's really life-changing. So as we look at the U.S. and our discussions with FDA and the ongoing conversations we continue to have, the 4 milligrams is imperative for these patients to get the benefit and the efficacy that they need to be able to go about their daily life. So it is still our strategy that we believe in the 4 milligrams. We're seeing it play out in the real world and we look forward to having the resubmission, and it is on track to happen before the end of January as we had mentioned in the past. And then after that, we'll have a six-month clock in which we'll get a read, but we're very optimistic.

Thanks, Christi. Mike?

And Umer, I can confirm there is no settlement agreement in place between Lilly and Sanofi related to their follow-on lispro.

Thanks, Mike. Enrique?

So there are a few things to consider when we basically compare and contrast the basal insulin situation vis-à-vis mealtime insulin, and when we enter, of course, with Basaglar and all of the learnings that we've got there and then hopefully we can apply those learnings in reverse in a certain way. So first, the basal insulin class was significantly more open at the time that Basaglar entered. So we had a number of different basal medicines in formularies, and that's relative to the mealtime insulin space where most formularies are really under exclusive status, and that leads to lower prices. So the situation today and the economics for the payers today are such that it was easier to create viable economics for the payer in the basal insulin space relative to where we are in the mealtime insulin space. Two is that in the case of Humalog, we have a full range of formulations, not just Humalog but Humalog mixtures. We have a concentrated mealtime insulin, Humalog U-200, and we recently even just launched the Humalog Junior KwikPen, which basically is the first half-unit pre-filled pen in the market. So we're excited by that offering and we do believe that our offering gives us some strength when it comes to a follow-on lispro just coming into the market. Of course, it's additional competition and we have to see when will they launch. It is likely that they have to resubmit, of course, to get final approval. And that's probably a question from a timing perspective for Sanofi.

Great. Thank you, Enrique. Alan, if we can go to the next caller.

Yes. Good morning. Enrique, back to Trulicity, if I may. To what degree is the growth due to switches from Victoza versus that from orals straight to Trulicity? Part B of this is does or would diabetic retinopathy actually cloud the class assuming that's part of the warning of semaglutide in the label? And then the second question is really around abemaciclib in non-small cell lung cancer. Well, one trial did not show OS, and I'm curious your confidence on the other trials specifically in non-small cell lung cancer. Thanks very much.

Great. Tony, thank you for the question. So Enrique, the first two for you on the source of Trulicity growth as well as if the diabetic retinopathy that was seen in one of the Novo studies might impact the overall class. And then Sue, over to you for a discussion on the other trials that are ongoing for abemaciclib in non-small cell lung cancer. Enrique?

Very good. When it comes to the source of Trulicity growth, I think it's important to highlight that our strategy from the very beginning was not to focus on current GLP-1 users. So most of our strategy has been on additional adoption by specialists and then, really, the breadth in primary care. I believe the strategy has been highly successful, so the source of our business by a very significant amount. I don't have the actual figures with me but it's minimal whatever we get in terms of switching from other GLP-1s. We'd like for that to continue given the opportunity when it comes to patients on oral medicines that could benefit from better control. When it comes to retinopathy, the data for Trulicity I think is very clear. We do not have a signal when it comes to retinopathy. We have to see how a potential warning or how the labeling of retinopathy for semaglutide will basically read out. But clearly, we see significant advantages of GLP-1s in general, and we are counting on significant growth of this class as we think about Trulicity. I think that is probably one of the most important drivers of overall value for this asset.

Thanks, Enrique. Sue?

Yeah, sure. Tony, with regard to the JUNIPER study which was abemaciclib in KRAS mutation-positive advanced lung cancer, we did not see an overall survival advantage. I should mention we did see though interesting singulation activity in progression-free survival and overall response rate. And this is the first study that has been prospectively looking at erlotinib in KRAS mutation-positive breast cancer. And without giving you full data, we did use historical control and had assumed basically I think about a 6.5-month overall survival with erlotinib. We saw higher than that. What we are continuing to progress though other studies in lung cancer, and we continue to be confident in those, particularly around rational combinations. We do believe, particularly with regards to KRAS mutation-positive lung cancer, which is really hard to treat, that rational combinations will be important and we've got a number of those ongoing, including IO combination with abemaciclib in combination with PI3K/mTOR, and also we've got a Phase 2 squamous lung study ongoing. In addition to that, we're looking at other tumors as well. So our lifecycle plan continues to look at progressing abemaciclib, Verzenio now, in breast cancer but also in other tumor types.

Great. Thank you, Sue. Alan, if we can go to the next caller?

Yes, morning. If we look in the Phase 2 pipeline there, there's eight products. I think many of us know the base but several of the others are not as well-known. Can you just talk about some of the products and where we should be focused and what kind of data we should be expecting and where there's excitement there? And then just secondly on Basaglar. It had a very strong uptick relative to the script trend, so I was just wondering if there was any stocking or anything unusual in inventory change there. Thanks.

Great. Marc, thanks for the question. So Jan, if you'd like to take the lead on the Phase 2 pipeline question. Others, feel free to augment that answer if you'd like. And then Enrique, anything unusual on the quarter on the Basaglar numbers, so if you can comment on that. Jan?

Okay. So let me start in immunology with mirikizumab, our IL-23 P19 antibody, which is tested in psoriasis as well as the two IBD indications, ulcerative colitis and Crohn's. And we are expecting data, well, early next year. The first half for particularly psoriasis will come first. In immunology, we also have the oral BTK inhibitor, the Bruton tyrosine kinase, which we are testing in RA, with also data coming next year and we are interested clearly because it's another potential oral agent in the immunology space. For diabetes, we have two agents. The first one is GIP/GLP-1. It's a dual agonist then of two different mechanists to lower body weight and also having potentially a better glucose control. We are particularly interested in this agent since in pre-clinical models it had actually better efficacy than any other GLP-1 agent studied, including semaglutide. The DACRA is another variant then of incretin-like molecules with the amylin and also the calcitonin simulating receptor agent. And the reason here is to have not only body weight lowering but also potentially insulin sensitization activity. And clearly, these two agents are somewhat in parallel for readouts. And we also have a high-dose dulaglutide coming about the same time, and then I think we will make a choice about what is the next potential Phase 3 then in the insulin space. The BACE inhibitor we also have in Phase 2 is a very potent oral agent that has potentially less peripheral issues in relation then to targeting BACE2. And we are actually running this also as kind of a backup to lanabecestat, as you know, which is in Phase 3. And we're also considering potential combinations of this BACE inhibitor with N3pG since in pre-clinical models that has been shown to have an extraordinary clearance of not only plaques but also diffused amyloid. Perhaps Sue can talk about the oncology space.

Sure. Well, prexasertib we have in Phase 2 in ovarian cancer. We are specifically looking at developing this medicine, looking at biomarkers. So first, you look in ovarian cancer and then we will progress hopefully with a biomarker-driven registration study should the Phase 2 data warrant that. Merestinib, we are developing actually this medicine in biliary tract cancer. We have a study for both Cyramza and merestinib in biliary tract cancer. Depending on the data on the Phase 2 on that, we would progress one or either, potentially both, but probably one or either of those medicines in that indication. And PI3K/mTOR inhibitor, we're really developing that as a combination therapy and we have, as I mentioned earlier, a combination of PI3K/mTOR with abemaciclib.

Great. Thank you. Enrique, on Basaglar?

Sure. So we are very pleased with the performance of Basaglar and the continued adoption of Basaglar as a key basal insulin. When we look at the quarter, I think there's nothing on the stock inside but there was $12 million worth of benefit related to changes of the estimates of rebates and discounts for prior periods.

Great. Thank you, Enrique. Alan, if we can go to the next caller, please?

Hello. Thanks for the question. So just a couple here. You guys have obviously evaluated the Elanco potential spin for quite some time. Dave, if you want to talk a little bit and just kind of get your sense of – in the current market we've seen companies make these types of announcements and then it takes a longer period of time to actually execute on the spin and then the results and disappointment. Just trying to get a sense of your commitments to offering a definitive conclusion as of the middle of 2018, as you stated in your press release. And if we could, just to get a sense, I think the spin is fairly obvious. But historically, most companies have talked about the synergies between the business. Dave, I was just hoping you could talk about if you see those synergies in the business any longer given the evolution of Lilly's business. And then my second question, we did see a few additional VTEs announced for a competitor JAK inhibitor in an ACR abstract. I wanted to know if there has been any change in the frequency or rate of VTE that you've seen in any of your clinical data or if it's still consistent, as part of the resubmission, if it's consistent with the rates that we've seen in the past which I believe you've stated are consistent with the historical rates of VTE for patients with RA. Thanks.

Okay. Seamus, thank you for the question. So Dave, we'll go to you for the first couple of questions on we'll be able to provide a definitive answer by mid-2018 on the strategy for Elanco going forward and your view on synergies with that business. And then over to Christi to talk about the rates we're seeing of VTE in our program with baricitinib.

Yeah. Hi, Seamus, thanks for the questions. Of course, we came out today and said mid-2018 because that's where we believe we're going to hit, so that's our best estimate of being able to get back to investors, and we think that's ample time to evaluate the questions before us as we look at the options to maximize the value of this asset over the long-term. So that's our focus and I wouldn't wobble from that certainly today, day one. I think this is a business that has been – it does have some synergies with core Lilly but primarily is operating outside of the core business of Lilly. There is some back-office synergies we gain and, of course, we've talked through time about the R&D synergies. Although, as we look into that I think they are currently rather modest. One reason for that is the platforms used across animal health are different. We have a large vaccine portfolio that doesn't synergize with pharma R&D today. We have a feed additives assets that has really no synergy connecting to Lilly. On the companion side, therapeutics, that has some potential. But as we've looked at this, I think there's no reason to believe we couldn't maintain some of those synergies contractually if we had a different structure. So we are looking at all of this, and mid-year or next year is our deadline.

Great. Thanks, Dave. Christi?

Sure. In regards to thromboembolic events with baricitinib, we continue to monitor the real-world evidence where we've launched commercially as well as accumulating data for our resubmission. As you know, the last time we submitted was January 2015, so we have much more data to resubmit. And everything that we've seen, we've seen nothing in our atopic dermatitis studies and everything is consistent, as we've said before, with normal background rates in the rheumatoid arthritis patient population. So no new news to report there.

Great. Thank you, Christi. Alan, next caller, please?

Okay. Good morning, folks. Thank you for taking the questions. Two questions, please, and a clarification. First, why did you discontinue the N3pG antibody in Alzheimer's? If I recall correctly at your Alzheimer's R&D day, this was highlighted particularly given that it is similar to aducanumab. So what's the incremental in you there that led to discontinuation? Second, on Elanco. Unless I'm not mistaken, it's not growing organically, excluding the BI vaccine acquisitions. So does it have enough of a pipeline and R&D productivity to sustain growth in line with the market? And then finally to clarifying Humalog. Did I hear you correctly that there are no legal barriers from your side preventing Sanofi from launching their biosimilars? Thank you.

Thank you for the questions, Alex. So Jan, if you could answer the question on the discontinuation of the N3pG asset in the pipeline. Maybe Jeff and/or Dave, if you want to comment on sort of what are the growth drivers going forward and pipeline prospects for Elanco. And then Mike, if you want to clarify on the Humalog legal situation. Jan?

Yeah. If we start with the FLAG-specific antibody, N3pG, as you can see on the pipeline chart we actually have three molecules for that target, and the frontrunner molecule is still then inside the pipeline as active. And the follow-on molecule did not meet the clinical criteria that we wanted, so hence we stopped it.

Just to be fair, we took a two to get one strategy in Phase 1 here. So I wouldn't over-read the plan all along. And then Jeff, on the strength of the animal health pipeline?

Yeah. Alex, good question. Yes, we feel very good about our pipeline. Also, I think we launched a series of products last year and into this year that we're going to see growth on and then we'll talk more as we get near the end of the year in our guidance call and going into next year about additional launches. So it's not just the pipeline but I think existing launches that are occurring now and ones that are right on top of us. And then I think the last thing is we're shifting our mix into these faster-growing markets. So as I mentioned, the food animal vaccines, nutritional health, companion animals, and aqua. As our mix gets higher in those spaces, that'll also drive more additional growth.

Maybe if I could just add to that. Just to be clear, we're not growing organically this year. The growth is the BI addition in companion and we described the food animal pressures. I think though we're not evaluating this business through the lens of 2017 performance. We're looking at the last 10 years and we've built a globally competitive animal health company with a nice pipeline, with good opportunities to improve margins, and grow at pace – and in some segments above industry pace. And as we look forward and do this analysis, we'll be looking, again, at those long-term trends in animal health. And because we're broadly positioned across many of these segments, and we do have innovation coming, we do expect forward trends to reflect those assumptions as we do the analysis. So this year, we've washed out some challenges. We've had some performance challenges. BI has helped us in terms of the stated growth rate, but we're looking at this decision-making through a much broader lens of time.

Great. Thanks, Dave. Mike?

Alex, you're correct. We have no legal basis to preclude Sanofi from entering the market. And as Enrique described earlier, we will compete with them in the marketplace.

Thank you, Mike. That concludes the Q&A session. So, Dave, if you'd like to wrap up the call, please?

Yes, I would. Again, I want to recognize and thank both Maria Crowe who has been with us today for many years as well as Derica Rice for the last earnings call with us, the CFO, for a great performance through your careers and many contributions to our company. So thank you, again. We appreciate all of your participation on today's earnings call and your interest in our company. Through the first nine months of 2017, we generated solid revenue growth driven by volume of our new pharmaceutical products. And we continue to improve margins, leading to even faster income growth. We believe Lilly remains a compelling investment given the strength of our product portfolio, our top and bottom line growth prospects over the balance of a decade. Please follow-up with the IR team if we've not answered any questions on the call or if you have follow-up questions. That concludes the call today. Have a great day.