Lilly(Eli) & Company (LLY) — Q1 2020 Earnings Call Transcript

Good morning. Thank you for joining us for Eli Lilly and Company’s Q1 2020 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, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific Officer; Anne White, President of Lilly Oncology; Patrik Jonsson, President of Lilly Bio-Medicines; and Mike Mason, President of Lilly Diabetes. We’re also joined by Sarah Smith and Mike Czapar of the Investor Relations team. In addition, I would like to welcome Anat Hakim who recently joined Lilly as Senior Vice President and General Counsel. Anat joined Lilly with a wealth of experience in the healthcare industry and more broadly across the legal profession. Her prior experiences include General Counsel of WellCare Health Plans and Associate General Counsel at Abbott as well as working for a number of years at Foley & Lardner, Latham & Watkins. 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 the extent and duration of the effects of the COVID-19 pandemic, as well as other factors listed on slide three, and those outlined in our latest forms 10-K, 10-Q and any 8-Ks, 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. As we transition to our prepared remarks, a reminder that our commentary will focus on non-GAAP financial measures, which exclude the financial contribution from Elanco during 2019 and present earnings per share as though the full disposition via the exchange offer was complete on January 1, 2019. Now, I’ll turn the call over to Dave for some opening comments.

Thanks, Kevin. Well, these are challenging times for all of us as the COVID-19 pandemic has affected the way we live, the way we conduct business and most importantly, the health and wellness of millions of people. Like all of you, we’re hopeful that the decisions to implement social distancing will be effective to curb the spread of COVID-19 as our industry works urgently to enhance testing and speed therapies to market to treat and then prevent the virus. Today’s call will have a different structure than normal. Before we discuss our Q1 results, we’ll describe the impact of COVID-19 and the pandemic in general is having on our business and the actions we’ve taken to respond to the resulting global crisis. Our Q1 results were driven by very strong fundamentals with additional benefit from increased inventory across the supply chain, including at the patient level. This is a result of the COVID-19 pandemic. Despite that near-term benefit, the COVID-19 pandemic is likely to have a negative impact on our business in the future. We expect headwinds later in 2020 and potentially beyond, such as destocking as supply chains normalize from the recent demand surge, decreases in new prescriptions as a result of fewer patients visiting physician’s offices, potential changes in segment mix in the U.S. due to rising unemployment and pricing pressures resulting from the impact on government-funded healthcare systems around the world. While we do not yet know the extent and duration of these impacts, like everyone around the world, we’re hopeful that the massive mobilization of scientific and technical resources occurring across this industry and in collaboration with government and academic labs will yield multiple effective therapies in the coming months and an effective vaccine in calendar ‘21. While it’s difficult to predict the specifics of how the world manages through this pandemic, it seems clear our industry will play a leading role. In the midst of the outbreak and in its aftermath, it seems equally clear that investing in research and development to address and then conquer human disease has never been more important, and this is likely to remain true for some time. As we’ve navigated the crisis, we’ve acted with speed and agility, focusing on the needs of patients, our employees and the communities we serve and operate in. I’ll provide a summary of our response, then Dan will describe our ongoing efforts to develop a treatment for COVID-19 and Josh will walk through potential financial impact of our outlook going forward. Slide four summarizes our strategic approach and actions to-date. As you can see, we focused on five areas: maintaining a safe supply of and access to our medicines; reducing the strain on the medical system; developing a treatment for the virus; keeping our employees safe; and supporting our communities. To ensure that the 40 million-plus patients we serve have access to their medicines, early in the outbreak, we took a number of steps to maintain the supply of medicines around the world. To limit their exposure to the virus, we reduced personnel at our manufacturing sites to the bare minimum required to operate our facilities and enhance already robust precautionary measures for safety and cleanliness. The majority of our supply chain is multi-sourced. And from materials we supply from one source, we keep sufficient inventory on hand to avoid disruptions. Even with increased demand and customer stocking, we have sufficient inventory and production capacity for all our products. This includes all forms of insulin. And we don’t currently anticipate any issues meeting patient needs through the remainder of the pandemic. Our manufacturing sites in the U.S., Europe and China have remained operational through this crisis. We’re proud of the extraordinary efforts of our manufacturing colleagues, who’ve worked diligently to supply our medicines to patients around the world who depend on them. In addition to the numerous programs currently available through the Lilly Diabetes Solution Center, we announced the introduction of the Insulin Value Program. This allows patients with commercial insurance or without insurance to limit their monthly out-of-pocket expenses for insulin to $35 per prescription. Of note, the Solution Center has seen a significant increase in daily calls since this new benefit was announced. Patient affordability continues to be a top priority, and we remain committed to helping people access the medicines they need. We’ve also made a number of decisions which reduced the strain on the medical system. These include pausing new clinical starts and enrollment for most ongoing programs, suspending our in-person customer visits to physicians, repurposing our labs to conduct diagnostic testing here in Indiana for COVID-19, and creating a drive-thru testing facility for healthcare workers and first responders in the Indianapolis area. We took these actions because they are the right thing to do during these challenging times and to do our part to combat the spread of COVID-19. Dan will give a more complete pipeline update later, but I would like to highlight that we do not expect significant changes to the timelines for our ongoing late-stage studies, except for the previously announced delays for the GI indications of our IL-23 antibody, mirikizumab. In terms of addressing the significant unmet need of treating COVID-19, we’ve acted upon several opportunities, which we hope will result in a treatment option. These include partnering with AbCellera to develop potential antibody therapies, which we expect will enter the clinic this summer, participating in the National Institute of Allergy and Infectious Disease, Adaptive COVID-19 treatment trial with our JAK inhibitor, baricitinib, initiating a Phase 2 clinical trial for an antibody targeting Angiopoietin 2 pointing to explore its potential use in reducing the progression of acute respiratory distress syndrome related to COVID-19. The need for new medicines is urgent, and we’ve mobilized our development team at a record pace. Keeping our employees safe and healthy and our Company running smoothly is of course also a top priority. We’ve implemented remote work practices, added health and wellness benefits and provided additional compensation for those essential employees routinely coming to our sites, such as those in manufacturing. We’ve also created opportunities for employees to volunteer during work hours to support our medical system, including helping staff, drive-through testing facilities. To date, Lilly has tested nearly 30,000 people for COVID-19, which represents over a third of all tests conducted in the State of Indiana, while absorbing all associated expenses. We are building on this capacity by developing serological antibody tests that will be critical in the next phase of the pandemic. In addition, we’ve been supporting our local communities by funding or contributing to public health awareness campaigns as well as providing assistance and deploying available resources to fight the pandemic. I would also note, our appreciation for the high level of responsiveness and cooperation from the FDA and other government agencies in the U.S. and abroad as we partner together to fight COVID-19, and to minimize the negative impact on drug development timelines for our other innovative medicines. Across the biopharmaceutical industry, we’re working around the clock, collectively driving forward to address the acute medical need created by the COVID-19 pandemic. And to further elaborate on that, I’ll turn the call over now to Dan to provide more details on the ongoing efforts to treat COVID-19 and our regular pipeline update.

Thanks, Dave. I’m proud to highlight the ongoing efforts we have to combat COVID-19. As Dave mentioned earlier, we’re moving at an unprecedented pace as part of an industry-wide effort to develop a treatment for COVID-19. As a scientist and as a physician, I am incredibly impressed and thankful for the ways our teams at Lilly are working to make an impact against this new disease. We’ve demonstrated how nimble a large organization can be when truly focused and united behind an important cause. Slide five provides an overview of the three active therapeutic programs we are pursuing. First, is baricitinib. This is our JAK inhibitor in collaboration with Incyte. We have recently announced it is part of the National Institute of Allergy and Infectious Disease, Adaptive COVID-19 treatment trial. Based on the known anti-inflammatory activity of baricitinib, recent data in preclinical studies and case reports from investigator-sponsored clinical trials, we believe baricitinib could have potential to dampen the cytokine storm that occurs when hospitalized COVID-19 patients are fighting to combat the inflammation in their lungs, which often leads to requiring a ventilator. While we’re cautiously optimistic about the potential of baricitinib to help treat patients with COVID-19, it’s important to also note the approved rheumatoid arthritis indication includes warnings about the risk for developing serious infection. The baricitinib arm of the study begins this month in the U.S. with planned expansion to Europe and Asia and results are expected in the next two months. Next, we started a Phase 2 trial with a monoclonal antibody against Angiopoietin 2 or Ang2 in pneumonia patients hospitalized with COVID-19 who are at a higher risk of progressing to acute respiratory distress syndrome or ARDS. The Ang2 level in plasma is strongly correlated to the ARDS risk and severity, based on multiple studies in humans. Our trial will test whether inhibiting the effects of Ang2 with a monoclonal antibody can reduce the progression to ARDS or the need for mechanical ventilation. This trial has already begun enrolling patients at centers across the United States. We expect results from this trial in the coming months. Our third and potentially most significant program is part of our previously announced collaboration with AbCellera, where we are pursuing antibody therapies for the potential treatment and prevention of COVID-19. Our scientists have been working together with AbCellera, NIH, and academic partners to characterize virus-neutralizing antibodies obtained from one of the first U.S. patients who recovered from the virus. The most advanced antibody in this program shows potent neutralization of live virus, and has now entered GMP manufacturing. We plan to submit an IND to the FDA by the end of May to allow the start of clinical testing in patients. The pace at which we’ve advanced these potential treatments has been possible through the tireless efforts of our research and development colleagues, in partnership with a number of private and government partners. The need for treatment options to battle COVID-19 is staggering, and we are leveraging our financial resources and our very significant scientific capabilities to rapidly pursue solutions. The challenges facing our society and our economy are great, and the pharmaceutical industry is rising to the challenge. I’ll now provide a brief pipeline update. Slide six shows select pipeline opportunities as of April 20th. Movement since our last earnings call includes the approval of Lyumjev in the EU and Japan, the U.S. approval of Taltz for pediatric psoriasis and previously mentioned COVID-19 trial initiations for baricitinib and Ang2, one program advancing to Phase 1, the attrition of an early phase project, and the removal of empagliflozin for type 1 diabetes, based on a complete response letter from the FDA. Moving to slide seven, we provide an update on our 2020 key events that have occurred during the quarter. In addition to previously mentioned approvals, we also announced the first of two Phase 3 trials studying mirikizumab in psoriasis met its primary endpoints, the submission of tanezumab in Europe for moderate to severe osteoarthritis pain in collaboration with Pfizer, the DIAN-TU trial for solanezumab, which did not meet its primary endpoint, and galcanezumab received a negative opinion from the CHMP for cluster headache in Europe. Before I close the R&D update, I’d like to emphasize that in addition to our ongoing efforts to combat COVID-19, we remain committed to advancing important new medicines across our entire portfolio. Although we announced our pause to new trial starts and enrollment in most programs, we remain committed to discovering and developing new treatments for the patients we serve. With the exception of mirikizumab for GI indications, our late-stage portfolio remains on track to deliver important clinical trial data in line with our previously communicated timelines. Of note, the tirzepatide SURPASS program in type 2 diabetes is fully enrolled, and we expect to share the first Phase 3 trial results later this year. These are challenging times around the world. But, I’m encouraged by the unprecedented response of the scientific community and the pharmaceutical industry to rapidly develop potential new treatments and vaccines for COVID-19 and to sustain advancements across all diseases. Now, I’ll turn the call over to Josh to discuss the impact of COVID-19 on our Q1 financial performance and our outlook going forward.

Thank you, Dan. And good morning, everyone. As Dave shared earlier, we are confident that our business fundamentals are strong and that we’re well positioned to navigate the obstacles ahead. However, there undoubtedly will be a near-term impact to our industry and our company. So, the length and magnitude of the effects are uncertain. So, I’ll spend a few minutes discussing the financial impact of COVID-19 on our Q1 performance, and providing a framework for how we are thinking about this potential impact going forward, before then providing a more detailed review of our financial results. We began 2020 with positive momentum and observed robust prescription trends in January and February. As COVID-19 spreads throughout the world and economic activity slows significantly in many cities and regions, we observed the following changes and behaviors that affected our business. Patients refilled existing prescriptions earlier than normal or bought a larger supply to ensure that they didn’t run out. Wholesalers and retailers increased the level of inventory on hand to ensure adequate supply. Reduced hospital visits resulted in a preference for medicines that do not require administration in a physician’s office or the hospital. Patients abandoned fewer prescriptions at the pharmacy counter. Mail order utilization increased, which typically has a larger number of units per prescription compared to those filled at retail pharmacies, and new therapy starts slowed as patients largely avoided hospitals and clinics unless they were seeking treatment for COVID-19. We estimate that the net impact of these trends resulted in increased patient and channel stocking, which increased worldwide sales by roughly $250 million in Q1 with approximately $200 million of that impact in the U.S. We think the majority of the U.S. impact occurred in our diabetes portfolio, and notable products where we believe increased stocking impacted our Q1 U.S. results include insulins by approximately $70 million to $80 million, Trulicity by approximately $30 million to $40 million, and Taltz by approximately $20 million to $25 million. While we expect much of this stocking to reverse in future quarters as the excess supply in the channel and in patients’ medicine cabinets is consumed, the timing and ultimate levels are uncertain. We continue to closely monitor these factors and will utilize our quarterly earnings calls to provide updates to our outlook. Slide eight lists several factors we are monitoring that may impact our financial performance. While reduced new therapy starts had a negligible impact during Q1, this impact could grow in future periods as fewer new starts translate into fewer total prescriptions. In the U.S., we are starting to see an impact as IQVIA reported new-to-brand prescriptions across the industry declined by 42% for the week ending April 10th versus pre-COVID-19 averages. For our portfolio, we anticipate this impact to be more pronounced for our immunology and pain products and less so for oncology and diabetes. However, we expect this impact to be temporary as patients will return to seeing their doctors as social distancing restrictions are lifted. Over the midterm, the significant increase in unemployment we are seeing could be a headwind. Increased unemployment may result in a shift of patients from commercial insurance to lower net price government insurance in the U.S. or to being uninsured. We’re monitoring this dynamic closely. And while it could create headwinds in the near-term, this effect should lessen when the global economy eventually strengthens. Given the significant benefits our products provide to 40 million patients around the world, we remain confident in our long-term outlook for revenue growth and margin expansion. In terms of managing capital, our balance sheet and liquidity are strong and we have investment-grade ratings from both Moody’s and S&P. We’re confident in our ability to generate substantial operating cash flow and have not seen an impact on our ability to access capital markets, including commercial paper at reasonable rates. Financial strength is a valuable asset during this period and we intend to maintain our current credit ratings while using our balance sheet capacity to invest in the business and pursue business development opportunities and enhance our future growth prospects. I’ll provide more details on our 2020 outlook shortly, but in summary, we do expect the impacts on our financial results to persist through the remainder of the year and potentially into 2021, but the underlying strength and momentum in our business is strong. While combating the COVID-19 pandemic is a top priority, we remain focused on executing our strategy of developing new medicines for patients. We exited 2019 with very strong momentum in revenue growth and margin expansion, driven by the uptake of our newer products. On slide nine, you’ll see that momentum continued in Q1 2020 as we delivered strong underlying business performance augmented by the estimated COVID-19-related buying patterns from patients and customers I just described. Revenue growth accelerated in Q1, increasing 15% versus Q1 2019 or 16% in constant currency. This strong performance was driven by volume, which contributed 22 percentage points of growth. Net of the estimated COVID-19 impact, revenue growth was 11% for the quarter in constant currency. Our newer medicines continue to be the driver of this growth, representing more than half of our revenue in the quarter. We’ve made good progress in Q1 on our productivity agenda as operating income grew 32% versus last year. Our non-GAAP operating margin improved by 390 basis points to 30.1% as revenue growth outpaced operating expenses. The estimated impact of COVID-19 buying patterns on the quarter also had a positive impact on our non-GAAP operating margin. But, as we discussed during our 2020 financial guidance call, we expect our 2020 operating margin to build throughout the year to achieve our 2020 target for the full year of 31%. We’ve announced multiple pipeline milestones since our Q4 2019 earnings call, including approval of Lyumjev in Europe and Japan, and new indications for both Trulicity and Taltz in the U.S. During Q1, we returned approximately $1.2 billion to shareholders via share repurchases and the dividend. As previously announced, we increased the dividend by 15% for 2020. At this point, we do not expect to make additional share repurchases in the near term, in order to maintain a cushion of liquidity and capacity for investment and continued dividend growth. Finally, we closed the acquisition of Dermira, a company focused on developing new therapies for chronic skin conditions, enhancing our Phase 3 pipeline with the addition of lebrikizumab, which is complementary to our dermatology business. Slide 10 includes the summary of key events since our last earnings call. Moving to slide 11, our non-GAAP financial performance in Q1 was robust, even when adjusting for the COVID-19 impact described earlier. In addition to strong top-line performance, gross margin as a percent of revenue was stable versus Q1 2019 at approximately 80% as favorable product mix and greater manufacturing efficiencies were partially offset by price and increased costs associated with COVID-19. Moving down the P&L, operating expenses grew slower than revenue at 7% versus last year’s quarter. Marketing, selling and administrative expenses increased modestly by 2%, as cost containment and productivity measures offset investments in key growth products. Travel restrictions and the suspension of in-person customer interactions late in the quarter resulted in lower travel and meeting expenses. However, it was offset by a higher U.S. branded prescription drug manufacturing fee that we recognized in Q1. R&D expenses grew 13%, reflecting higher development expenses for late-stage assets that increased throughout 2019. Our pause on clinical trial starts had limited impact in Q1. Operating income increased 32% compared to Q1 2019 as sales growth outpaced expense growth, resulting in operating income as a percent of revenue of 30.1% for the quarter. We begin 2020 with good momentum executing our strategy and are on track to achieve our 2020 full-year operating margin target of 31%. Other income and expenses was income of $89 million this quarter compared to income of $86 million in Q1 2019. In both quarters, this was driven by investment gains on public equities. Mark-to-market gains in Q1 2020 primarily generated by prior equity investments in companies that are now pursuing vaccines for COVID-19. As we regularly highlight, this line item can be volatile as public market valuations fluctuate. Our tax rate was 13.6%, an increase of 70 basis points compared with the same quarter last year, driven primarily by the mix of earnings in higher tax jurisdictions, partially offset by an increase in net discreet tax benefits. So, at the bottom line, earnings per share increased 32%. On slide 12, we quantify the effect of price, rate and volume on revenue growth. As mentioned earlier, worldwide revenue grew 16% in constant currency during Q1, driven by strong volume growth of 22%, which we estimate at 17% net of the impact of COVID-19 buying patterns. This was partially offset by price. Foreign exchange had a modest negative impact on revenue growth this quarter. Price declined 3% net of the price impact from the inclusion of Tyvyt and Alimta in government-sponsored programs in China. U.S. revenue grew 15%, compared to the first quarter of 2019. Volume growth of 19% was led by Trulicity, Humalog, Taltz, Alimta, Verzenio, Emgality, and Basaglar. As I mentioned earlier, we saw stocking at the wholesale and patient level due to COVID-19 that contributed approximately $200 million of revenues this quarter. While the situation remains fluid, we do expect this impact to largely reverse over the course of 2020. Pricing was a 4% drag on U.S. revenue growth this quarter, in line with our 2020 guidance. This was driven primarily by growth in lower price segments, primarily driven by our diabetes products, which was partially offset by changes to estimates for rebates and discounts. We have strong commercial and Medicare Part D access across the portfolio and have remained intact throughout Q1. Moving to Europe, revenue grew 21% in constant currency, driven by 24% volume growth, partially offset by the negative effect of foreign exchange and price. Volume growth was led by Trulicity, Olumiant, Taltz and Verzenio and also benefited from the divestiture of a legacy product in Spain. We estimate total international results were impacted by approximately $50 million of stocking due to the impact of COVID-19 in Q1 and the significant majority of this occurred in Europe. However, the underlying trends are very strong, as our newer products have continued to scale. In Japan, revenue grew 8% in constant currency, driven by volume growth, somewhat offset by a modest pricing headwind due to government-mandated price decreases that went into effect in 2019. Verzenio, Cyramza, Trulicity, Olumiant, and Alimta were the key contributors to growth, partially offset by increased competition from Forteo and the impact of generic Strattera. In China, revenue grew 30% in constant currency, driven by 93% volume growth, partially offset by pricing concessions associated with the inclusion of Tyvyt and Alimta in government-sponsored programs. We’re very pleased with the significant volume increases we saw for these products and our ability to increase access for patients suffering from these important cancer medicines. Outside of Tyvyt and Alimta, our business in China saw a meaningful decline in new patient starts during Q1 as the COVID-19 spread peaked during March. As the situation appears to be moving toward more stability, we are cautiously encouraged that new patient initiation and in-person customer interactions have begun to resume. Revenue in the rest of the world increased 14% in constant currency, driven by increased volume from our key growth drivers, Trulicity, Jardiance in collaboration with Boehringer Ingelheim, Taltz, Cialis, and Cyramza drove growth in Q1. As shown on slide 13, our key growth products continue to drive impressive worldwide volume growth. These new medicines delivered nearly 20 percentage points of growth this quarter while also benefiting from the increased stocking that I described earlier. Slide 14 highlights the contributions of our key growth products. In total, these brands generated nearly $3 billion in revenue this quarter, making up 51% of total revenue. On slide 15, we provide an update on capital allocation. In Q1 2020, we invested $2.4 billion to drive our future growth through a combination of business development, capital expenditures and after-tax investment in R&D. In addition, we returned approximately $1.2 billion to shareholders via dividends and share repurchases. We remain well-capitalized and closed Q1 with approximately $4 billion of cash and investments and the ability to access debt markets at attractive rates. Moving to slide 16, you’ll find our updated 2020 financial guidance. This is based on our best estimate at this time as we’re balancing transparency and insight into the current view of our business with the uncertainty surrounding the extent and duration of the impact of the COVID-19 pandemic. Key assumptions supporting our updated guidance include the Q1 stocking benefit largely reverses over the course of 2020; the near-term reduction in new patient prescriptions peaks in the second quarter in the U.S. and much of Europe; healthcare activity returns to more normal levels in the second half of this year, as doctors resume seeing new patients; price headwinds from the increased utilization of patient affordability programs and changes in segment mix due to increased U.S. unemployment; and enrollment in existing studies, as well as the initiation of new clinical trials resumes midyear; and near-term spending on travel, in-person customer interactions and direct consumer advertising decreases while investments in digital promotion and support increases. We do believe the reduction in new patient starts will be temporary, but will impact our 2020 performance. The potential impact from increased unemployment will likely be more muted in the near term, but the impact could be more pronounced in 2021, depending on the shape of an economic recovery and the U.S. government programs to stimulate employment. While the extended duration of impact from COVID-19 drives the most uncertainty in our outlook, the positive underlying momentum in Q1 in our business augmented by the estimated additional revenue benefit from COVID-19 related buying patterns, gives us confidence that the potential downside for the remainder of the year is accommodated within our previously communicated revenue range. While there are scenarios that could cause revenue to fall outside either end of our range, we believe the revenue range accommodates most of the uncertainty we see today. In addition to the impact of unemployment and the pace of economic recovery described earlier, the main variables we will monitor are the impact on new prescription trends during social distancing periods and the timing of resumption of non-COVID-19 healthcare activities. While we currently anticipate the most pronounced impact on new prescriptions to occur in Q2, the headwinds are likely to show up in Q3 and Q4 as inventory levels normalize and the impact of fewer new prescriptions compound. Moving down the income statement, we’re confirming our prior expectations for gross margin as a percent of revenue to be roughly 81% on a non-GAAP basis and 79% on a GAAP basis. We do anticipate higher manufacturing costs associated with the extraordinary measures we are taking to keep our manufacturing workers safe and to keep medicines flowing to patients around the world. We expect this to be offset though by benefits from higher manufacturing volumes. We’re maintaining a range for marketing, selling and administrative expenses as savings from reduced travel and decreased promotion are anticipated to be offset by investments in digital capabilities and increased marketing expenses in the second half of the year for key growth products. Our range for research and development expenses is also unchanged as savings from the pause on clinical trial activity are offset by our investments to pursue therapeutic treatments for COVID-19, as Dan described earlier. Therefore, there’s no change to our non-GAAP operating income as a percent of revenue guidance of 31%. We’re updating the range of other income and expense to $0 to $150 million of expense, reflecting Q1 gains in our equity portfolio. Obviously, this number has some volatility going forward and we’ll update accordingly. Turning to taxes. There’s no change to our GAAP and non-GAAP effective tax rate guidance of approximately 15%. Earnings per share is now expected to be in the range of $6.70 to $6.90 on a non-GAAP basis. Our GAAP EPS is expected to be in the range of $6.20 to $6.40. We are increasing the range to reflect the uncertainty of the impact to our business for the remainder of the year. Our performance in the first quarter, net of COVID-19 benefit, highlights the strength of our underlying business fundamentals. And as Dave mentioned in his introduction, we remain confident in the long-term outlook for our business. So Dave, I’ll turn it back to you for closing remarks.

Thanks, Josh. The COVID-19 global pandemic has impacted us all in unforeseen ways. Although near-term challenges exist, we do remain confident in our long-term outlook for the Company and the strength of our fundamentals. The times of great crisis can bring out the best in people and in companies. And Lilly will continue to rise to that challenge. While a great deal of uncertainty remains, there are a few certainties to which I would draw your attention. First, the collective spirit, expertise and commitment of my Lilly colleagues around the world is inspiring. Despite challenging circumstances and disrupted work routines, they’ve rallied to fulfill our mission of discovering and supplying medicines that make life better for people around the world. They are exceptional. Second, speed and agility continue to be critical to the success of our business. We’ve moved swiftly, pivoting our focus to join the fight against the COVID-19 pandemic by leveraging our deep scientific capabilities and expertise on both the testing and therapeutic fronts. And lastly, I’ve never been more certain of the importance of a healthy and vibrant biopharmaceutical industry. While it will take time to exit the current situation, we will recover. And the pharmaceutical industry will be the primary catalyst, developing new treatments and a vaccine to combat COVID-19, allowing people across the world to return to living their lives more normally and enabling economic activity to grow. It’s clear we are a vital part of any long-term solution for fighting this or any future pandemic. This concludes our prepared remarks. And now, I’ll turn the call 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 per caller. Alan, please provide the instructions for the Q&A session. And then, we’re ready for the first caller.

Hi. Thanks for taking the question. Maybe first I was just wondering, Josh, if you could expand on how the environment changes your approach to capital allocation. I know you mentioned, maybe less share repurchases in the near term. But on the BD M&A side, do you actually think there could be an increasing number of opportunities? And does it change how you think about size? And then, the second I had was just where you stand with regulatory interactions in launch prep for selpercatinib. Just wondering if COVID changes at all your go-to-market strategy.

Hi, Terence. Thanks. Regarding capital allocation, we are committed to our strategy. As we have previously stated, we view external innovation and business development as essential for our long-term growth. Our primary focus remains on identifying key opportunities in our therapeutic areas where we can integrate first or best-in-class assets into our pipeline. This effort is ongoing, and I haven't noticed any slowdown due to travel restrictions or remote work. While smaller biotech firms may have different perspectives on their financial stability, if this leads to more discussions, we will capitalize on that. However, our outlook on the size of acquisitions hasn't changed. Our business is strong, and we do not find large-scale acquisitions beneficial at this time. We will maintain our focus on our current priorities, and as long as social distancing measures are in place, I do not anticipate any impact on our ability to engage in transactions.

Yes, Terence, thank you for your question about selpercatinib. I’m happy to report that there have been no delays in the regulatory timeline for selpercatinib. The FDA has been very collaborative and responsive in navigating these challenges, and we appreciate their speed and commitment. They are continuing to move forward with the application, which we submitted in December and is currently under priority review. We anticipate regulatory action by the PDUFA date in Q3. Regarding the launch, these are indeed interesting times. As a Company, we continue to prioritize combating the spread of coronavirus, and we fully recognize the burden on healthcare professionals and appreciate their hard work for their patients. Nonetheless, we acknowledge that selpercatinib has demonstrated impressive efficacy and a very favorable safety profile in treating lung and thyroid cancers with RET fusions or RET mutations. It is important for patients and physicians to know that there is a new medicine available, the first specifically targeting RET alterations. Our launch activities will look different; however, we are committed to ensuring that patients who are suitable candidates for selpercatinib have access. If in-person interactions are still restricted during our launch, we will initially focus on informing customers about the approval and the key efficacy and safety data through email and other digital channels. We will also quickly engage in virtual product details upon customer request. Additionally, we will leverage virtual peer-to-peer programs, allowing thought leaders to share data with their colleagues. We will be disseminating data through a top-tier journal publication and at upcoming medical meetings. The goal is to ensure physicians and patients are informed about this remarkable new medicine targeting RET. This has been an extraordinary collaboration with the Loxo and Lilly teams. To put it in perspective, this medicine began Phase 1, with the first patient dosed in May 2017, and we are looking at approval in 2020, which is truly remarkable. We are grateful to the FDA for their swift review.

Great. Thanks very much and I appreciate all the color on the call today. Just my two questions. First on disruption to near-term prescription. You mentioned diabetes as an area less impacted relative to areas like pain and immunology. But, I do have a specific question on Trulicity. I guess, when I think about that product and the GLP-1 category in general, we’ve been seeing very healthy growth here. We’re seeing significant new patient starts. Is it a product and a market maybe more broadly that you anticipate could see a slowdown as we go through 2Q as the impact of some of the reduced physician visits starts to build? And then, my second question was on payer mix over time. Could you just help us frame the magnitude of impact you could see to net price in the U.S. from adverse payer mix as we look out over the next year or so? I guess, specifically, is this something that could cause price to meaningfully deviate from this low-single-digit price erosion we’re seeing? So, could that become more like a mid to high-single-digit erosion or do you think you’ve got a more modest impact than that? Thanks very much.

Okay. On Trulicity, it’s difficult to predict the long-term impact of the COVID-19 crisis, given the uncertainty on the length and the impact on the economy and patient visits. And also, it’s unclear how patients who live with diabetes, who are at greater risk for complications from COVID-19, will that change the compliance that they have with the medication and increase that. But, what I can tell you is a little over a month into the crisis that the GLP market and Trulicity TRX volume remain strong. It’s currently at 30%. And so, we haven’t seen the impact at the TRx level yet. We have seen the impact on NTS and NBRx volume kind of post-COVID, both for Trulicity and the GLP market. Josh has shared that the overall pharma market has seen a decline of 42% in NBRx. What we’re seeing in the GLP market is a 30% decline for NBRx. Now, we haven’t seen that manifest itself in the TRx volume yet. If you take a look at the NPRx and for Trulicity, it’s only 5.6% of the TRx rate, which is a relatively low turnover for the marketplace. So, we think that Trulicity relative to other products, other therapeutic areas will have kind of a slower impact from the COVID situation. But again, it’s hard to predict as we have uncertainty on the length of the impact of the economy and patient visits. What we can say is that we’re very confident in Trulicity’s strong fundamentals. We saw 32% volume growth in Q1 and 40% revenue growth in Q1. So, we’re very confident in the very strong fundamentals of Trulicity. So, Chris, thanks for the question.

Thank you, Chris. Regarding your question about the future of net prices given the current state of the U.S. economy, it's still early to make definitive predictions, as there is much to observe. We've already anticipated negative net prices in the U.S. from now until 2025 in our current guidance. Therefore, any changes here are likely to have a moderate impact. It's important to consider that Lilly's portfolio spans various payer segments. Generally, transitioning from well-insured commercial patients to Medicaid is a negative shift. However, many of the commercial patients who are losing jobs in this initial wave might not have high-quality commercial plans to start with, such as exchanges and other options. Thus, we need to see how this unfolds. Our priority is to ensure that patients losing insurance can still access our medications and programs. As Dave mentioned, we introduced the $35 change to our diabetes program. We're evaluating every possible way to keep people on our medications and ensure access, believing some impacts will be temporary. By the end of the year, we should have a clearer understanding of what 2021 will look like. Overall, we expect that the trend of declining net prices will continue, but this doesn't fundamentally alter our perspective on the business.

Thank you. Same topic. You have a high exposure relative to your peers to the commercial book. For your full-year guidance, could you help us on what kinds of U.S. unemployment rates you’re assuming, as well as some magnitude of the volume loss and potential Medicaid expansion, anything you can say about the rest of 2021? And then, separately, on Olumiant baricitinib COVID-19. I’m just trying to understand, which patient population you’re targeting. The literature talks to both a potential antiviral effect, as well as an anti-inflammatory effect, which would suggest potentially two different patient populations, the earlier then respiratory distress. Where you’re going here with the clinical trials? Many thanks.

Thank you, Andrew. Regarding 2020, our sales guidance range considers several factors. If we end up at the lower end of that range, we expect some additional impact from pricing, although it will likely be minimal this year. We need to wait and see what next year brings. It’s not only about the unemployment rate but also the programs in place to help. Given our strong position at the start of Q1, our range accounts for possible pricing impacts due to short-term shifts to insurance or Medicaid. However, it’s still too early to provide specific details on this.

Thank you, Andrew, for the question on baricitinib and mechanism of action and potential on COVID-19. You’re right in your comments about a potential for a dual mechanism of action for baricitinib. I think first publication on the potential role of baricitinib in COVID-19 came from a group called BenevolentAI where they modeled out that the effects both on viral entry and on inflammatory response could be beneficial in this disease. The trial that we discussed that is the Adaptive COVID-19 trial with NIAID is in hospitalized patients. So, it’s rather later in the disease progression. And the design of the trial is primarily to look at the effects of baricitinib on that inflammatory cascade. It’s notable that that trial currently is conceived of as a factorial design with remdesivir. Of course, in addition to looking at the clinical outcomes of these patients, viral load and other factors will also be evaluated. I think, if we see success there, that could give us confidence to go earlier in the disease course. But, given sort of the mixed mechanism of action here, right now, we’re looking at those hospitalized patients.

Yes. Thanks very much. So, I have two questions. First, in the event that baricitinib and/or the Ang2 succeed in June, what are the next steps? Would you be filing for approval at that time? And then, with respect to the Ang2, could you just discuss the manufacturing capacity and the amount of volume you could produce later this year? And then, second, with respect to clinical trials, when do you expect to restart enrollment in the majority of your trials? Thank you.

Thank you, David. To begin with the expectations surrounding our molecules in COVID-19, Baricitinib is the simplest case. It is a small molecule that can be manufactured at a large scale and is already approved in various regions for rheumatoid arthritis. Depending on the quality of data and the benefit-risk assessment in COVID-19 patients, it could potentially advance quite rapidly if it proves successful. On the other hand, Ang2 represents a more complex scenario. This is an investigational monoclonal antibody with limited production capabilities and longer lead times, still in Phase 2 trials. However, our primary focus is on the neutralizing antibodies against COVID-19. We believe there is a high chance of technical success with these antibodies, similar to what we have seen with other viruses, and based on our pre-clinical findings. There is a possibility of a broad treatment approach, as these antibodies could be effective not only in treating patients but may also have a prophylactic application, necessitating large quantities. Importantly, these programs are not intended for chronic use; they are designed for one-time administration or short-term use in the case of baricitinib. For the antibody, we are actively enhancing our manufacturing capacity to be ready for deployment, both internally and through partnerships, should neutralizing antibodies show success. We are making these investments proactively and have initiated GMP manufacturing at our facilities to support clinical trials, allowing for rapid scaling if we receive a positive indication from the neutralizing antibody. Regarding clinical trial restart timelines, it's critical to understand the context of why we paused new patient enrollments and trials. It was not due to our capability to conduct clinical trials. In fact, I feel more confident now than I did a month ago about meeting our sponsor obligations and delivering drugs to sites or directly to patients for outcome measurements at sites or by interacting with patients directly. I am truly confident in our ability to carry out the trials. The pause is more about alleviating the burden on clinical trial sites and hospitals running these trials. We are closely monitoring our clinical trial sites; many are already inquiring about restarting. We will make decisions collaboratively based on the burden of COVID-19 they face and how much attention they can allocate to clinical trials.

I have a couple of questions. HMA is a consulting group that estimates potential increases in Medicaid enrollment. I was hoping you could provide more detail about your expectations for Medicaid enrollment. This group estimates that Medicaid enrollment could rise by 11 to 23 million, and the number of uninsured could increase by 10 to 11 million. Additionally, could you help clarify what percentage of Lilly’s volume and sales currently goes into Medicaid? That context would be helpful. My second question is for Dan. We were expecting the Phase 2 Alzheimer’s data for the NGC antibody in the second half of this year. Could you provide an update on that? Is that still anticipated for the second half of this year, or should we expect it to come in 2021? An update would be appreciated. Thank you.

Sure. Thanks, Seamus. Currently, about 10% of our volume in the U.S. comes from Medicaid, with 40% from commercial insurance, 20% from Part D, and the remainder from Part B, hospital-based services, uninsured, or other types of volumes. As we discussed previously, one of the main challenges we face is a shift from a well-insured commercial patient to Medicaid. There are several steps before that transition occurs. In our sales guidance for 2020, we anticipate that there may be some net impacts due to this situation. We have analyzed those estimates concerning the long-term outlook and will provide further updates for 2021 when we have more clarity. For now, our sales guidance takes into account the possibility of an increase in transitions to Medicaid or an uptick in uninsured patients.

Thanks Seamus for the question on our Alzheimer’s Phase 2 portfolio. You asked specifically about the donanemab, our anti N3pG-a beta antibody. This is a really robust plaque clearing antibody. We know it can clear plaques to quite a great extent and quite quickly as well. It’s an 18-month Phase 2 study designed to demonstrate efficacy in a relatively large and homogenous population of Alzheimer’s patients. This study is fully enrolled. It’s proceeding along the previously communicated timelines, which means that last patient visit will be at the end of this year, as you said. Most likely then, we’ll have data to talk about shortly after that, although probably in January rather than December. But, no changes to our timelines on that trial. Similarly, the tau antibody as well as our symptomatic D1 PAM, those are all Phase 2 studies designed for efficacy, similarly fully enrolled and moving along the previously communicated timeline. So, no change in the Alzheimer’s portfolio there.

And we’re going to the next caller, please.

A couple of questions, please. On tirzepatide, you mentioned results in 2020, and everyone knows that, I think. Is that just likely to be top line, or are we likely to see a more set of results in some form or another, whether it’s publication or presentation? And then, second question is on Tyvyt, your PD-1 in China. I feel like over time, I’ve gotten mixed messages from the company on the importance of this product. Maybe a year ago, I was talking to one of the members of senior management and it was kind of described as a China-only product, of smaller importance. But, I don’t know if that’s still the current point of view. I asked about it last quarter. I didn’t get much of an answer. So, the question is really twofold on Tyvyt. The development program from here in China in terms of next tumor types; and perhaps more importantly, your plans to take this outside of China into developed markets, U.S., Europe or anywhere else that’s traditionally considered developed?

Yes. Thanks for the question. Just directly, we do believe we’ll have our first top-line readouts of the SURPASS program for the first trial in Q4 of 2020 and then additional readouts, top-line as well as at medical meetings going into 2021. Thanks for the question.

Yes, Tim, regarding Tyvyt, I believe your interpretation of the previous commentary is accurate. Initially, we partnered with Innovent focusing solely on the China market for biologics and cancer, along with a few other biosimilar opportunities. However, two things have evolved, and today we’re for the first time highlighting our focus on China. One key change is that Tyvyt is the only PD-1 product approved in connection with PD-L treatment nationally in China, which alters its economic profile for us and significantly impacts our business in China. The second development is the encouraging data released regarding its combination with pemetrexed for first-line non-small cell lung cancer, which I believe will positively influence its trajectory in China. Currently, we are concentrated on the opportunities in China, and that is our immediate focus. As Josh mentioned earlier, we have observed substantial volume growth in China for our oncology portfolio, with Tyvyt being an essential component. Overall, we appreciate our partnership with Innovent; they excel in their work. This collaboration has been an effective strategy for expanding our business, which was somewhat underrepresented in China a decade ago, through partnerships with local innovators. We are very satisfied with the progress we have made.

Thanks, Tim. Next caller, please?

Good morning. Thanks for taking the question. I just wanted to I guess dig into the comment over the inevitable fiscal pressure on government-funded healthcare, specifically thinking about Europe and the pressure on budgets there. I guess, are you guys viewing it as a possibility, probability or likelihood there’s incremental pricing pressure in Europe, I guess, looking out later this year or into next? I appreciate any thoughts there. And then following up on the Tyvyt discussion. When could we expect the ORION-11 data to be presented? Is that something that could still come in the first half this year, or will we have to wait until the back half of the year? Thank you.

Yes. Regarding Europe, I would say this also applies to other government-operated health systems like Australia, Canada, and Japan. We observed a policy response in almost every region after the fiscal crisis of 2008 and 2009. However, this situation is not just a fiscal crisis; it will lead to a fiscal crisis caused by the pandemic in many of these economies, resulting in lower tax revenues. Subsequently, governments will need to find ways to cut their spending. I believe we can almost certainly predict that will happen. One common target for budget reductions is often pharmaceutical costs, which can be negotiated or adjusted by simply changing regulations. We definitely saw this occur, leading to a series of policy changes over three to four years that kept drug prices down in regions like Europe, Australia, and Canada. Therefore, we anticipate similar occurrences in the future. As Josh pointed out, we do not expect significant changes in 2020. Dropping tax revenues in 2021 may trigger legislative measures in 2021 and 2022, resulting in ongoing pressure on pricing afterwards. That, to me, is certain across the industry. The key question, then, is how innovative your portfolio is, as many of these policies leverage government power when there are comparable alternatives. Thus, the more innovative your offerings, the more protected you become from these challenges. We are certainly putting effort into this aspect, and we hope to come out positively within the industry. That said, I suspect that international pressures will impact everyone’s portfolios to varying degrees.

Yes. So, with the Phase 3 ORION study, as you know is an interim analysis that was positive, and we’re very excited about initiating that submission with Innovent to the regulatory authorities in China. And we will be submitting that data for a medical meeting in the second half of this year. So, you’ll see it in the second half of 2020.

Thank you, Anne. Carter, thanks for your questions. We’ve exhausted the queue. So we’ll go to Dave to close.

All right. Thank you all. We appreciate your participation in the call and your interest in the Company. Obviously, different times today. And just on a personal note, I know many of the sell side community are based on the East Coast, and we hope you’re all well and your families are functioning and certainly healthy through this crisis. As usual, any follow-up calls or questions can be directed to our really incredible Investor Relations team. And again, hope you all stay well. And we’ll be in touch soon. Take care.