Lilly(Eli) & Company (LLY) — Q4 2018 Earnings Call Transcript

Good morning. Thank you for joining us for Eli Lilly and Company's Q4 2018 earnings call. I'm Kevin Hern, Vice President of Investor Relations. Joining me on today's call are Dave Ricks, Lilly's Chairman and CEO; Josh Smiley, our Chief Financial Officer; Dr. Dan Skovronsky, President of Lilly Research Laboratories; Christi Shaw, President of Lilly Bio-Medicines; Anne White, President of Lilly Oncology; and Enrique Conterno, President of Lilly Diabetes and Lilly USA. We're also joined by Kim Macko and Mike Czapar of the Investor Relations team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide three and those outlined in our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional, and is not sufficient for prescribing decisions. I will now turn the call over to Dave for a summary of our progress in Q4.

Thanks, Kevin. We continued our strong performance in 2018 with a fourth quarter revenue growth of 5%, non-GAAP operating income growth of 15%, and non-GAAP EPS growth of 17%. Newer pharmaceutical products, which represented 38% of human pharma revenue in the quarter, continue to be the driver of our worldwide revenue growth, led by Trulicity, Taltz, Basaglar, Verzenio, and Jardiance. Highlights of our strong volume-based growth include 31% U.S. diabetes volume growth, and 11% total pharma volume growth. This was achieved despite the significant headwind from the loss of exclusivity of Cialis in the U.S. We continue to see our year-over-year expansion in operating margins. Excluding the effect of FX on international inventory sold, Q4 non-GAAP operating income as a percent of revenue increased by over 165 basis points while investing in new product launches. We made significant progress with the pipeline, including the approval of Emgality for the prophylaxis of migraine, in Europe. The submission of Emgality for the prevention and treatment of cluster headache in the U.S., results from a phase 3 study of tanezumab in patients with moderate-to-severe osteoarthritis pain, and the results of two phase 3 studies of baricitinib in atopic dermatitis. We also provided an update or announced the confirmatory Phase 3 study of Lartruvo in combination with doxorubicin for advanced or metastatic soft tissue sarcoma. This study did not meet the primary endpoint of overall survival, and there was no difference in survival between the study arms. We are now working with global regulators to determine the next steps for Lartruvo, and will present the announced data in an upcoming medical conference. In terms of capital deployment, we continue to utilize our strong operating cash flow to access value-creating external innovation that will enhance our future growth prospects. We announced the definitive agreement to acquire Loxo Oncology, a biopharmaceutical focused on the development and commercialization of highly selective medicines for patients with genomically-defined cancers, which would add multiple first-in-class medicines to the Lilly portfolio and expand our oncology presence into precision medicines. We also announced several other business development transactions, including an agreement with AC Immune to develop small molecule tau inhibitors for Alzheimer's and other neurodegenerative diseases. We announced an agreement with Hydra Biosciences to acquire all assets related to their preclinical TRPA1 antagonist program, currently being studied for the treatment of chronic pain, and an agreement with Aduro Biotech to develop novel immunotherapies for autoimmune and other inflammatory diseases. In addition, we returned over $600 million via the dividend, and announced a 15% dividend increase for 2019. We also repurchased $1.1 billion of stock. I'd also like to provide an update on our plans for completing the full separation of Elanco. As we stated during our December investment community meeting, operationally we are ready to affect the full separation. Today, we are providing a timeline for the separation as well as the method we'll use to dispose of our remaining 293 million Elanco shares. Specifically, we plan to launch an exchange offer to Lilly shareholders in the first half of this year to exchange our remaining Elanco shares for Lilly shares. The exact timing of our decision to launch this exchange offer will depend on market conditions, but the launch of the tender could occur as early as the coming days. We're pleased with the market reception of the Elanco IPO, and with Elanco's performance as a publicly traded company. Jeff and his team are well prepared to take the next step, and Elanco employees are excited about their future. We're proud of what we've accomplished together, and we share their enthusiasm for Elanco's future. Moving to slides five and six, you'll see more detail on the key events since our November earnings call. Now, I'll turn the call over to Josh to review the Q4 results, and to provide an update on our financial guidance for 2019.

Thanks, Dave. 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 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 fourth quarter GAAP results. So, looking at non-GAAP measures on slide nine, you'll see the revenue increase of 5% that Dave mentioned earlier. Gross margin as a percent of revenue increased 50 basis points to 76.6%. Excluding the effect of foreign exchange rates on international inventories sold, gross margin as a percent of revenue declined about 25 basis points. Total operating expense increased 1%, with marketing, selling, and administrative expense increasing 3% driven primarily by increased expenses to support our newer product launches, including the U.S. launch of Emgality, while R&D expense declined 2%. Total operating expense as a percent of revenue compared to Q4 2017 declined by over 190 basis points, benefiting from previously announced actions taken to reduce the company's cost structure, partially offset by investments in new launches and our newest late-phase pipeline entries. Operating income increased 15% compared to Q4 2017, which put our operating margin at 25.1% for the quarter. And our operating margin excluding the effect of FX on the international inventory sold was 24.8% of revenue, an improvement of over 165 basis points versus last year's quarter. Other income and expense was an expense of $4.8 million for this quarter, compared to income of $111.9 million in last year's quarter, driven by approximately $100 million less in gains on investments. This reduction was due primarily to a large gain on the sale of an equity investment in last year's quarter, and to a lesser extent, mark-to-market reductions in strategic partnership or VC investments in public biotech companies in this year's quarter. Our tax rate was 15.8%, a decrease of 440 basis points compared with the same quarter last year, driven primarily by the impact of U.S. tax reform. So, at the bottom line, net income increased 13%, while earnings per share increased faster, at 17%, due to a reduction in shares outstanding from share repurchases. Earnings per share also included a reduction of approximately $0.02 per share to reflect the non-controlling interest in Elanco. Consistent with our performance throughout the year, we achieved significant earnings growth this quarter by delivering mid single-digit revenue growth while carefully managing our operating expenses, leading to meaningful improvement in profitability versus last year. Slide 10 details these same non-GAAP measures for the full year, where you can see the full-year impact of our strong top line growth and margin expansion as revenue grew 7% while operating expenses declined by 1%, which led to a 30% growth in non-GAAP EPS. Excluding the impact of FX on inventory sold, operating income as a percent of revenue for the full year was 28.4%, an increase of 470 basis points compared to 2017. Moving to slide 11 provides a reconciliation between reported and non-GAAP EPS. And you'll find additional details on these adjustments on slides 25 and 26. Moving to slide 12, let's take a look at the effect of price, rate, and volume on revenue growth. This quarter, foreign exchange reduced growth by one percentage point. On a performance basis, worldwide revenue grew 6% driven by an 11% increase in volume partially offset by price. Q4 represented the second straight quarter our human pharma business delivered double-digit volume growth. U.S. pharma revenue increased 6%. Like last quarter, strong volume growth, which was 12%, led by Trulicity, Taltz, Basaglar, and Verzenio was partially offset by price. Excluding Cialis, volume grew nearly 21% in the U.S., highlighted by U.S. diabetes products delivering over 31% volume growth. While the U.S. pricing environment continues to evolve, our sustained success is driven by the execution of our volume-based growth strategy. U.S. price declined 6%, which was similar to Q3. Approximately three points of the U.S. price decline was driven by changes to estimates of rebates and discounts, and disproportionate volume growth in certain government segments for Trulicity. Roughly one point of the decline was driven by new access and corresponding volume for Basaglar Medicare Part D, which we didn't have in last year's quarter. We also had approximately two points of decline associated with increases in patient affordability and access programs for Taltz and Humalog, which also drove increased volumes. Looking forward to 2019, we remain comfortable with our projection of mid single-digit declines in U.S. price more than offset by increased volumes. Moving to Europe, pharma revenue grew 3% driven by volume, largely offset by the negative effect of price and foreign exchange. This volume growth was achieved despite the loss of exclusivity for Cialis. Excluding Cialis, volume grew over 16%. This robust volume growth was led by Olumiant, Trulicity, and Taltz. In Japan, pharma revenue was up 1%, with 9% volume growth largely offset by a drag of 8% from the impact of the biannual pricing cuts which took effect in Q1. Volume growth was driven by newer products led by Trulicity, Jardiance, and Olumiant, with a significant contribution also coming from Cymbalta. Our pharma revenue in the rest of the world increased 10% on a performance basis this quarter, led by volume growth from our diabetes portfolio, namely Humalog, Trulicity, and Jardiance in collaboration with Boehringer Ingelheim. Turning to Animal Health, worldwide revenue grew 6% on a performance basis this quarter, driven by higher volume, higher sales of companion animal disease prevention and future protein and health products was partially offset by lower sales of products that are being exited and to a lesser extent declines in products for ruminants and swine, and companion animal therapeutics. Slide 13 outlines the same information for our full-year results. Now let's take a look at the drivers of our 11% worldwide volume growth on slide 14. Once again, our newer products with the engine of our worldwide volume growth, these products grew 13.7 percentage points of volume growth this quarter, nearly identical to their contribution in Q3. Brands that have experienced loss of exclusivity provided a drag of 450 basis points, driven almost entirely by Cialis. You may recall the generic versions of Cialis entered the U.S. market at the end of September last year and as expected, we've seen a rapid erosion of sales. When excluding LOEs, the rest of our products posted Q4 volume growth of over 18%. Slide 15 provides a view of our newer product uptake. In total, these brands generated over $2.1 billion in revenue this quarter, representing 38% of our human pharmaceutical revenue. Our newer product growth demonstrates the successful execution of our commercial strategy. We're particularly excited about the launch of Emgality in the U.S. for the preventative treatment of migraine. While still early the NBRx share gains we've experienced to date have been impressive. Combined with best-in-class U.S. payer access, we anticipate Emgality will be a meaningful growth driver going forward, demonstrating the promising future for our pain franchise. Moving to slide 16 and continuing with our non-GAAP explanations, this quarter the effective FX had a relatively minimal impact on our income statement with a small negative impact on revenue and a small positive impact on operating income and EPS. Turning to our 2019 financial guidance on slide 17, you will see that we've updated our non-GAAP guidance to reflect an approximate $0.34 impact of the anticipated Loxo Oncology acquisition, which we assume closes this quarter. Additionally, approximately $0.17 negative impact of Lartruvo Phase 3 announced study results was offset by positive trends in our core business performance and an improved tax rate versus what we projected in December. This updated non-GAAP guidance by line item includes a decrease of $200 million on the top line, driven by the impact of Lartruvo, partially offset by the inclusion of Vitrakvi, and an improved sales outlook across other products based on Q4 momentum, an increase of $200 million for R&D expense due to the addition of the Loxo Oncology pipeline, and a decrease of $100 million for other income and expense to a range of between $175 million and $325 million of expense, which is driven by higher net interest expense due to the Loxo Oncology acquisition. As we stated during our Investor Call for the acquisition, the incremental interest expense reflects only a portion of the financing, as our 2019 guidance in December had already contemplated business development financing needs for roughly half the size of the transaction. A decrease in our effective tax rate from 16% to 15% driven by adjustments for U.S. tax reform, and this resulted in a decrease in our non-GAAP earnings per share range to $5.55 cents per share to $5.65 per share. I would note that the revised guidance continues to include a reduction of approximately $0.08 per share to reflect the non-controlling interest portion of Elanco profits for the full year. The average of 2019 non-GAAP earnings per share estimates for analysts who have updated their model since the Loxo Oncology and Lartruvo announcement is $5.55, and for those who haven't updated since our December meeting, the average estimates for those is $5.94. Touching briefly on our updated GAAP guidance, the 50 basis point increase in the effective tax rate is due to certain Loxo Oncology acquisition and integration expenses not being deductible for tax purposes. In addition, GAAP earnings per share for 2019 is now expected to be in the range of $4.57 per share to $4.67 per share. I'd note that currently the Euro is slightly weaker and the Yen and Renminbi are slightly stronger than what we assumed in our guidance in December, but in total, FX impacts are modest. We will monitor FX movements and incorporate changes as appropriate in our quarterly updates. Moving to slide 18, the numbers here should be helpful as you think about our business on a go-forward basis post the separation of Elanco. Our pharma-only expectations for 2019 first shared with you at our December Investment Community Meeting reflects mid-single digit revenue growth, relatively flat marketing, selling and administrative expenses, R&D growth to accommodate the Loxo Oncology acquisition and other Phase 3 investments, and operating income as a percent of revenue at approximately 28% or 27.5%, excluding the effect of forex on international inventories sold. We will provide an EPS range once we've executed the Elanco exchange offer and know the number of Lilly shares retired. Although our updated full company EPS guidance is lower than our December guidance due to the Loxo Oncology acquisition, we still expect strong full-year performance led by volume gains and our newer products. We remain committed to our innovation-based strategy and are making substantial investments in 2019 to bring forward our next generation of new products. And I'd also note that despite the incremental costs associated with the Loxo Oncology pipeline and unexpected Lartruvo impact, we're committed to and confident in achieving our 2020 sales and operating margin goals. As we move forward, we will continue to prioritize funding for existing marketed products, new launches, and lifecycle opportunities in addition to replenishing our pipeline. We will also continue to leverage business development to upgrade our pipeline and future growth prospects, and finally, we'll return excess cash to shareholders via increases to the dividend and share buybacks. Now I'll turn the call back over to Dave to review the pipeline and key future events.

Thanks, Josh. Slide 19 shows select pipeline opportunities as of February 1, in addition to the pending addition of Loxo assets movement since our last earnings call include the U.S. submission of Emgality for episodic cluster headache, the start of Phase 3 for teriparatide and Type 2 diabetes, the start of Phase 2 for a once-weekly basal insulin, and an automated insulin delivery system, which is part of our connected care efforts that Dan highlighted at our December Investment Community Meeting, and a new indication for Verzenio in prostate cancer, the initiation of Phase 1 testing for eight biologic entities across our therapeutic areas, and the attrition of three early-stage molecules. On slide 20, we provide a final tally on the key events we expect for 2018. As we reviewed in detail at our December Investment Community Meeting, 2018 was a strong year for progress in our pipeline, and in execution of our innovation-based strategy. And while we experienced the setback on Lartruvo in January, we enter 2019 with great momentum. Slide 21 shows the early progress we've made on key events, and we're monitoring for 2019. These include the initiation of a Phase 3 study of empagliflozin in chronic kidney disease, results from a Phase 3 study of tanezumab in osteoarthritis pain, results from two Phase 3 studies for baricitinib atopic dermatitis, and the previously-announced and discussed Lartruvo study. Now, let me briefly highlight some of the progress we've made in the past 12 months and our priorities moving forward. In 2018, we delivered strong volume-based revenue growth of 7% driven entirely by our new products, which accounted in the calendar year for 34% of pharma revenue. We continued our strong operating performance, and our margin expansion of over 470 basis points, excluding the impact of foreign exchange on international inventories sold. We've seen excellent progress in our pipeline with our internal and external innovation investments yielding multiple approvals, submissions, and positive Phase 3 readouts, along with several significant first-in-class additions to our late-stage pipeline. We completed a review of the strategic alternatives for Elanco. Through a well-received initial public offering, Elanco Animal Health became a publicly traded company. Elanco raised over $4 billion through the IPO and debt offering, the vast majority of which was provided to Lilly as consideration for the businesses Lilly transferred to Elanco in connection with the IPO. We also returned approximately $6.5 billion to shareholders via the dividend and share repurchase, announced the pending acquisition of Loxo Oncology, and bolstered our early-phase pipeline and preclinical platforms with numerous business development deals. Moving into 2019, we remain focused on launching with excellence and continuing to replenish our pipeline. Before moving to Q&A, I'd like to take a moment to comment on the latest news regarding potential U.S. Healthcare System Reform. The proposed rule that would eliminate the Safe Harbor protections for rebates within the Medicare and Managed Medicaid segments will represent meaningful change to the system. While it's still a proposal, we see this as potentially accomplishing the following. First, this could be a win for patients, lowering their out-of-pocket costs at the pharmacy counter with the greatest benefit realized by patients taking more highly rebated products, such as insulin. Second, for innovative products and companies, the rule will shift the focus to demonstrating the value of our medicines and partnering with health insurers and systems to improve quality, outcomes, and lowering overall medical costs. Patients should directly benefit from price reductions and concessions in federal and commercial plans. Unfortunately, as you know, this rarely occurs today. Finally, this change could remove an artificial barrier to competition, creating space for innovation that addresses unmet needs for patients. We continue to support making medicines more affordable and accessible to patients. Too often the sick are subsidizing the well in our current system. And this appears to be a positive tool to address this issue. We are in favor of improvements to the U.S. healthcare system like this which appropriately balance patient affordability, market-based principles, and reward innovation. While I know you likely have many questions on this, I'm sure we'll continue to talk about this as more details emerge about the rule. This concludes our prepared remarks. And now, I'd like to turn the call back over to Kevin to moderate the Q&A session.

Thanks, Dave. We'd like to take questions from as many callers as possible, so we ask that you limit your questions to two or to a single question with two parts. John, please provide the instructions for the Q&A session, and then we're ready for the first caller.

Thank you for the question. Quickly, could you provide an overview of the expectations for implementing a REMS program for tanezumab and how that might affect the product's launch? Also, regarding the recent data on atopic dermatitis with baricitinib, how do you see this data competing in the market against the existing product Dupixent? Thank you.

Okay, thanks, Seamus. We'll go with Dan for the expectations for the tanezumab REMS program. Christi, if you want to weigh in on the potential commercial impact. And then to Christi for baricitinib in atopic dermatitis.

Yes, thanks for the question on tanezumab. On course we're excited to, along with our partner Pfizer, announce the data on the latest Phase 3 trial. We still don't have the full data package, of course, on this molecule on OA. As we said before, though, we're very confident in the efficacy. We continue to see that replicate. And that's encouraging, the risk obviously we've been looking at is rapidly progressive osteoarthritis, RPOA. And the data that we continue to get, I think, is a very encouraging picture. This molecule, I think if you take the context of the vast unmet medical need for chronic pain and the deficiencies with the existing therapies that are available, including opioids and NSAIDs, I think really this offers a compelling benefit. So, we have to wait and see what the next trials read out, particularly the long-term safety study. But if we can continue with the pattern of results that we've seen so far, I think we have great reason to be encouraged. With respect to your specific question about post-approval REMS and things like that; I would just say it's premature to discuss that. Let's get the full data package and then move forward with the FDA.

Dan mentioned that there is a significant commercial opportunity, as 27 million patients suffer from osteoarthritis. Among these, 11 million of those patients are very similar to those involved in our studies, having been on at least three different classes of analgesics. Many have been dealing with their condition for over six years and often change medications, indicating a very high unmet need in this severe market. Therefore, when we consider safety and REMS, this substantial unmet need presents a great opportunity in treating severe patients. Regarding atopic dermatitis, we have announced positive results for our primary endpoints in our studies. Remember, this reflects just two out of five studies, with three more results expected this year that will help support a global package. In terms of the atopic dermatitis market, 54 million patients are affected with 18 million suffering from moderate to severe cases. Experts in the field compare this market to where psoriasis was 15 years ago, and our aim is to introduce the first oral treatment, as these patients are in dire need of new therapies.

Thanks, Christi. John, next caller?

Thank you. I have two questions. Were the baricitinib trials in atopic dermatitis only positive in the four milligram arm or was statistical significance achieved on the one and two milligram cohorts as well? And then the second question is the impact on 2019 P&L of the Lartruvo failure was not small. I appreciate there were reasons for this. But as we look to critical 2019 readouts, what can you tell us about their contribution to guidance. I am specifically thinking about the LOXO-292 LIBRETTO trial, the tanezumab safety trial, Trulicity AWARD-11, and Verzenio MONARCH plus trial. Thank you.

Christi, we'll have you answer the question on baricitinib, and then go to Josh for the guidance question. Thanks, Steve.

Yes, so as you look at the trial, it included three doses, one milligram, two milligram, and four milligram. One milligram did not meet the primary endpoints, but two milligram and four milligram did meet the primary endpoints. As you look at the pain and the global assessment scores, the three primary endpoints, four milligrams did meet all of those. And two milligrams met two of the three. So, as we look at those we know in atopic dermatitis the four milligrams is an effective dose and will be something that as we look at the total package we'll be submitting to FDA for approval.

Hi, Steve, it's Josh. On the guidance, I'd first say that for all of the R&D pipeline, as you mentioned, our R&D range funds and contemplates success in those categories. Obviously, with the Loxo addition, 292 is the primary driver of the $200 million R&D expansion in our line item guidance. In terms of the top line, we look at all the opportunities and potential sales impacts and probabilize those, so they're contemplated in our range. Although I would say most of the things that you mentioned really will have more of an impact in 2020 to the extent that they're positive. As I mentioned in the upfront comments, even with the impact of Lartruvo coming out, we're confident in achieving our sales goal for 2020, which would be the 7% compound annual growth rate for the pharma business between 2015 and 2020. To achieve that based on the guidance we're giving for 2019 that assumes a minimum growth of about 6%. And that's not dependent on any individual product launch or R&D readout at this point. We're confident with the number of launches that we're in the midst of now and the clinical data that are still accruing, we're confident that we can hit that number in 2020.

Thank you. John, next caller?

Great. Thanks very much for the questions. My first one was on your expectation for mid single-digit decline in U.S. price. I was just wondering can you give us some more granularity like you did in the 4Q about the drivers of that assumption. I guess I'm really trying to get here is, should we be thinking about a similar dynamic, like we saw in the 4Q where it's channel mix and patient affordability initiatives that are the primary drivers of price decline, or this is more about greater rebates and contracting pressures driving that erosion? My second question was just about the operating margin targets as we think out to the 2020 on pharma. I think you're looking at about a 200 basis point impact versus prior guidance on pharma for '19. So, can you just elaborate some of the dynamics as we think out to 2020, and what we should be thinking about for the pharma business there? Thank you.

Great. Thank you, Chris. We'll go to Josh for both those questions.

Yes, Chris, regarding the price decline for 2019, one key factor is the expansion of the Medicare donut hole, which increased from 50% to 70% and is expected to impact us by about $200 million or nearly two points of the mid single-digit decline. This is something new for 2019. Generally, we are experiencing similar trends, including an increase in our patient affordability initiatives, particularly around Humalog and new products like Trulicity and Emgality. We are optimistic that these initiatives will have a positive impact over the long term, as they tend to lead to volume increases, which we are currently witnessing with Taltz. We anticipate some drag from this, but the remainder of the factors influencing us will be related to product mix or minor unit declines, all aimed at maintaining or enhancing access. We continue to focus on the diabetes segment, which is quite competitive, but we are pleased with the access level we have entering 2019, and we do not foresee significant new pricing challenges. Concerning the operating margin targets for 2020, our guidance for 2019 suggests a midpoint of approximately 27%. With Elanco excluded, we aim for a 31% target for 2020, which we estimate will provide about a point of benefit. This means we are looking at an improvement of around 300 basis points compared to our midpoint range this year. We believe this is very attainable. In 2018, we improved our operating margin by about 450 basis points, achieved through mid to high single-digit revenue growth and relatively stable expenses. For us to meet our minimum revenue growth expectations, we would need about 6% growth in 2020, which we are confident about. Therefore, with mid single-digit revenue growth and effective expense management, we see a clear path to meeting that minimum target.

Thank you. John, next caller.

Hi, good morning everyone. This is Chi on for Jason. Thanks for taking our questions. I have one question on pricing and another on Emgality. First, could you provide some insight into the impact of exclusive contracting, particularly for products with high gross-to-net ratios? I'm curious if the company anticipates an end to exclusive contracting or if you see value in winning those exclusive contracts. Secondly, regarding Emgality, how do you view its progress over 2019? Is Lilly focusing on primary care, which may cause it to lag behind competitors who are early adopters? Additionally, if you could briefly comment on the current paid prescription data for Emgality, that would be great. Thank you.

Okay, thank you. We'll go to Enrique for the question on Part D rebates, and then Christi for Emgality.

Yes, I'm not sure that I understood the full question, but at this point in time I think as we look at the status quo, we basically see the continued trend when it comes to exclusive contracting. As we all know, mealtime insulin is already contracted that way. And we basically trends where most payers are trying to restrict utilization, maybe have fewer products and extract rebates on concessions. Clearly, right now there's some uncertainty when it comes to the new proposed rule. And we really need to see how that is going to play out. I won't be able to speculate at this time.

Yes, and on Emgality, we're so excited with the number of patients that are being helped by the CGRP agents. We expect probably six million patients to be eligible. If you look at Emgality specifically in your questions, we launched in October, obviously so we just have a couple of months of data. But right now what we're seeing is similar, that our paid prescriptions are at about 50%. The marketplace splits up, that about a third of the prescriptions come from primary care, a third come from neurologists, and a third come from midlevel. So this very much will be an expansion into primary care beyond the neurologists as well. So specifically looking at Emgality's performance, we ended the year, even though we launched late at a 20% NBRx. And we're currently looking at 26% already in January. So, as you look at these launches, we just launched our direct-to-consumer TV ad campaign this week. We know that Lilly has very strong consumer activation relative to our competitors. We know that we have a drug that has not just demonstrated 50% improvement, but 75% and a 100% reduction in monthly headaches that our competitors don't have, as well as quality of life. And we have the unique platform and device that Trulicity uses that we know over a million patients really like. So, we're very bullish on both the market and on Emgality's ability to compete.

Thanks, Christi. John, next caller please?

Hi. Thanks for taking my questions. My first question here is how long do you think it will take for Trulicity sales to benefit from your Rewind presentation at ADA, and what type of uptick you think we should see after that? And then secondly, on the market opportunity for lasmiditan, just curious how you think about it now in light of the injectable CGRPs being approved and the potential for oral CGRPs to come to the market? Thank you.

Thank you. So, Enrique will take Trulicity, and then Christi will handle the question on lasmiditan.

Clearly Trulicity is on a present outstanding run right now and benefiting from a huge growth of the GLP-1 market. If anything, we are seeing the GLP-1 market accelerate from already very high levels, growing at nearly 30% on a year-on-year basis. And importantly, in those markets Trulicity has continued to perform well, and we've been able to gain share, in fact over five share points since the launch of Ozempic. Now, as we look at Rewind, clearly we see that this as a critical trial and dataset that's going to benefit patients. The big impact is when we basically start promotion of this important data. And I think it basically solidifies, I think, the bright future that Trulicity already had. We expect that impact, of course, sometime in 2020 once we get the FDA action on the new label.

Yes, and then on lasmiditan and how it will play in the marketplace, where we will have some regulatory action this year. So, we're looking forward to that. If you look at the marketplace, kind of how we look at it is with the 36 million patients who suffer from migraine there's about 16 million of those that are diagnosed, and 6 million that suffer from acute migraines and are taking therapy. And that is overlapping only somewhat with the prevention market. So, as you look at prevention CGRPs versus acute use, there's obviously a huge need for both distinctly. And CGRPs also obviously don't clear 100% of all patients of their migraine. So we see the use obviously may overlap there. And we think lasmiditan has a really great positioning versus the oral CGRPs. If you're taking a preventative CGRP you may want to look at the different mechanism if you have to add to that. And then if we look at the acute marketplace, so many patients have fallen out of the market because of lack of efficacy or they can't tolerate the safety, so lasmiditan will be a great option for them.

Thank you. John, next caller, please.

Great. Good morning and thank you. Verzenio was notably below our expectations. You mentioned buying patterns in the U.S. impacted this. Could you please quantify the inventory impact and your latest long-term expectations for this product given the apparent slowdown in the CDK4/6 market? And just a follow-up, a bigger picture question on your operating margin. I'm just trying to look past 2020 here. Historically you've invested more on internal innovation as opposed to external innovation, and with that higher R&D your operating margin was relatively lower to your peers. Now that you seem to have a more balanced approach with increased contribution from acquisitions, as your top line grows in the mid-single digits is it reasonable to expect that Lilly can get to mid 30s operating margin? Thank you.

Okay, thank you. We'll go to Anne for the question on Verzenio, and then Dave will take the question on operating margin post 2020.

Thanks, Alex, for the question. So, we saw about $4 million in inventory impact in 2018. As you mentioned, we are seeing flattening in the CDK4/6 market as penetration has occurred. With Verzenio our focus is clearly on execution, to drive new trial of Verzenio and increasing our share of market. On a positive note, we're encouraged that we're seeing high conversion rates with over 50% of physicians who trial Verzenio moving on to write additional prescriptions. We're also really looking forward to the launches outside the U.S. So we've launched in Japan, and in several countries in Europe, and the uptake has been strong as well, in particular what we're seeing is good uptake in patients with a poor prognosis. And so that will be patients with visceral disease or liver metastases who are also driving execution in there. So we have a hope for continued growth for Verzenio as we really focus on a strong year of execution across the globe.

Yes, and as it relates to sort of margins and long-term R&D strategy, it's a good question. I know there's a lot of appetite for us to nail down some long-term target number. We're not going to do that, because I think really at the core of this is a question, 'What are our opportunities,' which we don't have full visibility to be on 2020, but let me just tell you how we think about this. We see a period ahead of prolonged revenue growth for the company, because we have a relatively new line-up of products that should continue to grow. We're adding to that even this year, and next with additional launches. We do see ourselves balancing R&D spending both in balance sheet, M&A as well as partnerships, and continue to expand it, I would say, toward the top of the industry on internal income statement-based R&D, because we see good opportunities today, but that is not a fixed line item, it's based on what we see in front of us and the opportunity to create value for shareholders and patients with innovation. I would expect long-term to continue to see as we grow top line, a better gross margins and better SG&A as a percent of sales, so those will be helpful long-term to that to continue an expansion, R&D will be more a function of our choice making on growth drivers for the future. And it's hard to speculate on which direction that would go. We would hope actually to be able to spend more because that would mean the science is promising and we see opportunities to grow the value of the company and improve therapies for patients.

Thanks, Dave. John, next caller, please?

Good morning, everyone. Thank you for the question. Enrique, you've noted some positive sequential trends for Jardiance in the third and fourth quarters. What do you think is driving that, and do you expect this demand trend to continue into 2019? Many investors initially anticipated a larger shift after a certain point, which hasn't materialized yet, but I’m seeing indications that it may be starting now. Additionally, Josh, in light of the Loxo deal, you've expanded your presence in oncology. From a capacity or priority perspective, where do you see business development fitting in? Is there a specific therapeutic area where you feel additional support would be beneficial? Thank you.

Very good. As we look at 2019, I'm particularly bullish when it comes to Jardiance, because we have a number of inflection points that I think are playing us strong tailwinds for the success of the product. As you know, we have new updated ADA and EASD guidelines I think that place emphasis on SGLT2s, but in particular, preference for Jardiance within that class. Clearly, we have the re-inclusion of Jardiance in the CVS formularies, and that's pretty significant in that. Now, Jardiance has basically 90-plus access across commercial, and part of it is likely that we are seeing as we look at some of the data, when we look at market data, it is likely that we are seeing some spillover effect of that re-inclusion even beyond some of the formulary itself. Jardiance now, it's basically running around in the low to mid-60s, when it comes to NBRx share, and we're actually seeing the SGLT2 class accelerator now basically showing growth in double digits. I think all of that I think is very encouraging. And finally, given the profile that we basically have the increased investment in terms of our competitors, we see that also as beneficial to the product. So very bullish in terms of how I see these overall class accelerating, and more importantly, Jardiance basically capitalizing as the share leader.

Hi, Geoff. Thanks for the question. I think as it relates to business development capacity and interest, first, I'd go back to Dave's earlier comments about how we think about the future, we see a period of good growth in front of us, and that good sales growth and operating income growth translates to strong cash flow generation. So I think in terms of capacity, we feel like we've got very good capacity going forward. So really from a business development perspective we're going to be mostly constrained by the opportunities that we see. We're not particularly tilted towards one therapeutic area. It's really the therapeutic areas that we're invested in today when we see good assets where we like the science can enhance the portfolio and can create value for shareholders with the acquisition. We'll pursue those and we'll pursue them aggressively. I think just given where investment and the progression of opportunities and sciences, you'd have to expect that we will continue to be looking in oncology and immunology are two areas where there's just a lot of opportunity, but all of our therapeutic areas are open for us and when we can find the best assets, really, we've got the balance sheet and cash flow capacity to act.

Thank you. John, next caller, please?

Yes, thanks very much. First, could you please discuss the forthcoming Loxo 292 readouts to watch and if possible it would be helpful if you could characterize what percentage of patients could be candidates in each tumor type. Second, with respect to Novo's oral semaglutide, I think the expectation is that it will be priced lower as an oral, could you discuss potential implications for the GLP1 market including Trulicity? And then I just have one little nit question, which is for Tradjenta, the CAROLINA study versus sulfonylurea completed six months ago in August, when should we expect the top line, thank you?

Okay, thank you. We'll go to Anne for Loxo and then Enrique will take the final two questions.

For Loxo 292, you can anticipate an additional readout at a scientific meeting in the second half of 2019, which we are looking forward to. The LIBRETTO study is enrolling well, with over 300 patients now participating. We expect to report robust data by the end of this year. Notably, data reported last year at various meetings like World Long indicated response rates between 60% and 80% based on tumor type, with over 90% of patients remaining on therapy. We are very excited and encouraged by the 292 data, believing it to be transformative for patients with RET fusions or mutations, and you will hear more about this. Regarding incidence rates, discussions with thought leaders and existing literature show that RET fusions occur in about 2% to 3% of lung cancers, representing a significant market opportunity, potentially over 3,000 patients in the U.S. In papillary RET fusions, the occurrence is about 10% to 20%, a smaller group but with a strong response rate. For medullary thyroid cancers with activating RET point mutations, this mutation is found in about 60% of those patients, potentially adding another 500 patients in the U.S. alone. Considering global figures, while incidence rates may not be high, the response rates are impressive. We believe there will be strong market penetration and long-lasting response durability, and we are excited to see the upcoming readouts.

Very good. David, thank you for the question on oral sema. There is a question for Novo Nordisk. Unfortunately I'm unable to really speculate on how they're going to price the product and some of the implications. As far as Tradjenta and CAROLINA, we expect to release the top results this quarter, the top line results.

Thank you, Enrique. Next caller, please?

Hi, sorry. Thanks so much for taking my question. First, I noticed in some of the deal documents that came out on the Loxo deal, there was the sales estimate from Loxo management of sub $40 million for 2020, can you comment on that and maybe just give us a little more specific metrics on what extent of testing is already happening, and how you see that changing let's say by year end 2019? Thank you very much.

Okay, thanks. We'll have Anne take those questions.

Going forward, we don't provide specific comments on sales forecasts, so we won't discuss the details of forecasted sales. This year is clearly the launch year, and I believe it's too early to comment on it. I think Bayer would say that things are off to a good start, but we will need to assess the full-year performance before making any comments about future performance.

So, in our launch strategy, it's very much about the partnership at the laboratories, the pathologists to make sure that they understand the value of testing and I know that Bayer and Loxo agree with this as well. So we believe that good medicines will drive change in practice. And so we definitely are bringing forward good medicines. We look forward to helping change the face of medicine, particularly in precision medicine, which is a very high value driver with the fact that with these very strong response rates, the efficiency of the healthcare system is significant; small numbers of patients, high response rate. So very efficient use of health care dollars, so we believe we can change that dynamic pretty rapidly.

Thank you, Anne. Next caller, please?

Thank you. Christi, may I clarify your comment on the baricitinib atopic dermatitis data, there is only one primary endpoint in the trial, that's Investigator global assessment, is that the one that the two milligram missed? Secondly, MONARCH Her and MONARCH plus are not listed in the key 2019 event, but both were expected, can you clarify? And then lastly for Enrique, I hate to split hairs, but on the Q3 call you referred to REWIND as paradigm changing on several occasions. You did not say that today, what has changed in the last three months? Thank you.

Thanks, Steve. We'll go to Christi for the first one on baricitinib, then Anne for the MONARCH readout, and then Enrique finally to close out on REWIND. Christi.

Yes. Regarding the primary endpoint of the data, we had several secondary endpoints, and we plan to present this data at a future scientific meeting, particularly as we learn more from the next three studies we will analyze this year. The global assessment serves as the primary endpoint, with a total of eight secondary endpoints. The four-milligram dose successfully met all primary endpoints, while the two-milligram dose did not meet some of the secondary endpoints. Thank you for allowing me to clarify that.

Yes, on the MONARCH Her study, we do expect the readouts to be in the first-half of this year. It is a Phase 2 study, so that's we wouldn't know necessarily on those listings, but we do look forward to that readout and look forward to the next stages of that, so whether we move forward to a Phase 3 study depending on the verboseness of the data. So you'll see that readout in the first-half of this year.

My enthusiasm for REWIND and Trulicity have not changed at all, if anything, we are even more bullish today than we were maybe a couple of months back.

Thank you.

Okay, great. Thank you. We will go to Dave for the close.

Great. Thank you, Kevin, and we appreciate your participation in today's earnings call and your interest in the company. We demonstrated again in 2018 clear progress toward our revenue and profitability goals for 2020. The company is executing well. We continue to advance our innovation-based strategy through progressing internally discovered medicines augmented with business development transactions, highlighted by our recently-announced acquisition of Loxo Oncology. With a robust pipeline and volume-driven revenue growth, Lilly continues to be a compelling investment as we move into 2019. Thanks again for dialing in today. Please follow up with our Investor Relations team if you have any additional questions we didn't address on the call, and hope you have a great day. Thank you.