Eli Lilly and Company (LLY) Q4 2007 Earnings Report, Transcript and Summary

Ladies and gentleman, thank you for standing by, welcome to the Q4 '07 earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time [Operator Instructions]. I would now like to turn the conference over to Phil Johnson. Please go ahead.

Good morning and thanks for joining us for Eli Lilly and Company's fourth quarter 2007 earnings conference call. I'm Phil Johnson, Executive Director of Investor Relations and I'm joined today by Derica Rice, Lilly's CFO and by John Lechleiter, Lilly's President and COO. As we announced in December, John will be succeeding Sidney Taurel as CEO effective April 1. Sidney will continue in his role as Chairman of the Board until his retirement at the end of the year. 2007 was a very strong year for Lilly and in the course of our call this morning we will highlight important positive trends in our business, including double-digit sales growth, driven primarily by volume with strong performance across many geographies and products, operating leverage with EPS growing faster than sales, strong cash flow, numerous business development transactions that have provided Lilly with access to exciting molecules and an increase of nearly 50% in the number of compounds in the clinic. You can access the earnings press release and supporting materials, a live webcast, an Internet-based replay and for the first time a podcast of this conference call at lilly.com. The replay, the support materials, and the podcast will be available on our website through February 29, 2008. During this conference call, we anticipate making projections and forward-looking statements that are based on management's current expectations but actual results may differ materially due to various factors. For example, our results maybe affected by competitive developments, the timing and success of new product launches, regulatory and legal matters, patent disputes, government investigations and governmental actions regarding pricing, importation, and reimbursement, changes in tax law, acquisitions, business development transactions, and the impact of exchange rates. For additional information about the factors that affect our business refer to our Forms 10-K and 10-Q. In addition, 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. Now, let me turn the call over to John to give a recap of our major accomplishments.

- President and Chief Operating Officer: Thanks Phil. At our Analyst Meeting in early December we discussed our strong operational performance across products and geographies and we described the emphasis we are placing on execution. With the year complete, you will see that our efforts are translating into outstanding financial results. 2007 was one of the strongest years we've had in sometime and we intend to carry this positive momentum into 2008. Before we go into the detailed results for the quarter, let me provide an overview. As we have done in prior calls, I will focus my comments on the pro forma adjusted results, which we believe provide insights into the underlying trends in the business. This view assumes we owned ICOS as of January 1, 2006, and it excludes some items. Later in the call, Phil will provide details on these specific items excluded, as well as reconciliations between reported and pro forma adjusted results. Slide two, summarizes major achievements for 2007. To begin, let me recap the financials. Fourth quarter pro forma sales grew 16% and nearly half of this growth was from volume. For the year, pro forma sales growth of 14% was leveraged into even greater EPS growth as we delivered pro forma adjusted earnings per share of $3.54 at the upper end of our guidance range and a robust 17% increase over 2006. Cash flow was also strong. We generated $5 billion in operating cash flow enabling us to complete $3 billion of business development transactions in 2007 and to raise our dividend 11%. The other achievement I would like to highlight relates directly to my top priority as incoming CEO advancing our pipeline. We have the strongest mid-stage pipeline in our history and the efforts of Steve Paul and our research organization in 2007 resulted in some significant achievements. 16 New Molecular Entities entered clinical testing increasing our in the clinic portfolio nearly 50% to 44 NMEs. We received approval for five important new indications or line extensions for Cymbalta, Evista, Cialis, Byetta, and Humalog. Along with our partner Daiichi Sankyo, we completed the TRITON study on Prasugrel and submitted what we believe is a very compelling data package to the FDA on December 26 achieving our aggressive goal of submission before the end of the year. And we are poised to bring 14 more NMEs into the clinic in 2008, as well as start a number of important Phase III trials. Let me turn to another important aspect of our performance and that's operating leverage. Slide 3, characterizes the growth in sales relative to OPEX and the trend of our gross margin percentage. Recall that the line represents the gross margin percentage overtime. The bars represent the spread between sales growth percent and OPEX growth percent. During periods in which sales are growing faster than OPEX, the bars are positive and vice versa. Our full-year 2007 results continue the positive leverage trend. For the year, sales grew 14% versus 12% for total operating expenses. For the fourth quarter, however, total operating expenses grew 1 percentage point faster than sales, driven by substantial marketing investments. Previously, we have indicated that while we intend to grow sales faster than costs and expenses, there maybe quarters in which this does not occur because of investments we choose to make. In the fourth quarter, we made significant investments in our DTC program for Cymbalta, substantial U.S. and OUS investments in our insulin business, a pilot DTC program for Byetta, promotional efforts for launching the invasive breast cancer risk reduction indication for Evista, preparation for the potential fibromyalgia indication for Cymbalta, and we conducted a number of promotional pilots to identify other approaches to our marketing mix. These investments underscore our commitment to two things; first, accelerating the growth of existing products and indications, and second, adequately preparing the launch of new products and indication. On the first objective, we are pleased with our investments in Cymbalta, a product which gained market share more rapidly than either of its branded competitors yet again in the fourth quarter. Conversely, our DTC investment in Byetta did not fully meet our expectations. The DTC campaign did however, provide useful learning that we will apply to our future marketing efforts. We will aggressively trim expenses from our base to make way for increased investment in those products and initiatives that show the most promise. Again, we are intent on continuing to generate positive operating leverage and to improve productivity company-wide. At the same time, we will continue to make appropriate investments to drive future growth. Let me also take a moment to discuss the gross margin. You can see that for the full-year, the gross margin percent declined slightly from 2006. While we originally expected to see a slight increase in the gross margin in 2007, the impact of foreign currency exchange rates was the main driver for the slight decline. In addition through tight control, we have reduced the days of inventory on hand. While this effort clearly helped our working capital position, it does have a temporary depressing effect on gross margins due to higher variances. Importantly, our productivity initiatives are paying off throughout the company, nowhere, more so than in manufacturing. As an example, we ceased production at our Basingstoke manufacturing site in December 2007, six months earlier than originally planned. During 2007, including the fourth quarter, our manufacturing expenses grew significantly slower than sales. These trends and ongoing initiatives drive our expectation for a modest improvement in the gross margin percentage in 2008. Let me conclude my remarks with a highlight of how individual products as shown on slide four are contributing to our volume growth. As an example of how to read the graph, Cymbalta contributes 3.6 percentage points of the 8% total volume growth. Alimta contributes 1.4 percentage points and so on. Underlying demand trends are strong and reflect the considerable effort we have placed on execution for every brand in every region of the world. Now let me turn the call to Phil to give a more in-depth review of results. Phil?

Thanks John. Slide 5 shows key events over the last three months. In pipeline developments, on December 26, 2007, Lilly along with partner Daiichi Sankyo submitted a new drug application for prasugrel to the U.S. Food and Drug Administration. The proposed trade name for prasugrel is Effient. The submission follows the release of results of the TRITON TIMI-38 Phase III head-to-head study of prasugrel versus clopidogrel in November. In November, the FDA approved Cymbalta for the maintenance treatment of major depressive disorder in adults. In January 2008, the FDA approved Cialis for once-daily use to treat erectile dysfunction. In October, Lilly along with partner Amylin and Alchemies announced results from the pivotal study of exenatide once weekly showing that the once weekly formulation demonstrated superiority in glucose control over Byetta. Submission to the FDA is expected by the end of the first half of 2009. On the business development front, in October, Lilly acquired the rights to a portfolio of transient receptor potential vanilloid sub-family 1 or TRPV1 antagonist molecules including a clinical compound GRC 6211 from Glenmark Pharmaceuticals. GRC 6211 is currently in early clinical Phase II development as a potential next generation treatment for various pain conditions including osteoarthritic pain. In December, Lilly entered into licensing and development agreement with BioMS Medical granting Lilly exclusive worldwide rights to BioMS Medical's lead multiple sclerosis compound, MBP8298. The compound is currently being evaluated in two pivotal Phase III clinical trials in secondary progressive MS and one Phase II clinical trial in relapsing-remitting MS. The transaction closed earlier this month. Moving on to review financial results for the quarter, worldwide pro forma sales grew 16% to $5.190 billion. We will begin with a review of the sales performance of selected products and then discuss the other line of the income statement. Slide 6 shows worldwide Zyprexa sales increased 10% to $1.274 billion. Sales in the U.S. increased 11% to $609 million due primarily to higher prices and increased volume of variations in wholesaler buying patterns. International sales increased 10% to $665 million due to the favorable impact of exchange rates. The impact of generic competition in Germany and Canada offset increased demand in other markets leading to OUS Zyprexa volume being essentially flat versus Q4 2006. Moving to Slide 7, Cymbalta sales in the fourth quarter was $628 million, up 48% compared with the fourth quarter of 2006. U.S. sales increased 45% to $547 million due to strong demand and to a lesser extent increased prices. International sales totaled $81 million, an increase of 70% over the prior year and an 18% sequential increase over Q3. Slide 8 shows worldwide Byetta sales for the quarter were $184 million, a 34% increase driven by demand. Lilly reports half of the gross margin from U.S. sales of Byetta plus sales of pens to Amylin. Total Byetta revenue recognized in Lilly’s income statement was $92 million, a 34% increase. On Slide 9, Humalog, sales grew 18% to $414 million. U.S. sales increased 10% to $249 million, reflecting higher demand and increased prices. Sales outside the U.S. increased 32% to $166 million driven by increased demand and the favorable impact of foreign exchange rates. On Slide 10, Humulin sales for the quarter were up 6% to $273 million driven primarily by the favorable impact of foreign exchange rates and higher prices both in the U.S and internationally partially offset by lower demand in the U.S. Slide 11 shows worldwide Cialis sales. Global sales were up 29% to $346 million in the quarter. Sales in the U.S. were up 24% to $133 million due to higher prices and increased demand while sales outside the U.S. increased 31% to $213 million driven by increased demand and the favorable impact to foreign exchange rates. Moving to Slide 12, Alimta sales in the fourth quarter were $244 million, an increase of 42% over Q4 2006. U.S sales increased 33% to $126 million due primarily to increased demand. Sales outside the U.S. were up 54% to $118 million due to increased demand. Slide 13 shows quarterly Forteo sales of $198 million, up 15% over Q4 of last year. U.S. sales were up 12% to $138 million primarily due to higher prices partially offset by lower volume caused by variations in wholesaler buying patterns. International sales of Forteo were up 24% to $60 million due to the favorable impact of foreign exchange rates and higher demand. Slide 14 shows the revenues from the products Lilly has launched this decade. Alimta, Byetta, Cialis, Cymbalta, Forteo, Strattera, Symbyax, Yentreve, and Xigris. On a pro forma basis these products grew 30% reaching $1.7 billion or 33% of our sales. On a recorded basis, sales of these products grew 55% in Q4. Before taking a look at the rest of the income statement, let's look at the impact of price, exchange rates, and volume on the sales results. A summary by geography on a pro forma adjusted basis is shown on slide 15. For the quarter, Lilly sales growth of 16% was driven by a volume impact of 8% and a favorable impact of 4% each from exchange rate and price. For the year, Lilly sales growth of 14% was driven by a volume impact of 7%, a 4% favorable impact from price, and a 3% favorable impact from exchange rate. For your information, slide 16 shows the impact of price, rate, and volumes on our reported basis. For the quarter, Lilly’s reported sales growth of 22% was driven by a volume impact of 15%, a favorable exchange rate impact of 4%, and a favorable price impact of 3%. Now, let's look at the rest of the income statement. The acquisitions of ICOS create some complexities when comparing financial data across years. Consistent with the approach used in prior quarters, we will provide two views of the results to facilitate analysis. Slide 17, provides the summary of these views. The reported results for each year include all financial results as reported according to Generally Accepted Accounting Principles. Consequently, the impacted the ICOS acquisition appears in reported results as of the acquisition date up to and including January 2007 reported results reflect our earnings from the Lilly ICOS joint venture and other income and deductions net of tax. Subsequent to the ICOS acquisition, so beginning in February 2007, all ICOS and Cialis related revenue and expenses are shown in their respective lines of the income statement. Another view of the results is also being shown pro forma adjusted; this view is intended to show the trends in our ongoing operations and to provide comparable data across years. The pro forma adjusted results reflect the reported income statement adjusted to exclude charges such as the restructuring of our manufacturing operations, the reduction and expected insurance recoveries, and the 2007 in-process R&D charges from the acquisition of ICOS, Hypnion, and Ivy and the in-licensing deal with OSI, MacroGenics, and Glenmark. Reported results are also restated utilizing GAAP methodology as of Lilly owned ICOS for the entirety of each comparison period. By incorporating the impact of the ICOS acquisition into both periods, we are better able to gauge performance across time. We will focus on pro forma adjusted results as we feel it provides better insight into the underlying trends in the business. Slide 18, shows the pro forma adjusted income statement. Gross margin as a percentage of the sales in the fourth quarter was 75.5%, a decrease of 60 basis points compared to Q4 2006. This decrease was primarily due to the impact of foreign exchange rates offset in part by manufacturing expenses growing at a slower rate than sales. Overall, operating expenses increased 17% in the quarter. SG&A was up 23% to $1.8 billion for the quarter. The increase was primarily due to increased marketing expenses and support of key products, primarily Cymbalta, Humalog and Byetta, and the impact of foreign exchange rates. R&D expense grew 7% to $954 million or 18% of sales. The increase was primarily due to increase in discovery research and late-stage clinical trial costs. For your information, we have provided a reported earnings statement on slide 19. Details about our reported earnings are available in our earnings press release dated today January 29, 2008. Slide 20 shows fourth quarter other income and deductions, which contributed $32 million, a decrease of $7 million. The adjusted effective tax rate was 20.4% for the quarter. To help investors better understand the underlying trends in our business, slide 21 shows the adjustments made to reported earnings per share in order to arrive at pro forma adjusted earnings per share. To calculate pro forma adjusted earnings, Q4 2007 reported earnings have been adjusted for the $98.2 million pre-tax charge or $0.07 per share for asset impairments, restructuring related to previously announced site closures, and other special charges related to Zyprexa product liability, including settlements, reserves for claims not covered by settlements, and defense costs. In December, Lilly settled more than 900 Zyprexa claims. For those folks who are tracking the number of claims settled approximately 150 of these claims had previously been filed and were reported in our third quarter 10-Q. Approximately 1,200 Zyprexa product liability claims remain outstanding. We also adjusted for the $89.0 million pre-tax charge or $0.05 per share for acquired in-process R&D for compounds acquired for MacroGenics and Glenmark. And no pro forma adjustments are required to Q4 2007 results as we owned ICOS for the entire period. The full-year 2007 reported earnings have been adjusted for the following pre-tax charges. A total of $221.2 million or $0.15 per share for asset impairments, restructuring and other special charges, $81.3 million or $0.06 per share for charges related to an adjustment to insurance recoverables on Zyprexa product liability, the $745.6 million or $0.63 per share charge for in-process research and development related to the acquisition of ICOS, Hypnion, and Ivy and the in-licensing agreements with the OSI, MacroGenics and Glenmark. Finally, year-to-date 2007 results are adjusted by $0.01 per share to show the pro forma impact as we owned ICOS for the entire period. Now, let me turn the call over to Derica to update you on our financial guidance.

Thanks, Phil. Slide 22 provides a summary of our 2008 financial guidance on a pro forma adjusted basis. The guidance is unchanged from the guidance we provided in early December at our Analyst Meeting. We expect sales to grow in the mid-to-high single-digit driven primarily by increased volume and strong sales growth for Cymbalta, Cialis, Byetta, Alimta, and Humalog. Gross margin as a percentage of sales is expected to improve modestly compared with 2007 driven primarily by manufacturing expenses growing slower than sales. We expect total operating expenses to grow more slowly than sales with growth in the mid-single-digit. Marketing, selling and administrative expenses are expected to grow in the low-single digits driven by investments in prasugrel, Cymbalta, Humalog, Byetta, and Evista for invasive breast cancer risk reduction, offset by reductions in other areas. Research and development expenses are forecast to grow in high single to low-double digits. We expect other income to contribute less than $100 million. While it is likely to vary quarter-to-quarter we also expect the effective tax rate for the full year to be approximately 23% assuming that R&D tax credit is extended. At the bottom line, we expect pro forma adjusted earnings per share to fall within the range of $3.85 to $4 per share. Compared to 2007 pro forma adjusted EPS of $3.54, this represents growth of 9% to 13%. Capital expenditures are projected to be $1.1 billion. Finally, recall that as we announced mid last year, we will no longer be providing quarterly financial guidance. We realized that financial estimates will be produced by those following our stock. However, we will not comment on the accuracy of these estimates. We believe the detailed guidance we provide for the year and the updates to this guidance we provide in the quarterly calls are the appropriate level of detail. Now this concludes our review of the fourth quarter and we will now be happy to take your questions. Operator, first caller please. Question and Answer

Thank you. [Operator Instructions]. Our first question is from the line of David Risinger from Merrill Lynch. Please go ahead.

Yes, thanks very much. Thank you for all the detail on the financial results. Just looking forward to next week, could you please preview the Zyprexa Depot panel and help frame that for us? Thank you.

David, I'll try to tackle that one. The panel will meet on February 6. Clearly this is going to be, we think an important addition to the medicines we have available for treating schizophrenia. It should be... if approved the first product of this type, it has the full four-week duration. So, we think that Committee is going to be interested in looking at the data in terms of how a patient switched over, they are going to want to see the… look at the efficacy data and then of course, they are going to want to consider the benefit of... the balance of benefit and risk as they consider this small reported rate of inadvertent intravascular administration that we talked about in New York and that we've seen to a small extent in the ongoing clinical trial. So we think that's going to be the kinds of things that will be considered that day.

Next caller please.

Thank you. The next caller is Catherine Arnold from Credit Suisse. Please go ahead.

Thanks very much. Today, you gave us two surprises. One was that sales are really strong both in the U.S and international market and that's great. However, expenses were also much higher than market forecast. And so, was that... as a backdrop, I noticed that you have not changed your expense guidance for '08 and I wondered particularly because it is going to be about half of what you experienced in '07, could you comment on why we should feel confident that your expense guidance is realistic and could you give us some color on whether or not they’re in a [inaudible] that you can decrease to offset any future or increased investments or Six Sigma effects and so forth? Thanks.

Hi Catherine, this is Derica. We are absolutely confident that we will be able to continue the operating leverage in 2008 that you saw in 2007. And as Phil said in some of the opening remarks and we actually talked about this in December as well in New York. When we moved away from giving quarterly guidance, we don't run our business kind of March to April. So we will look for the opportunities to make the right investments in the business and so if you look at where we put those expenses in the fourth quarter behind some products like Cymbalta, Humalog, Cialis. In the case of Cymbalta, we gained 30 basis points in share of market in the fourth quarter. For Cialis, we gained 60 basis points in share of market in the fourth quarter. And as John highlighted in his comments, we didn't quite achieve the goals we had set for ourselves in regards to the Byetta DTC but we will continue to make those kinds of investments where we think we have the opportunity to further drive the topline, which you saw. Now on the flipside, we believe we also have continuing opportunities to further trim expenses and drive our productivity agenda. We are still committed to reducing headcount. This year in 2007, we reduced our headcount by over 900 employees and by the way we also were able to complete some of our manufacturing restructuring earlier than we thought such as Basingstoke, which we completed by the end of the year. So that combined with Six Sigma of achieving at least $750 million of expense savings in 2008, we believe we can continue to drive the operating leverage while making the appropriate investments in the business.

One other thing we had mentioned Catherine at the December call, you’ve heard us mention on number of occasions is putting up as many of our resources as possible into customer phasing role. So within that SG&A index, I think it's safe to assume that there would be priority placed on the selling and marketing expenses that are directly going to impact customer perception of our products and use of our products and we would be attacking even more vigorously those expenses that our non-customer phasing typically in G&A areas.

Next caller please.

Thank you. We go to the line of Chris Schott from Banc of America. Please go ahead.

Great, thank you, just a couple of quick question on Zyprexa. First, can you quantify the impact of the wholesaler buying patterns on this quarter, may be just where inventory levels currently stand and again should we expect any kind of reversal in Q1? And then on the Zyprexa international business in Canada and Germany were you’re seeing of the generic competition, how much of erosion are we seeing in those markets at this point? May be you can quantify the sales in those markets may be versus Q4 '06? And again, as we go into 2008 should we expect generic competition to intensify there or are we kind the seeing the full impact at this point? Thanks.

Thanks Chris. I'll go ahead and take your question. Essentially for the wholesaler movement, in total for the U.S. business in the quarter it really was quite minimal. We did see a little bit of buying in Zyprexa and a little bit of draw down of inventory at the wholesalers’ for Forteo but really we are talking very, very small numbers here and nothing that would be out of average or normal we would expect to see for days on hand at various wholesalers. For your question on Canada and Germany, Deric, you want to go ahead and take that one?

Sure. Chris, in Germany and Canada, today we see about 50% of the prescriptions in those two markets are generic prescriptions. So that's the impact that we are seeing. In regards to quantifying them, the guidance that we give or the insight we've given previously is that if you look on a total year basis, going back to 2006 which was the first... the last 12 months where we saw no generic impact the sales in Canada was about $250 million and the sales in Germany were about $180 million. So that will give you a kind of a reference point.

A little more color may be on what is happening in those markets as it’s helpful to you. In Germany, you may be aware if was not until mid-November that generics were introduced. We actually saw generics introduced by a number of companies both for the base tablet, as well for the rapid dissolving or dispersible tablet. As Derica mentioned, by the end of the year they had gone to about 50% of the total scrip. In Canada, it's a bit different. As you know in mid July we had Prince Edward Island and Ontario that went generic. We since had Alberta join that mix. All three of those provinces essentially do not reimburse the branded. So you've got probably 90% conversion in terms of scrips over to generic. Quebec is the other province in Canada that has gone ahead and authorized generics. However, they will continue I think through 2013 to reimburse the branded as well. That also didn't occur until late in the year, I believe in the December timeframe, but at the end of the year there was about 10% of the scrips that has shifted over to generic. And in Canada there are no generics for the rapid dissolving order or disposable and that continues to grow nicely there.

Next caller please.

Thank you. Next question is from Tim Anderson from Sanford and Bernstein. Please go ahead.

Thank you. On prasugrel, did you guys file with both the 5 and 10-milligram maintenance dose? And what data on prasugrel is coming out at ACC? And on the multiple sclerosis compound when might we see Phase III data?

Tim I'll go ahead and try and take your questions in order. For prasugrel, we submitted data from the Phase II and Phase III. Obviously they would have included 7.5, 10, and 15 on the maintenance dose. There was additional data submitted not from those particular studies on the 5-milligram as well. The ACC… I’m not aware, I’m not sure if you are John of any updates. I know there may be another upcoming venue at which one of the gentleman from BioMs will be speaking. We are waiting finalization of content of what may be presented there if we can pass that along to you. And right now it's too early for us to comment of our next phase of development for VMS product we've got from BioMs.

On the BioMs product, I will just add we've got... there are two Phase III studies ongoing for so-called secondary progressive disease and there is a Phase II program also for relapsing/remitting. So there's probably going to be a continuous stream of data coming out of those studies over the next few years.

Next caller please.

Thank you. Our next question is from Jim Kelly from Goldman Sachs. Please go ahead.

Great. Thank you very much. Just looking at some of the pipeline dates that were discussed back at the December meeting, I know we are only about six weeks beyond that but there were lot of dates for the first quarter and the first-half and I don't if there has been any updating or tightening of some of the timelines around things whether it's a [inaudible] or gamma-secretase Phase III initiation etcetera. Do you have any updates on events in the next couple of months? Thank you.

I think a couple of updates, you may've heard on Amylin’s call yesterday, the first of the additional three studies that we have mentioned has begun enrolling. We did get a little more precise, I believe out in San Francisco on timings for the gamma-secretase initiation. We'd expect that essentially… the first patient visit is probably late March, early April. Those are the two updates I am aware of since the December timeframe. John?

Jim, I think though in large measure as we look across the activity this year there certainly hasn't been any slippage since we talked to you last. So we are continuing to track not only the line extensions, the new indications but some of the potential Phase III entries including gamma-secretase very closely.

Next caller please.

Thank you. Our next question is from Roopesh Patel from UBS. Please go ahead.

Thanks. John, I was just wondering if you could kindly address the pricing environment in the U.S. market. It appears that the industry in general including Lilly has really been able to push through healthier price increases than have been seen in the past several years. That doesn't seem to imply a very tough pricing environment as is present and I would appreciate your views on that? And then separately if you could also address the growth outlook for the animal health business, I noticed there has been sequential acceleration in growth during this fourth quarter. What's driving that and should we expect that to continue into the 2008 quarters? Thanks.

I think the pricing environment in the U.S. remains challenging; it's probably going to be… we expect going forward a bit more challenging due to a variety of dynamics, including obviously the entry of more generic product alternatives into the mix. We have taken, I think a very responsible approach to this and we’ve judged the price of our products, made decisions with respect to price increases based on the value that we believe these bring and obviously as we deal with large payor customers too many… in many cases there is as you know a contracting negotiation process that ensues and we want to make sure that we, in any decision we make or able to maintain good access through these important large payor channels. With respect to animal health, you saw a big volume growth number in the fourth quarter but half of that volume growth came out of our core food animal business. About a quarter of that total, I think it was 21% volume growth came from the acquisition of Ivy Animal Health which we did in the first half of the year and then the other quarter came from the Companion Animal business, the launch of Comfortis in the fourth quarter of the year. So, our animal health business had a good year and I think the acquisition of Ivy and also the continued development of this Companion Animal business is going to continue to augur well for that portion of… for that business unit.

Next caller, please.

Thank you. Our next question is from the line of John Boris from Bear Stearns. Please go ahead.

Good morning and thanks for taking the questions. Derica, can you tell us what the gross margin in SG&A in the fourth quarter and full-year '07 would have been without the impact of foreign exchange? And then, on your '08 guidance, you are expecting only a modest improvement in gross margin, when your volumes are fairly robust and the pricing environment in '08 seems to be pretty healthy can you help us understand with little bit more granularly what's going on there?

Hi, John this is Derica. I can't give you too many specifics other than to say if you were to take a look at the foreign exchange impacts in the fourth quarter on our gross margin, the impact alone if we hadn't had it, if we’re excluding we would have had improving gross margins much like you saw in the first nine months of the year. Okay, so I think that will give you a little bit of sight there. If you look at our operating expense growth, I don't have the exact detail in front of me in terms of… if you look at SG&A, the 23% how much of that was FX related. Phil, I don't know if…

I believe in terms of the Q4 '07 to Q4 '06 [inaudible] magnitude you apply talking around 20% to 25% of that increase being FX. And in the terms of '08 gross margin, we will continue to see some compression on the gross margin as a percent of sales given the… particularly the rate that we are seeing the Euro at currently. Next caller please.

You next question is from Jamie Rubin from Morgan Stanley. Please go ahead. Jamie Rubin – Morgan Stanley: Thank you. I just want to follow up on an earlier question related to U.S. Zyprexa sales. John, I’m still really puzzled that the size of the gap between total prescription declines and your revenue… your actual revenues reported and this quarter it seems that the gap is about as wide as it’s ever been about 19 percentage points. Maybe my math is strong but based on the data we are seeing total prescriptions were down about 8% in the fourth quarter. So you also say that, that you are not… no longer getting a dual benefit pricing bump as you did for much of last year and part of 2007. So, can you provide better clarity on what is happening with the pricing environment, because clearly a big part of the upside for Zyprexa for a number of years and that seems to continue has been on the price side? Thanks.

Hi Jamie, this is Derica. Let me try to may be provide a little more color around Zyprexa. Recognize when you are looking at the scrip data IMS, you are picking up the retail. The piece that you are not picking up is the institutional segment. And if you recall, in our repositioning of Zyprexa about 18 months ago, we began to focus on the urgent patient, which is primarily focused on the institutional setting. So that may be described… why you see the difference between the scrip trends that you are seeing that's retail focus versus the volume trends that you're seeing in our reported results. And then also from a pricing standpoint, because we've the repositioning and the urgent patient need, we believe, we have got a much better balance in terms of the value proposition to the clinician and the patient.

The two other factors that would have affected the full year really, and then one that would have affected, I guess may be Q4 in particular for Zyprexa, you had a shift over the course of 2006 to 2007 as we have gone after the urgent need patient from lower dose to higher dose forms of Zyprexa, which helps volume, essentially Jamie, as we measure it which is in kilos. The other thing we did see again, it was not a large impact in overall dollar terms, but there was a slight benefit to volume in Q4 because of the variation in the number of days that the wholesalers were carrying at the end of December.

Next caller please?

Thank you. Tony Butler from Lehman Brothers. Please go ahead.

Thanks very much. John, just going back to an earlier question, is it the goal of Lilly and Amylin to actually submit the outcomes of superiority trials for LAR versus the DPP 4 and LAR versus Actos as part of that submission? And second, Derica, in your $1.1 billion CAPEX expense, is any of that, actually going to the West Chester, Ohio facility? Is Lilly supplying any help for the technology transfer? And then, finally John all the best in the new role.

Tony, I'll go ahead and take your Amylin question, for the U.S. FDA submission, we would not anticipate needing to submit data from the additional head-to-head superiority trials that we're running. I know you didn't ask it, but I would like to lay a note there may be data that would be useful for the European regulators, who typically do look for like they did with BID [ph] additional patient exposure to make their decisions. But for the U.S. the answer will be no, those are not required for our submission as far as we understand it. Deric, you want to handle the CAPEX?

Sure. And Tony for the… on the CAPEX question the $1.1 billion does not include the Ohio facility.

Next caller please.

Thank you. Our next question is from the line of Steve Scala from Cowen. Please go ahead.

Thank you. A little over a month has passed since the filing of prasugrel. Has the tone of discussions and the nature of the questions asked from FDA lead you to think that the NDA will be accepted next month, is being viewed positively and also justifies the pre-marketing expenses that you've mentioned? And relatedly, I assume TRILOGY has not started yet enrolling based on your response to Jim Kelly's question. Thank you.

Steve, it's John Lechleiter. I think, the review of the application is clearly underway by the FDA, we are getting currently the sort of questions that you get early on in the process and I don't think there is anything of note to report there. Obviously, we'll be keeping you abreast as anything further develops through the course of the review process. We want to be prepared to launch prasugrel obviously at the point we get approval. This is obviously going to be a big effort involving Lilly and Daiichi Sankyo. And I think we are in good shape there. We will make the right investments at the time in preparation for that.

The initiation of the TRILOGY trial, we are still on track for the first half of 2008 but it has not yet begun enrollment during January. Next caller please.

Thank you. Our next question is from line of Bert Hazlett from BMO Capital Markets. Pease go ahead.

Thanks for taking the questions. John, could you comment, there seems to be more... Lilly seems to be taking more of an aggressive stance with regard to external licensing then over the past year, year and a half, could you just comment on that in general? And then secondly, with regard to the timing of specific programs, the Type 1 diabetes program with MacroGenics, there appears to be multiple trials underway, could do just describe the pace of the data roll out there? And in appropriate world with that program when could that program potentially be filed? Thanks.

Okay, Bert, I'll get it started here with respect to licensing. We had a good year last year, three acquisitions Hypnion, ICOS and Ivy Animal Health, five major in-license deals all of them in mab [ph] deals including BioMS at the end of the year and also Glenmark I believe in the fourth quarter. We’ve ramped up our efforts here in the company to make sure that we not only have our eyes on all the innovations that is external to us but that were already to seize opportunities as it comes along. I'm pleased to say that we do see opportunity out there. Obviously, we are going to evaluate that carefully and make sure that any deals we do make sense for our investors, but there still continues to be something that I will emphasize we have $5 billion plus operating cash flow last year, good strong balance sheet and we won't hesitate to use that wherewithal if we see assets like the ones we bought in last year that looked promising.

Bert on [inaudible] we are going to get back to you on that one. We do not have the detailed information on the various trials and when we might have data coming out and it probably will still be while though until we would comment on submission time frame for the particular compound.

But the molecule is currently in Phase III.

Next caller please.

Thank you. From the line of Seamus Fernandez from Leerink Swann please go ahead.

Thank you, just a couple of quick questions. Can you let us know whether or not there is a risk map included in the NDA for prasugrel? Second, can you just remind us what the specific label is that you have requested for prasugrel? Third, and I apologize for not sticking to one question here but I think I may be one of the last callers so the potential impact of AVAmax generics on Evista volume trends and whether or not Evista is subject to any step therapy programs in your contracting for Osteoporosis prevention? And then the last question is can you just remind us the timing of the potential changes in the Cymbalta CSO arrangement? And if you can just remind us or give us any insight into your plans with regard to that arrangement? Thanks very much.

With respect to the prasugrel NDA I'm not familiar enough to able to answer your question about the risk map, Seam, Phil, do you have any…

No. I think on the label we talked about the indication but we have not disclosed any specifics of the wording that we have put into to the submission itself.

Obviously the initial indication is going to be for ACF patients undergoing PCI consistent with the Phase III study.

On the AVAmax generics, I am not sure about your step-contracting question. I need to look with the team to find that out and get back with you. Clearly, we have been extremely pleased with the response we are getting to go out with the invasive breast cancer risk reduction indication that we got last year. That really seems to have made both the efficacy, as well as just sort of twofer with being able to have not only osteoporosis prevention but also protection against the risk of invasive breast cancer, really building in the image of physicians Evista. So, we are very pleased with not only some of the scrip trends we have seen but also some of leading indicators we have got on customer perceptions. John, do you want to comment?

I think it is important to keep in mind that despite our prognostication back in ‘98 when we launched Evista, we still haven't seen another serum enter the category. So from a mechanism of action point of view, Evista remains unique. I think that's going to be helpful in a generic [inaudible] environment. Also our current plans are to file arzoxifene in early 2009. So, I think we have got an opportunity here to bring even potentially better therapies forward in the form of arzoxifene and continue the progression in the serum category.

And our arrangement with… in terms of the Cymbalta sales in the U.S. goes through 2009 and we have not disclosed anything further than that in terms of ongoing discussions with Quintiles.

Next caller please.

Thank you, a follow up from the line of David Risinger from Merrill Lynch. Please go ahead.

Yes, thanks very much. Could you just run us through any update on the new prasugrel study, the TRILOGY study, I believe, it is called? And just walk us through the time line on that? Thank you.

Yes, Dave, since the early December meeting, there is not an update. The team has been working since then on the actual clinical trial plan. But those are not yet finalized enough for us to come out with more specific data over and above what we had discussed at the time we were on the 10,000 patients with 30 countries and obviously the indication in the ACS Medical Management. As soon as we do have some of the discussions finalized we will find quite appropriate forum to begin to share those... more details with expectations with you. Next caller please.

You’ll hear from the line of Tim Anderson from Sanford and Bernstein. Please go ahead.

Yes, can you talk about what you think the impact from generic respidol might be on the Zyprexa franchise in the U.S.? Do you expect there any to be access restrictions placed on your products or any incremental downward pricing pressure once generic respidol launches?

Tim, we are going to watch that very carefully and in preparation for that certainly their actions we have already taken and I think data that continues to really support Zyprexa. First of all we aim to retain the broadest possible access for Zyprexa to emphasize the efficacy, the superior efficacy evident in KD [ph] the longer duration of therapy. We are going to continue as we said earlier to highlight the urgent need patient and to differentiate that Zyprexa in many cases is the best choice for those urgent patients. We have got good health outcomes data. We will be emphasizing the total cost of healthcare for patients who are using Zyprexa versus other a typical. We also know as we commented, I think in New York that even with sales policy the nature of this type of disease schizophrenia and bipolar disease is such that the people do tend to cycle through different medication. So even if there is a failed first scenario, where patients would need to try a generic respidol first I don't think this is necessarily all bad news for Zyprexa depending on how failed first is defined.

Next caller?

Thank you, from the line of John Boris from Bear Stearns. Please go ahead.

Thanks for taking the follow-up. On Zyprexa Adhera you just comment on what percent of the current users of Zyprexa, the oral users that might be candidates for the Adhera, are you just view that as a switch type strategy? And then on risk management, on injection of the product, how will you address that issue with the FDA? And then just one follow-up real quickly for Derica on tax rate for '08 guidance of 23%, did you say that includes the R&D tax credit or excludes it? Thanks.

Deric, you want to take those last part first?

Yes. John, our tax rate assumption includes the extension of the R&D tax credit.

John, on Zyprexa, our long acting injectable, I think it is difficult to say what percentage of patients that are currently on the oral medication would be candidates. We know that for many patients and possibly many patients who are sort of in that urgent need categories that Zyprexa currently treat so effectively, having access to a product that has four-week coverage would probably be viewed by care givers and patients as a positive thing. So we are looking at it being very consistent with the way that the oral product is currently positioned. As far as risk management goes, I think there are several approaches we can take and certainly you can expect that as we further prosecute the NDA and go through the Advisory Committee, that will be a subject of discussion with the FDA.

All right. Thank you very much for your questions. We will go ahead and I’ll turn it John to wrap up the call.

We want to thank everyone for their time this morning. Let me summarize a few of our key points. We are delivering on our priorities and concluded 2007 with accelerating sales growth, solid fundamentals, robust cash flow and earnings at the top end of our guidance range, bringing positive momentum into 2008. The strong performance is broad-based across products and geographies. We expect a number of important events in 2008 including U.S. launches now in progress of Cialis for once-daily use and Humalog quick pen plus ongoing OUS launches of Cymbalta and Byetta, FDA action on Prasugrel, Cymbalta for fibromiolgia, Alimta for first-line non-smallcell lung cancer, and the long acting injectable formulation of Zyprexa, submissions of prasugrel in the EU, Byetta monotherapy, Cialis for PAAH, and Cymbalta for chronic pain, and the initiation of a number of Phase III studies. In my new role as CEO, my priorities will be increasing the flow of innovative new therapies from our pipeline, engaging our customers in fundamentally new ways by focusing on improved outcomes for individual patients, continuing to reduce our cost base and improved productivity and developing effective leaders. At Lilly, we have a sense of urgency to deliver strong results today while also reshaping the company to win for the benefit of patients and shareholders alike. Thank you for joining us this morning and I look forward to continuing my interaction with our investors.

Thank you. Ladies and gentlemen this conference will be available for replay after 11:00 AM Eastern Time today through midnight February 5th. You may access the replay service by dialing 1-800-475-6701 and entering the access code 905376. International participants may dial 320-365-3844 using the same access code 905376. This does conclude our conference for today. Thank you for using AT&T Executive Teleconference. You may now disconnect.