Lilly(Eli) & Company (LLY) — Q3 2021 Earnings Call Transcript

Good morning. Thank you for joining us for Eli Lilly and Company's Q3 2021 earnings call. Joining me on today's call are Dave Ricks, Lilly's Chairman and CEO, Anat Ashkenazi, Chief Financial Officer, Dr. Dan Skowronski, Chief Scientific and Medical Officer, Jake Van Arden, CEO of Loxo Oncology at Lilly and President of Lilly Oncology, Patrick Johnson, President of Lilly Immunology, and Mike Mason, President of Lilly Diabetes. We're also joined by Lauren Zerki Santueja and Sarah Smith 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 3. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Form 10-Q and 8-K, 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. Now, I will turn the call over to Dave for a summary of our third quarter results.

Thanks, Kevin. Once again, Lilly had a very strong quarter growing our newest medicines around the world and continuing to advance significant potential new medicines in late-stage development. We also built long-term opportunities through early-stage investments in technology and progress in early-stage programs. Q3 2021 was also a period where the resilience of our Company, our people, and collaborators were tested by the pandemic. Again, they rose to the challenge, and I would personally recognize and thank my Lilly teammates for delivering such a strong overall performance. Innovating to maintain pipeline velocity, running our plans to meet the rapidly growing demand for medicines, and continuing to serve our customers, whether in person or online. Turning to our strategic deliverables on slide 4, Q3 revenue grew 18% compared to Q3 2020, or 17% in constant currency. This performance was driven entirely by volume, with volume growth being 17 percentage points. When excluding COVID-19 therapies, including revenue from COVID-19 antibodies and sales of Olumiant for COVID-19 treatment, revenue grew an estimated 11% for the quarter and year-to-date. Revenue attributable to our newer medicines grew over 35%, now representing nearly 60% of our core business this quarter, an important indicator for our long-term growth potential. Our non-GAAP gross margin was 79% in Q3 or 79.3%, excluding the impact of foreign exchange on international inventories sold. Excluding this FX impact, our gross margin decreased by approximately 60 basis points compared to last year. Our non-GAAP operating margin was 30.5%, representing over 400 basis points of improvement compared to Q3 of last year, and over 100 basis points of sequential improvement from Q2 of this year. We had a number of significant pipeline milestones since our last earnings call in August. This includes the FDA approvals for Verzenio in certain patients with high-risk early breast cancer and for Jardiance, in collaboration with Boehringer Ingelheim in heart failure with reduced ejection fraction. Regulatory submissions for Tirzepatide for type 2 diabetes in the U.S., for which we applied a priority review voucher, as well as in the EU, and Jardiance in heart failure with preserved ejection fraction. We initiated a rolling submission in the U.S. for donanemab in early Alzheimer's disease and had positive Phase III readouts for lebrikizumab in atopic dermatitis. We also continue to augment our pipeline with development opportunities as we continue to leverage external innovation to build our discovery capabilities with a focus on new modalities at Lilly. In Q3, we announced a research collaboration and licensing agreement with Lycia Therapeutics to utilize their proprietary protein degradation technology. Finally, on financials, we distributed nearly $800 million to shareholders via dividends this quarter. Moving to slides 5 and 6, you'll see a list of key events since our Q2 earnings call, including issuing the company’s first sustainability bond with proceeds allocated towards environmental projects, including pollution prevention, energy efficiency, and renewable energy, as well as social projects to increase access to essential services and socioeconomic advancement and empowerment. We announced a series of leadership and organizational changes this quarter. Recent positive data readouts this year led us to the natural decision to increase our focus on immunology and neuroscience and to unify the Loxo Oncology and Lilly Oncology organizations. We believe these changes enhance our ability to execute on a broad range of exciting commercial and pipeline opportunities. I'd like to welcome Jake Van Arden to Lilly's Executive Committee, and I look forward to Ann, Patrick, and Jake continuing their leadership in their new roles. They'll be focused on increasing our competitiveness in their therapeutic areas and growing our existing medicines while also launching our late-stage pipeline of new medicines which could benefit patients across a diverse set of medical conditions. Similarly, I'm grateful for Ilias' continued leadership and look forward to him leading our growing international business. Finally, I would like to thank Kudo for his impact on our Company over more than three decades for his commitment to patients and the development of our industry-leading commercial capabilities. Kudo, thank you for your service to our Company. We have a deep leadership venture at Lilly. They are smart, energetic, and experienced. I know they are as excited as I am to take Lilly to another level in the decade ahead. Now I will turn the call over to Anat to review our Q3 results and provide an update on our financial guidance for 2021.

Thanks, Dave. Slides 7 and 8 summarize financial performance in the third quarter and year-to-date. I will focus my comments on non-GAAP performance. Revenue increased 18% this quarter compared to Q3 2020 or 11% excluding the items Dave mentioned earlier, representing strong momentum for core business, despite the impact of Alimta's loss of exclusivity. We continue to be pleased with the strong volume growth across key brands like Trulicity, Taltz, Verzenio, and Jardiance as our key growth products made up nearly 60% of our core business during the quarter. Gross margin as a percent of revenue declined ten basis points to 79% in Q3. Favorable product mix, excluding COVID-19 therapies, and a favorable impact from foreign exchange rates on international inventory sold were more than offset by lower gross margin on COVID-19 therapies. Total operating expenses grew eight percent this quarter compared to the same quarter last year. Marketing, selling, and administrative expenses increased one percent while R&D expenses increased 17%, driven by significant investments in exciting late-stage pipeline opportunities, including the non-specific and unspecified assets. We also invested approximately $50 million in research and development for COVID-19 therapies in Q3, bringing our total COVID-19 R&D investment to approximately $350 million year-to-date. Operating income increased 37% compared to Q3 2020, with operating income as a percent of revenue at 30.5%, an increase of 420 basis points compared to the prior year, with sequential growth for the second straight quarter. This increase was driven by revenue growth outpacing expense growth, and we expect continued margin expansion in the fourth quarter. Other income and expense was an expense of $7 million for this quarter compared to income of $10 million in Q3 2020. Our effective tax rate was 14.3%, a decrease of 70 basis points compared to the same quarter last year. The lower effective tax rate in the third quarter of 2021 was driven by a mix of earnings and lower tax jurisdiction, partially offset by a decrease in net discrete tax benefit compared to the same period in 2020. At the bottom line, we delivered strong growth as earnings per share increased 38% in Q3 2021. On slide 9, we quantify the effect of price rate and volume on revenue growth, and we're encouraged by the growth seen across the world. This quarter, U.S. revenue grew 26% compared to the third quarter of 2020. Adjusting for revenue from COVID-19 therapies, revenue grew 14% in the U.S. This increase, driven largely by volume, was led by Trulicity, Taltz, Jardiance, and Verzenio. The higher net realized price in the U.S. this quarter was driven by lower utilization in the 340B segment. Unfavorable changes to estimates for rebates and discounts for Trulicity in the third quarter of 2020 and modest list price increases, partially offset by increased rebates to maintain broad patient access for our medicine. Our year-to-date U.S. net price decrease of 1% is in line with the low-to-mid single-digit guidance we gave last December, and our full-year outlook is consistent with those expectations. Our 340B limited distribution program began in September 2020, and so the fourth quarter of 2021 will be the first full quarter where its impact will also be included in the base period when calculating year-over-year price changes in the U.S. Given the increase in variability in payer mix, we continue to see quarterly variability in reported U.S. net price changes across our business. Moving to Europe, revenue grew 3% in constant currency, excluding the impact of the first full quarter of loss of exclusivity for Alimta. Revenue grew 16% in constant currency, driven primarily by volume growth for Trulicity, Taltz, and Verzenio. We're pleased with the momentum of our business in Europe and expect continued growth, excluding Alimta. In Japan, revenue decreased 6% in constant currency, driven primarily by the decline of post-patent products. Revenue in Japan continues to be negatively impacted by decreased demand for several products that have lost market exclusivity. Now, including Alimta as well as the COVID-19 pandemic. Importantly, our key growth products grew 12% in Q3 in Japan. We expect improved revenue growth in Japan moving forward based on the uptake of these newer products. In China, revenue grew 30% in constant currency primarily driven by continued uptake of Tyvyt and Trulicity. We're excited by the significant growth we're seeing in China as sales of new medicines continue to drive growth there. Revenue in the rest of the world increased 16% in constant currency, driven primarily by our key growth products. At the bottom of the slide is the price rate and volume effects on revenue for our September year-to-date results, which shows double-digit growth across all major geographies except Japan. As shown on Slide 10, our key growth products continue to drive strong worldwide volume growth. These products drove 15 percentage points of growth this quarter and continue to drive our overall performance and outlook. Slide 11 highlights the contributions of our key growth products. In total, these brands generated nearly $3.9 billion in revenue this quarter, making up 58% of our core business revenue. We are encouraged by the strength of our key growth products in Q3, collectively up over 35% compared to the same period in the prior year. Trulicity, Verzenio, and Jardiance all continued to outgrow their respective classes, and we're pleased with Taltz growth driven by increased access. On slide 12, we provide an update on capital allocation. In the first nine months of 2021, we invested $7 billion to drive our future growth through a combination of R&D expenditures, business development outlays, and capital investments. In addition, we returned over $2.3 billion to shareholders in dividends and have repurchased $500 million in stock. We will continue to fund the growth of our key products and recent launches, invest in our pipeline, seek external innovation to augment our future growth prospects, and return capital to shareholders. Turning to our 2021 financial guidance on slide 13, we're updating our GAAP and non-GAAP guidance. We're increasing the full-year revenue outlook by $200 million at the top end of the range and $400 million at the lower end of the range to reflect additional COVID-19 antibody revenue and the outlook for a core business. COVID-19 antibody revenue expectations are roughly $1.3 billion based on the existing U.S. government purchasing agreements for additional doses of etesevimab in Q3 and Q4. The net impact of these changes is an updated revenue range of $27.2 billion to $27.6 billion, up from the previous range of $26.8 billion to $27.4 billion. Our outlook for GAAP and non-GAAP gross margin percent remains unchanged. For research and development and SG&A, our guidance ranges remain unchanged. As we noted last quarter, investments in promising R&D opportunities and exciting potential launches are expected to push us to the top end of our guidance range for operating expenses. Our reported and non-GAAP operating margin guidance is unchanged; excluding the impact of COVID-19 antibodies, non-GAAP operating margin remains approximately 31%. Our non-GAAP ranges for other income and expense and our expected tax rate remain unchanged as well. On a reported basis, other income and expense is now expected to be an expense in the range of $250 million, reflecting the impact of the charges associated with a repurchase of debt and net mark-to-market losses on investments in equity securities. In the third quarter of 2021, the 2021 effective tax rate is now expected to be approximately 11% on a reported basis, reflecting the tax impact of the charges associated with the repurchase of debt and acquired IP R&D, as well as unfavorable mark-to-market adjustments on investments in equity securities in the third quarter of 2021. Finally, the non-GAAP range for earnings per share has been raised to 795 to 805, while the GAAP EPS is expected to be in the range of $6.38 to $6.48. At our Investor's Day in December, we will share our initial 2022 guidance. Today, before I turn the call over to Dan for the R&D update, I'd like to provide a few reminders on the pushes and pulls across the P&L as we begin thinking about next year. In Q3, we saw the initial impact of Alimta's OUS patent expiry in Europe and Japan. Next year, we will see its full-year impact, as well as the U.S. patent expiry, with limited launches from a single generic company in Q1 before the full launch of generic entrants starting in Q2. As for revenue from COVID-19 therapies, we intend to reflect in guidance our expectations related to signed purchase agreements for COVID-19 antibodies. Currently, we expect minimal revenue from COVID-19 therapies in 2022 leading to more difficult year-over-year comparisons. As we do this year, we will provide commentary on our financials excluding the impact of revenue and certain expenses from COVID-19 therapies to enable a more meaningful year-over-year comparison of the performance of our core business. Regarding major drug pricing reform, our 2022 and mid-term outlook continues to be mid-single-digit net price erosion in the U.S. and globally, as the impact of lower utilization of the 340B segment moves into the base period as we enter Q4, 2021. We continue to invest in our bright future as we advance promising R&D opportunities and scale up to support exciting potential launches from our late-stage pipeline. While these investments may pressure operating margins in the near term, they are critical to maximizing pipeline opportunities to help sustain top-tier revenue growth and operating margin expansion over the mid to long-term. Now I will turn over the call to Dan to provide an update on our pipeline.

Thanks, Anat. Like 2020 before it, 2021 continues to be a very productive year for R&D at Lilly. Before I get into the broader portfolio update, I'll highlight several updates from our late-stage pipeline. Starting with Tirzepatide, we shared detailed results from the Tirzepatide SURPASS-4 study at EASD this quarter. SURPASS-4 is the largest and longest surpass trial completed to date, and we were encouraged by the continued hemoglobin A1C and weight control, which participants experienced even past the initial 52-week treatment period, continuing up to 2 years. Looking at slide 14, this shows the change from baseline in hemoglobin A1C over time during the study. A1C reduction plateaued by roughly 24 weeks and was maintained at 52 weeks and thereafter, to 104 weeks across all Tirzepatide doses. In the insulin glargine comparator arm, A1C began to increase after 52 weeks. Durability of A1C control is a challenge for type 2 diabetes treatments. While the 104-week data isn't a definitive answer as to whether Tirzepatide could potentially offer even longer-term durable blood glucose control, these data certainly are encouraging. Moving to slide 15, as you can see, weight loss plateaued at approximately 52 weeks and was maintained thereafter, such that at 2 years, weight difference at the highest dose was approximately 15% compared to insulin glargine. We've seen in previous incretin therapy trials conducted with GLP-1s a further increased impact on weight reduction in participants with obesity without type 2 diabetes compared to studies in participants who do have type 2 diabetes, such as this one. It will be interesting to see if this trend also extends to the dual agonism of Tirzepatide, which has demonstrated weight reductions in type two diabetes trials beyond what has been shown by GLP-1s to date. We clearly are excited about the weight loss potential here and believe the data to date bode well for upcoming readouts in obesity, starting with SURMOUNT-1 which reads out next year. Tirzepatide represents a new class of medicines, and we're focused on continuing our significant investment for patients with type two diabetes, obesity, and related metabolic disorders who may benefit from Tirzepatide. Moving to slide 16, today we announced the U.S. submission for Tirzepatide and type II diabetes, utilizing a priority review voucher with the intention of bringing this investigational treatment to patients as quickly as possible. We are delighted to see the continued progress for this novel dual agonist incretin and hope to obtain approval in the U.S. by the middle of next year. Moving to donanemab, we have several important updates for this program. First, in the U.S., we initiated a rolling BLA submission to the FDA for accelerated approval in early Alzheimer's disease. We intend to complete the submission in the next few months and expect regulatory action in the second half of 2022. We've also completed the originally planned enrollment of 1,500 participants for TRAILBLAZER-ALZ 2. Based on the pre-specified 18-month primary endpoint, we expect to have topline results by the middle of 2023. We've added a separate single-arm addendum for safety exposures to TRAILBLAZER-ALZ 2, which has already enrolled more than 300 patients and is continuing to enroll rapidly. This addendum will provide us with additional safety data to support the rolling submission. Moving to TRAILBLAZER-ALZ 3, this is a prevention study for cognitively unimpaired individuals who already have Alzheimer's brain pathology but don't yet have clinical symptoms. We're excited to report that we have already initiated screening. This pioneering trial has multiple novel elements to reduce research subject burden, including the use of our phospho-tau217 blood assay currently in development to help detect Alzheimer's disease pathology in the patient screening process. Video call technology for assessing cognitive function in the subject's home, and a large network of infusion centers that allow subjects to select the site most convenient to them in a decentralized clinical trial paradigm. We also announced today our plans to conduct a head-to-head Phase 3 study comparing donanemab to Aducanumab to assess superiority of brain amyloid plaque clearance in early symptomatic Alzheimer's disease. The co-primary endpoints will evaluate complete amyloid plaque clearance as measured by PET scan and will assess superiority on bringing amyloid plaque clearance in the total population as well as the intermediate population. This study TRAILBLAZER-ALZ 4 is expected to begin enrollment this year, and we expect to share primary endpoint data in the second half of 2022. We're encouraged by the progress we've made with donanemab and its potential to positively impact patients with high unmet medical needs. We have, of course, followed progress in the Alzheimer's disease landscape since our last call, and are watching closely as CMS's national coverage determination process plays out. We're committed to effectively communicating donanemab's clinical data and value proposition and ensuring that the diagnostic and patient management ecosystems are adequately well prepared. Given the current environment, we think it's reasonable to have modest expectations for the scale of patient impact for anti-amyloid therapies available under accelerated approval prior to the readout of their definitive Phase III data. Assuming potential accelerated approval for donanemab in the second half of 2022, our expected TRAILBLAZER-ALZ 2 phase three readout by mid-2023 would follow quickly, meaning the window of accelerated approval without definitive Phase II data is likely to be brief. Assuming positive Phase three results, we should be confident in the mid and long-term opportunity for donanemab if approved. Moving on to Verzenio, in-line with the expectations I outlined last quarter, we were pleased with Verzenio’s recent FDA approval as the first and only CDK4/6 inhibitor in combination with endocrine therapy for adult patients with HR-positive, HER2-negative, node-positive early breast cancer, who are at high risk of recurrence with the Ki-67 index of greater than or equal to 20% as detected by an FDA-approved test. This approval in the adjuvant setting represents the first new addition to endocrine therapy and adjuvant treatment of HR-positive HER2-negative breast cancer in nearly two decades. We're delighted to bring this important new treatment option to patients. Also, we recently shared updated data from the entire monarchE study at the ESMO Virtual Plenary meeting and co-published these data in Annals of Oncology. These data reflect additional follow-ups since our last public presentation and highlight the robustness and effect size we're seeing for Verzenio in the adjuvant setting. Notably, with a median follow-up of 27 months, we are pleased to see both IDFS and DRFS benefits extend beyond the two-year study treatment period. These data are important for patients and also help dispel concerns that the curves would come back together over time. We've clearly observed continued separation of the curves, if not expanding separation since the adjuvant approval two weeks ago. There have been questions regarding why the FDA approval applied only to a subset of the study population. As previously communicated, overall survival was a secondary outcome measure for the monarchE study and an important component of the FDA's review. However, we do not typically publish immature overall survival data; we feel it is valuable to address these important questions about the difference between the enrolled study population and the approved indication. As a result, while the overall survival data remain immature, we plan to publish data from the additional follow-up analysis, with cut-off of April 1, 2021, in a medical journal in the coming days. These data will show what we have observed thus far for overall survival trends in the ITT population compared to the approved population. We'll continue to follow patients in the ITT population for more mature overall survival data. If a positive OS trend emerges in the ITT population, we plan to work with regulators to expand our adjuvant indication. Importantly, the collective results from the Verzenio clinical development program have demonstrated a differentiated CDK4/6 inhibitor profile. We look forward to continued investment in Verzenio for breast and prostate cancer and are excited about the opportunity to serve more patients. Slide 17 shows select pipeline opportunities as of October 22 and slide 18 shows potential key events for the year. There have been several important developments since our last earnings call, and I'll cover these by therapeutic area. In oncology, in addition to the exciting news for Verzenio, we continue our investment in the Pirtobrutinib Phase III program, with an additional study starting in chronic lymphocytic leukemia, including fixed duration Pirtobrutinib plus Venetoclax and rituximab in relapsed or refractory patients. We plan to start a study in first-line treatment compared to bendamustine plus rituximab before year-end. We prioritize this first-line study rather than the head-to-head study evaluating superiority compared to ibrutinib as we think this first-line study could provide a faster pathway to bring Pirtobrutinib to patients in the first-line setting. We expect the head-to-head brutinib CLL study to start in the first half of 2022. We look forward to sharing updated data from the Phase 1-2 BRUIN study at a medical meeting later this year, and we plan to provide a regulatory update for Pirtobrutinib at our Investor Day in December. Our oral formulation, also moved into Phase 3, with the start of its monotherapy study compared to Exemestane or fulvestrant. Finally, we also publicly identified and presented preclinical characterization for two new agents at the Molecular Targets meeting this month: LOXO 783, which is a highly mutant-selective allosteric PI3K alpha inhibitor, and LOXO 435, which is a highly isoform-selective FGFR3 inhibitor. We look forward to filing IND for both programs in 2022 and subsequently moving them into the clinic. In diabetes, in addition to the Tirzepatide update, we obtained U.S. approval for Jardiance and HFpEF, presented detailed results from the EMPEROR PRESERVED study at the European Society of Cardiology, and submitted for HFpEF in the U.S. and Europe. We're excited about the opportunity Jardiance has to improve outcomes for patients across type II diabetes, heart failure, and chronic kidney disease. We also started Phase II studies for our GLP-1 non-peptide agonist in collaboration with Chugai in type II diabetes and in obesity, and look forward to sharing some Phase I data from this molecule in December. In immunology, we were delighted to have multiple positive Phase 3 readouts for lebrikizumab in atopic dermatitis, and look forward to the readout of the maintenance data from the ADvocate 1 and 2 studies in the first half of next year, ahead of global submissions expected by the end of 2022. We're pleased with our progress in immunology this year with positive Phase 3 readouts for mirikizumab and lebrikizumab, and look forward to sharing more about our next generation of early phase immunology assets in December. In neurodegeneration, our anti-tau antibodies Zachatenamab recently concluded its Phase 2 study in early symptomatic Alzheimer's. Zachatenamab failed to meet the primary endpoint and was unable to modulate tau spread in the brain. The placebo population progressed as expected. While this negative outcome was disappointing, and we're discontinuing development for Zachatenamab, we remain committed to tau as a high conviction target in Alzheimer's disease, and plan to continue studying tau biology, including inhibition of tau aggregation with a small-molecule OGA inhibitor currently in the clinic. In the pain therapeutic area, in collaboration with Pfizer, we discontinued the global clinical development program for tanezumab, following receipt of a complete response letter from the FDA for tanezumab in osteoarthritis pain and a negative opinion adopted by the CHMP. Finally, the FDA expanded the emergency use authorization for Bamlanivimab and Aducanumab administered together to include post-exposure prophylaxis in certain individuals for the prevention of SARS-CoV-2 infection. To recap, Q3 was another positive quarter for R&D at Lilly, continuing the positive momentum we've seen with a steady stream of significant pipeline advancements over the last couple of years. As we move closer towards our goal of delivering more faster best-in-class treatment options to patients in areas of unmet need. Now, I'll turn the call back to Dave for some closing remarks.

Okay. Thanks, Dan. Before we go to Q&A, let me sum up the progress we've made during the quarter. We have seen continued strength in our core business through the first nine months of the year, with double-digit volume-driven revenue growth net of COVID-19 therapies and strong performance across key brands. We're pleased to see sequential and year-over-year operating margin expansions, as well as strong non-GAAP earnings growth. We have made significant progress developing new medicines. Q3 was another important quarter for our pipeline as we announced the submission of Tirzepatide in type 2 diabetes, the initiation of a rolling submission for donanemab in the U.S. for early Alzheimer's disease, key lifecycle approvals, and submissions for Verzenio and Jardiance, and positive Phase 3 readouts for lebrikizumab. We returned nearly $800 million to shareholders through dividends in Q3, reflecting confidence in the ongoing strength of our business. As we move toward the close of 2021, we are confident in our long-term growth prospects. While the past year has seen tremendous advances in our late-stage pipeline, at our Investor Day in December, we look forward to sharing information with you regarding the next generation of assets that we believe will enable us to sustain the flow of innovative medicines to patients and augment our future growth prospects. Now I will 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. Louise, please provide the instructions for the Q&A session, and then we are ready for the first caller.

Great. Thanks so much for the questions. I guess the first one for me is just on some of the 2022 comments. I know you're not giving formal guidance yet, but should we be thinking about margin expansion next year from the roughly 30% or so margins that are implied in this year's guidance? I'm just trying to get my hands around how meaningful of a step-up in OpEx we should be thinking about supporting these major new launches coming next year. And the second one was just one related to the rollout of Aduhelm. It's obviously been a challenging launch. Are there learnings here or just changes about how you're thinking about your go-to-market strategy for donanemab? And I know Dan, you made some comments in the remarks, but should we be thinking about much in the way of revenue at all for donanemab? And I guess in that window between when it's approved and prior to TRAILBLAZER-2, I'm sure a sense of again, just as you look at what's happened, there have been surprises or changes in your thinking on the market. Thanks so much.

Thanks, Chris. We'll go to Anat for the first question on 2022 margin expansion and then on the thoughts about the uptake and outlook for donanemab.

Great, thank you. We will provide more details and guidance for 2022 in December, which is not too far away. We will also share our perspective on the year ahead, including the investments we plan to make and the challenges we foresee. Regarding our margin expansion and the targets we have communicated to achieve mid-to-high 30s in margin growth, we are confident in our ability to reach that goal. However, this growth will not be linear; there will be stronger years as we make targeted investments. This year, for example, we placed significant investment in donanemab when we believed strongly in its potential. As we prepare to launch promising opportunities and products, we will continue to invest accordingly. We aim for growth towards mid-to-high 30s, but recognize that it will occur in relation to our investment strategies.

Thanks, Anat. Ann?

Well, as Dan stated and as our competitor has shared, they've experienced there clearly is work to do to ensure that the diagnostic and the patient ecosystems are prepared for these medicines. Until there is definitive Phase III data, we do believe that we should expect modest use of these medicines. Now fortunately, as Dan said, for donanemab, this confirmatory data comes quickly in mid-23 for TRAILBLAZER-2. This will be the opportunity to really help patients on a more significant scale. Some of the opportunities here, certainly pursuing accelerated approval is really important, both to provide early access but also to let us begin addressing some of these infrastructure challenges ahead of the Phase III data. We need to build out the diagnostic ecosystem, particularly PET scans and blood tests. We need to ensure that there's adequate infusion capacity and, importantly, that there is reimbursement so that the appropriate patients can have access to donanemab. These will be our areas of focus now through our phase 3 window. We're confident in our ability to address these infrastructure challenges over time. By clearing plaque faster and deeper, we believe that, as well as identifying the right patients, we've optimized the chances for showing compelling benefits in the Phase III, which is what we said would lead to significant uptake in the class. We continue to see the same opportunity for donanemab in the mid to long term once these challenges are addressed and the confirmatory data is available.

Thanks, Ann. Chris, thanks for your questions. Next caller, please.

Hey guys. Good morning, and thanks for the question. I had two on Alzheimer's probably for Dan. For donanemab, would you expect completion of the rolling submission by the end of this year, and is there a regulatory threshold you need to hit in terms of the safety exposure? I'm just trying to think about the number of patients that you have to get exposed to it. And then for Zachatenamab, what are the next steps here? Is it moving to another anti-tau asset altogether, or do you want to optimize monotherapy Zachatenamab, or maybe even move forward in combination with donanemab? Thank you.

Thanks, Jeff. Dan.

Great. Thanks, Jeff for two good questions. The first is just on the timing of the completion of the donanemab rolling submission. I think you can assume we chose our words carefully here in the call prepared remarks on the timing. You're trying to draw out what's the regulatory hurdle with respect to safety exposures. You're right, that's the key gating factor on timing. You've heard we've enrolled a lot of patients in the clinical trials, including patients in safety addendum. So, we're extremely confident we'll reach that safety exposure hurdle. Looking forward, there are probably two risks or question marks. One is just around the timing of exactly when do databases get locked and data get cleaned and submitted to the FDA. So that's why we're a little vague on timing here. I think the second, of course, is that we don't know and won't know until all that data is in, what the safety will actually show. The assumption here, of course, is that they continue to be consistent with what we've seen in Phase 2. If those things work out, then I think that'll be the opportunity to talk a little more specifically about the data. With respect to Zachatenamab, look, I think we have a very potent anti-tau antibody designed against what we believe is an important species of aggregated tau delivered at relatively high doses compared to traditional monoclonal antibodies, and we were unable to slow the spread of tau progression in the brain. As presented, I don't see a path forward for this antibody and I would be reluctant to invest in any anti-tau antibody, given what we've seen here. Tau is still a great target; it's just hard to hit it with a monoclonal antibody, given that most of the tau that we care about is inside of cells.

Thank you.

Thanks, Dan. Jeff, thanks for your questions. Next caller, please.

Hi, thanks for taking my questions here. So my first question is, how are you preparing for the launch of Donanemab and Tirzepatide next year? And how should we think about the costs associated with that launch? And then the second question I had for you is, do you think it's the national coverage determination or the price of Aduhelm that is keeping doctors on the sidelines? Thanks.

Thanks. We'll go to Anat for the question on launch preparation and the overall costs for both Tirzepatide and Donanemab and how we think about that going into next year. And then we'll go to Ian for the question around the NCD and Aduhelm.

Sure. As we're preparing to launch both these medicines, one is in an area where we have significant commercial footprint, manufacturing scale-up capabilities, and the other is an area we're currently building. We're investing in advancing both of these efforts forward, preparing for the potential launch of Tirzepatide mid-next year, and then a regulatory decision on Donanemab by the second half of next year. Those will be factored into the guidance that we will provide on December 15th as we go into next year. Rest assured, we're building the commercial footprint that we need to launch these effectively and leveraging the existing footprint we have as well.

Thanks, Anat. Ann?

Well, it's a good question that you've asked, and I do think there's a number of things that are challenging here. I think as you look at donanemab, what's incredibly important is that we had a positive Phase 2 study that cleanly met its primary endpoint, showing cognitive benefits for donanemab, as well as the ability to share that we had limited duration dosing to plaque clearance. We believe that this will be important for the decisions that physicians and payers make. So I believe the donanemab data is incredibly strong. Following quickly the Phase 3 confirmatory data is also of importance, along with all of this being published in the New England Journal of Medicine. As we're talking to thought leaders and physicians, I do believe that they see the strength of the data that we brought forward for donanemab, and this has been a challenge that they've had with some of the competitive space. That said, I do think the NCD is playing a role; obviously, that will be resolved before we launch, and we will be ready for any of the potential outcomes there. I've been working closely with them along the way to make sure they understand the donanemab data, particularly the rapid clearing of plaques and the limited duration dosing that we think offers benefits to them as well. It's been a good conversation with them, and we look forward to what they have to say regarding CMS in January, launching with the strong datasets as Dan shared in the second half of next year.

Thanks, Ann. Louise, thanks for your questions. Next caller, please.

Hi. Thank you. I have a couple of questions on the pending NCD by CMS. So two questions. First, it's commonly said that this upcoming decision will pertain to the whole ABA class. I struggle to see how that can realistically be the case because that decision will be made on only one Company's mixed Phase 3 data, and there are still other really important informative Phase 3 datasets that are forthcoming. So wouldn't the NCD, whatever it is initially, potentially be revised later as CMS has more information from these additional trials? And then second, if this is indeed a decision that pertains to the whole class, and presumably Lilly has a view on what will happen in January. Do you expect CMS will say that Aduhelm and the class more broadly should be covered in a way that will be commercially meaningful? One can envision that there could be lots of restrictions that might limit the commercial market opportunities.

Thanks, Sam. We'll go to Ann for those questions on the NCD process.

Well, thanks. Good questions on the process for the NCD. CMS has been clear that the NCD, as they are running the process, is to cover the class. Now as I said, we are actively participating in the process, including providing oral comments in July and additional written comments in August. We'll be meeting with CMS throughout the process to share our specific data and ensure that the differences in these medicines are understood. We've asked them to evaluate each drug based on their data. This has been particularly important because there are differences between these drugs. We share the data later in the year subsequent to the original readout that the degree of donanemab plaque clearance relates to clinical benefit, which is very important to CMS in this decision as well as limited duration dosing. We look forward to seeing what they have to say in January and how the readout will look. We do acknowledge there's a lot of skepticism in the national discussion. Our hope is that we can influence that the drugs should be evaluated by CMS, payers, and prescribers based on their own data. It is possible that the NCD will narrow for the patients most likely to benefit. That’s a possibility stemming from this. But this aligns with our clinical trial designs, which has long been to use diagnostic tools to ensure that the right patients receive treatment. We'll look forward to the readout in January and continue to stay very engaged in this. I believe as additional data comes out, our data and others in the class will continue to influence the process.

Thanks, Ann. Tim, thanks for your questions. Next caller, please.

The noise coming out of Washington suggests that the Peters Bill, some of the components of that are gaining traction. Some of them are worrying components of price negotiations seem to be becoming more and more limited. I just wonder if you could share any thoughts on what you think, just take the Peters proposal on out-of-pocket costs could mean for Lilly and pharma in terms of increased volume without catastrophic coverage changes. And then second, could you comment on whether you're seeing neutralization of donanemab by the anti-drug antibodies that you see with prolonged usage? Is this one of the factors which is contributing to the finite treatment duration, or is neutralization simply not a concern here?

Thanks, Andrew. We'll go to Dave for the first question and Dan for the second.

Thanks, Andrew, for the question. Obviously, there’s a lot of talking and discussing going on in Washington about how to make medicines more affordable. I think we've been consistent in our view that both as Lilly, and I think I can speak for the industry, we are for progress, not for the status quo. The centerpiece of almost every part of legislation being discussed is, I think, good news for seniors is some reform to the Part D benefit. That is certainly highlighted in Representative Peters Bill, it's in HR-19, it was in the aggressive widening effort. It's I'm sure in the Senate Finance effort now, and I think that's good news. The contours of that are all different, but the general idea is that the industry would pay additional costs into the system, that that would reduce monthly out-of-pocket costs below and above the catastrophic phase cap, as well as eliminate the donut hole. I think we're generally supportive of those changes, believing they are good steps forward. Where the debate kicks in is around how to pay for that or whether the pay-from-the-industry funds should go to other healthcare priorities. Of course, we have clear positions on that. One piece of Peters Bill we don't like is the retroactive CPI cap. I think that's punitive and unfair. It also disproportionately impacts some types of medicines more than others. I think the industry is aligned, we don’t care for that. Generally, the idea of a CPI regulator on forward price increases is something people are accustomed to discussing. The thing we firmly oppose and why we're so against HR3 and other efforts is taking funds out of the pharmaceutical industry for other priorities. Isn’t drug pricing a significant enough problem? Why not take the money out of the pharmaceutical industry and give it to patients who want to buy our medicines? That’s been our position for a long time. I think this week has been very busy discussing this package, but we remain hopeful that some of these messages resonate, and we can land with Part D reform and a modest impact on the industry so we can keep innovating for the future.

Thanks, Dave, Dan.

Thanks, Andrew, for the question on anti-drug antibodies or ADAs. We do see ADAs with donanemab; they arise pretty early in treatment. However, there is no connection between the ADAs and our decision on fixed duration dosing. The reason for that is because the doses that we're using are much higher than the level of anti-drug antibodies. We do not see an effect in our clinical trials on PK or importantly on PD, which is the plaque clearance effect of donanemab, so there’s no connection there.

Thanks, Dan. Andrew, thanks for your questions. Next caller, please.

Thanks for the questions. So maybe first on the performance of Verzenio in the quarter and then your conviction that this market can accelerate moving forward now with the Ki-67 approval. We're hearing good things from physicians, but it just doesn't seem to be reflected in the opportunity that I think we all see ahead for Verzenio. As a separate question, I'm sure Mike Mason is tracking the opportunity in obesity very closely. Just wondering what feedback he’s gotten on the types of patients that are going on to Tirzepatide at this point and how Lilly is thinking about the opportunity in obesity, given the attempted acceleration of the launch of Tirzepatide with the PRB. And obviously, that's in diabetes, but just wondering when we might see a full launch in obesity, given all the trials. Thanks.

Thanks, Seamus. We'll go to Jake for the question on Verzenio and then Mike for the question on Tirzepatide.

Thanks, Seamus. Starting with Verzenio's performance this quarter, we experienced some inventory stocking in the channel during the second quarter, and this quarter reflected a slight reduction of that inventory. The fundamentals indicate that our NBRX share is around 30%, and we aim to continue growing that. We have yet to see the entire class of CDK46 inhibitors return to pre-COVID prescription levels. This is crucial for future growth and is likely tied to factors like mammogram volumes and other preventive care measures that help get patients diagnosed and in front of doctors. We are also increasing our share of NBRX in the market. Regarding the adjuvant indication, we are excited about launching this medicine for men and women with early breast cancer, particularly for patients with high Ki-67 levels. This represents a significant opportunity, although it's smaller than the entire study population from the monarchE study. We will conduct the next survival analysis next year, which could allow us to consider expanding to a broader patient population, depending on the outcomes we and the FDA are looking for. We see great potential ahead of us, with growth expected from our current position. The new indication represents a meaningful size in terms of both patient numbers and treatment duration. Achieving this potential is also connected to my earlier comments about patients returning to doctors for preventive care and getting diagnosed.

Thanks, Jake. Mike?

Hi, Seamus. First of all, you are one hundred percent right; we're looking very closely at the obesity opportunity for Tirzepatide. We're very excited about the weight loss that we saw in type 2 diabetes patients of up to 14% weight loss, and the potential of that being even higher in the obesity population. Obviously, just a massive unmet need: 110 million Americans live with obesity, but only about 3% of them are treated with some type of anti-obesity medication. We think the opportunity is huge, to really help people who live with chronic weight management issues. Our program has four trials in the SURMOUNT obesity registration program. Our first obesity trial will read out next year or SURMOUNT-1. We're very excited to see that that should happen in mid-next year. Then, SURMOUNT-2, 3, and 4 will wrap up in 2023. When you look at our obesity submission and approval, it looks like our approval in 2024 is the most likely outcome if everything goes well as we expect in our SURMOUNT program. We're very excited about all these launches; we think we've done a nice job. It’s not a surprise to us. We thought that what was holding back the current market was just that current products didn’t provide clinically meaningful enough weight loss. We thought if we had products in the marketplace that showed meaningful weight loss and good clinical outcomes for those living with obesity, that would position payers for providing access for it. It’s not going to develop overnight, but we're encouraged by the early launch, and we go big; we’re excited about Tirzepatide’s opportunity.

Thanks, Mike. Seamus, thanks for your questions. Next caller, please.

Hi, thank you for taking my question. Dan, I was very interested in the donanemab versus Aducanumab head-to-head trial. My question is about the primary endpoints related to amyloid plaque. Will the trial also be able to assess clinical efficacy on endpoints like CDR and some of the boxes? I ask this because I understand it's an open-label trial. Additionally, there seems to be quite a bit of investor discussion and maybe confusion regarding Lilly's messaging on the Innovent PD-1 launch in the U.S. The debate ranges from whether Lilly will be a dominant player to not so much. To clarify, what are your expectations? Do you foresee it being a significant PD-1 option in the U.S. market? Also, could you share your thoughts on whether data from Chinese patients would be a relevant commercial factor for U.S. oncologists?

Thanks, Umer. We'll go to Dan for the first question and Jake for the second.

Thanks. As for the question about whether the donanemab head-to-head trial will be powered to measure clinical efficacy outcomes, it will not be. It is a small and shorter trial. We won't be able to draw conclusions about that. However, I would point out that if we believe that plaque clearing is the appropriate surrogate the question will certainly be answered in the next year or 18 months as we get data from a number of Phase III plaque-lowering drugs. If it turns out that plaque lowering is an appropriate surrogate for predicting clinical efficacy, then I think the degree and speed of plaque lowering could be the basis of comparison across different Alzheimer's drugs in the same way that surrogates in oncology are used to compare different drugs in a class, knowing that the long-term outcome trials would have to be extremely large and long duration, powered for clinical outcomes. I would suggest we are expecting here a scenario where we’re really excited about this, expecting to have a positive Phase III trial for donanemab, which in itself is a differentiator from current competitors. So head-to-head on efficacy against Aducanumab may not actually be relevant.

Thanks, Dan. Jake.

Hey, Umer, thanks for the question. So, Sintilimab, the PD-1 inhibitor from Innovent, we brought into the Company specifically for the intent to disrupt the U.S. market starting with the United States and potentially moving to Europe as well. As we've said publicly over the past couple of months, the intent there is really through price predominantly versus other mechanisms such as rebating, etc. There are certain customers, certain practices, and care models for which this is going to be an attractive tool for lowering costs to their system. Unfortunately, for the way the system is designed today, for many channels a lower-priced option actually isn’t appealing. As to your question about whether we intend to be a dominant player, it’s hard for me to say that with any degree of assertion today. We will focus initially on the segments where this is an attractive option given their payer dynamics. Today, that’s not the majority by any stretch, but it will be our focus out of the development should Sintilimab be approved. On your second question regarding whether the data package generated for the agent will face issues with prescribers in the United States, our market research suggests that this won’t be an issue. Obviously, we haven’t launched or gotten approval yet, so I can't say with certainty, but our market research suggests it won’t be an issue. That said, what’s in front of us initially is just getting the drug approved. That's something we hope will happen early next year. But the drug will be subject to an advisory committee, and we await details of what that will cover.

Super helpful. Thank you so much.

Thanks, Jake. Umer, thanks for your questions. Next caller, please.

Good morning, and thank you for taking my question. Two of them. First thing with Umar's points around Sintilimab in the U.S.; essentially two parts on this one. First, any comments about FDA change in policy and using a China-only patient population as a basis of submission in the U.S? We've heard some things at conferences suggesting that there might be some change there. And second, on the same point, you've kind of talked about price as the dominant note here. I guess the question is more around your thinking process. You know, pharma has struggled for a long time in commercializing low-cost products and innovative products at the same company. If PD-1 should have a low-cost option, why not lebrikizumab? Why should those not follow a deep discounting strategy given the clinical profile versus other products in the same class? And second question, given the recent impact of interchangeable Lantus, can you discuss a little bit how the insulin market differs for fast-acting insulin? Assuming we will see interchangeable products there, how are the features of the market different? Would that also be a market more amenable to adopting interchangeable insulin?

Thanks, Ronny. We'll go to Dave for the first couple of questions around low-cost entrants and FDA policy, then we'll go to Mike for the question on the interchangeability of Lantus and how that can potentially impact a fast-acting insulin.

Sure. Happy to. Maybe before we go to me, Jake, do you have any comments on the FDA comments on China data?

Yeah. I think it's a good observation. We've observed the same thing. The tone from DC does seem to have changed a bit over the past 18 months on this topic. So I think we're hearing and reading in some ways, probably the same things that you guys are. We don't have a lot more information than that. So we await again the regulatory decision from the FDA about the acceptability of the package.

As it relates, Ronny, to the broader question about why not more everyday low-priced strategies in the main line pharmaceuticals, I mean, I think a couple of things come to mind here. First, I think in oncology in particular, it's often infeasible to run comparative studies. Once an incumbent is established, it's difficult to displace that incumbent. The one narrow exception might be what Jake highlighted with Sintilimab, where you could have a more price-sensitive segment. Here we have analogous data from a different country, conducted in a timeframe prior to other PD-1s being approved in that setting. This presents an opportunistic play. We have, of course, also pursued this in insulin. Mike can comment on that in a second. But basically, our launch to the 30% discount to the other insulin glargine and we've pursued our own low-cost authorized generic of Humalog, reducing the price effectively to 70% off the original brand. But here again, it illustrates the point Jake was making: Even in the retail side, it's not universally adopted. Today the half-price form of Humalog and the third off-price of insulin glargine we provide have minority market shares, and that’s a little counter-intuitive. But, we all know the incentives of the supply chain which tend to favor higher list price products, and that's where that shows up. Finally, you asked why we don’t pursue this for our whole portfolio. The overriding thought is to create differentiated datasets. One thing different from an authorized generic or Humalog is that they aren't differentiated datasets; they are more or less interchangeable. So when we create a new medicine, we're seeking to create something better. That's typically favored when pricing reflects that innovation. Of course, if there were big policy shifts that flattened gross to net or somehow, reduced the incentives of intermediaries, we'd take a look at that. Our goal would be to deliver lower cost points to consumers if we could. Right now, mostly the system rewards something else, and that's how we are forward planning for the portfolio that Dan was talking about. Maybe Mike has some final comments on insulin and interchangeability.

Yeah. Thanks, Dave. First of all, when we look at Semglee, it’s only interchangeable with the reference product, which is Lantus, not Basaglar. We think it's going to have more of an impact on Lantus versus Basaglar. You look at the mill time segments; the first reference product will be insulin aspart, not Lifpro. I think you also have to look at the similarities with interchangeable biosimilars. Many stakeholders in Washington believe that Semglee interchangeable insulin would launch at a significant discounted price. That hasn't been the case. The net impact of Semglee's interchange will lead to the introduction of a higher-priced presentation rather than a lower-priced presentation. The new presentation is priced at $269 a vial versus $99 a vial of the original Semglee, which is a 273% increase. What you're not going to see here, at least what we haven't seen in the insulin biosimilar space, is that the Semglee interchangeable will really disrupt the basal insulin market. Rather, it will allow it to compete in the traditional healthcare system. We’ve talked about gaps and issues we’ve been trying to fill with our insulin value program and the senior savings model. The mealtime insulin market is a bit more complicated. This requires more presentations than what you see with basal insulin. So, the mealtime insulin is a bit different than the case with basal insulin. Based on our price point on interchangeability, we don't think it's going to be truly disruptive to the system, but it will work within the current system where we feel we can strongly defend as our goal. Ultimately utilize our connected care launch.

Thanks, Mike. Ronny, thanks for your questions. Next caller, please.

Hi, thank you. Two questions. The increase in demand this quarter. Was that due to higher U.S. pricing relative to the UK or other markets? Also, just talk a bit more about the dynamics regarding the upcoming Adjuvant launch. Then secondly, on the Adjuvant situation, Novartis has commented on that call earlier today that the FDA has stated to them, that mentioning the base with IDFS would be sufficient. I’m curious if you think there might be any relaxed approach from the FDA.

Kerry, you were breaking in and out, but I think these are for Jake. The first question, Jake, if you didn't catch it, was about quarter-on-quarter revenue and whether that was affected by pricing in the CDK46 market or rather the stocking point you made earlier. Then I think the second point was about IDFS versus OS in the FDA 's policy.

Yes. On the first point, yes. The sequential quarters are really mostly related to the inventory stocking and destocking point I made earlier. We haven't seen a ton of fluctuation in price. On your comment about Adjuvant, I can't comment on the back and forth that Novartis had with the FDA; I'm just obviously not privy to that. That said, what you framed in your question, doesn't sound particularly different than the conversations we've had with the agency. As Dan mentioned in his prepared remarks, we've received questions around the nature of the approval in the subgroup versus the enrolled population amongst our relevant studies. We plan to publish in the coming days the actual OS data that were part of the regulatory submission. You'll see what those trends look like in both the ITT population as well as approved subgroups. Again, trends in one direction or another for you to interpret. But I don’t believe the Novartis feedback from the agency differs significantly from what we've received.

Thanks, Jake. Kerry, thanks for your questions. Next caller, please.

Okay. Great. Thanks. I was just wondering if you could comment on lebrikizumab and your sort of views on the market, in particular, now that you've seen the OX40 data from Amgen. If that has any impact on how you think about the longer-term potential of that market.

Thanks, Matthew. We'll go to Patrick for the question on lebrikizumab.

Well, thank you very much for the question. We're encouraged by the initial data on lebrikizumab, where we saw more than 50% of patients treated with lebrikizumab achieving an EASI-75, and that we met all the key secondary endpoints. We believe that we have an opportunity here to launch a best-in-class treatment. We're looking forward to the 52-week data based on the ongoing trials and potential submissions in the second half of next year. In terms of OX40 data, it doesn't change our outlook for lebrikizumab. We believe we have a best-in-class IL-13 product, and we know there is a significant unmet need, and that currently, biologic penetration in this market is still very low.

Thanks, Patrick. Matthew, thanks for your question. We'll wrap up our Q&A. Go to Dave for our close.

Great. Thanks, Kevin. We appreciate your participation in today's earnings call and your interest in our Company. We continue to grow our broad commercial portfolio with strong momentum in our core business, supported by key brands and accelerating classes. This is complemented by a compelling pipeline with industry-leading opportunities. We remain focused on bringing new medicines to patients and creating value for all of our stakeholders. Thanks again for dialing in, and please follow up with Investor Relations if you have any questions we did not address on the call, and hope you have a great day.