Eli Lilly and Company (LLY) Q3 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, welcome to the Q3 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer question and instructions will be given at that time. [Operator Instructions]. We do remind you; today's call has been recorded. Replay information will be given out at the conclusion. And hosting today's call, we have the Executive Director of Investment Relations, Phil Johnson. Please go ahead sir.

Good morning, and thanks for joining us for Eli Lilly and Company's third quarter 2008 earnings conference call. I'm Phil Johnson, Executive Director of Investment Relations. I'm joined today by our Chief Executive Officer John Lechleiter; our Chief Financial Officer, Derica Rice; and Veronica Fletcher [ph] and Nick Lumon from the IR department. You can access the earnings press release and supporting material, a live webcast, an Internet-based replay and a podcast of this conference call at lilly.com. The replay, the supporting material and the podcast will be available on our website through November 21st, 2008. During this conference call, we anticipate making projections and forward-looking statement that are based on our management's current expectation. But actual results may differ materially due to various factors. For example, our results, alone or following the completion of the ImClone acquisition maybe affected by competitive development, the timing and success of new product launches, regulatory and legal matters, patent disputes, government investigations, governmental actions regarding pricing, importation and reimbursements, changes in tax law, acquisitions, business transactions, the state of the financial markets and the impact of exchange rates. Also, the ImClone acquisition is subject to successful tender offer and antitrust clearance and maybe subject to ImClone Systems shareholder approval, none of which can be guaranteed. For additional information about relevant risk factors, please refer to both Lilly's and ImClone's 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 subscribing decisions. Now let turn the call over to John.

Thanks, Phil. The third quarter was a very successful quarter for Lilly. Our underlying business performed very well, with sales as well as earnings per share excluding significant items, both growing 14%. Sales growth was driven by a robust 6% increase in volume and the increase in volume was consistently strong across all major geographies. We also grew sales faster than both the cost of goods and ongoing operating expenses. Importantly, we made significant progress executing on our strategy, creating value for shareholders by accelerating the flow of innovative new medicines that provide improved outcomes for individual patients. Before providing my usual update on our pipeline, I would like to briefly highlight some of the key areas of activity that supports this strategy. I believe that will provide an insight into how past actions support our strategy, and help you understand where we're headed in the future. Across Lilly, we're becoming more patient centered and customer focused. In research and development for example, we are using our AME technology to design and tailor therapeutic antibodies. We're structuring Alimta trial to identify patients who can benefit most from this valuable cancer therapy. And as we did just last week, we're launching a new Forteo pen delivery system custom made for ease of use by elderly patients. In sales and marketing, we're providing our sales representatives with tools and resources aimed at meeting the unique needs of individual doctors. And we continue to lead the industry in providing external stakeholders with greater transparency about our business, having recently announced plan to disclose payments to physicians in the U.S. Second, we're moving more aggressively into biotech. Biotech therapeutics are attractive for a variety of reasons. They often lend themself to tailoring. They carry a higher probability of technical success than small molecules and have proper standards for generic substitution. We have a longstanding presence in biotech, which is relatively unique in major pharma. Currently, nearly a quarter of our sales come from biotech products, making us the fifth largest biotech company in the world. Biotech products also comprise nearly one-third of our clinical stage pipeline today. We aim to increase that proportion over time, entirely consistent by the way with our acquisition of ImClone. Third, through out the company we're becoming faster, leaner and more efficient. We are systematically using Six Sigma to improve the efficiency and effectiveness of our operations, de-layering management and methodically reducing head count and the fixed portion of our expenses and by working with business partners in new and creative ways. Fourth, we are expanding our global scope and reach. We aim to capitalize on opportunities to expand our presence in the world's fastest growing market. And increasingly, we will access capabilities, ideas and capital from beyond Lilly's wall in diverse geography such as China and India. Acquisitions such as AME and SGX also provide us greater access to important U.S. reserve centers like San Diego. Finally over time, we will selectively diversify our business. Now this doesn't mean, we will become a conglomerate or that we will venture outside our core areas of expertise. It does mean that through in-licensing and acquisitions, we will look for ways to deepen or build upon our current therapeutic area presence and expertise. We'll also look for new ways to tailor our medicine to more precisely meet defined need. With that context, let's review the major events that have occurred only since our last earnings call, all of which are aligned with the effort I just outlined to become faster, leaner and more efficient and more patient and customer focused. As part of a series of actions we are taking to restructure our research and development organization, we sold our Greenfield Laboratories site to Covance in a groundbreaking deal. Under the terms of this multi-year deal, Covance will conduct preclinical toxicology work for Lilly as well as expanded early stage clinical work and Phase 2, 3 clinical trial support. Covance has demonstrated they can expedite early stage development timeline and improve efficiency, enabling Lilly to lower drug development cost and speed the flow of new medicines. We have also initiated a strategic review of our Tippecanoe manufacturing facility in Lafayette, Indiana. A range of options are being considered, including continuing site operations with a revised mission, selling this facility or ceasing operations. Over the past three months, we have made targeted acquisitions and in-licensing deals to strengthen our discovery capabilities as well as to deepen our presence in two key businesses; animal health and oncology. We completed the acquisition of SGX Pharmaceuticals. SGX brings unique capabilities in structured guided drug discovery. This acquisition also bolsters our presence in San Diego, a key market for scientific talent. In animal health, we continue to build our global presence by acquiring from Monsanto, the worldwide right to the dairy cow supplement, Posilac as well as the product supporting operation. We entered into a collaboration and worldwide licensing agreement with Deciphera Pharmaceutical, involving four different project areas involving selective or multi-kinase targeted B-Raf inhibitors. Most notably, we announced our offer to acquire ImClone Systems. The strategic combination would create one of the leading oncology franchises in the biopharmaceutical industry, offering both targeted therapy and oncolitic agents plus a pipeline spanning all phases of clinical development. It provides the opportunity to generate additional value from ERBITUX, from both existing and potential new indication. It supports our strategy to further increase our focus on biotechnology and brings a state-of-the-art development and commercial manufacturing facility. Finally, with three pipeline assets, that could be in Phase 3 testing in 2009, it can help meet the challenge posed by patent expirations in the middle of the next decade on several currently marketed products. We've also made progress in accelerating the flow through our internal pipeline, with successes in the third quarter centered on new indications for key products. We received FDA approval of Alimta in combination with cisplatin for our first-line treatment of locally-advanced and metastatic non-small cell lung cancer. Consistent with our goal of improving outcomes for individual patient, we generated compelling data for the use of Alimta in patients with non-squamous cell histology. We also submitted Alimta in the U.S. and Europe for histology based use in the maintenance treatment of non-small cell lung cancer. The data generated in the maintenance trial reinforce the utility of Alimta in treating patients with non-squamous non-small cell lung cancer. In addition, this trial fulfills our FDA commitment from the original accelerated approval of Alimta in second-line non-small cell lung. Last December, I spoke about our efforts to eliminate what we termed the drug lag that has historically seen medicines reach Japanese patients years after they reach American and European patients. I'm pleased to report that we simultaneously submitted tadalafil in the U.S. and Japan as a treatment for pulmonary arterial hypertension or PAH. The European Commission approved Cymbalta for the treatment of generalized anxiety disorder. Also in Europe, we received a positive opinion from the CHMP for olanzapine, long acting injection known as Zypadhera. We also made progress towards resolving major uncertainties in our business. The UK Patents Court just recently issued a ruling upholding the validity of our Zyprexa patent in the United Kingdom. We resolved a multi-state investigation involving 32 states and the District of Columbia related to the sales, marketing and promotion of Zyprexa. Finally, we significantly advanced discussions to resolve the ongoing investigation by the U.S. Attorney for the Eastern District of Pennsylvania related to past U.S. marketing and promotional practices for Zyprexa. The centerpiece of our strategy is to accelerate the flow of innovative new molecules. So let me wrap up my remarks with our usual update on our pipeline. Slide five shows the snapshot of our clinical pipeline as of mid-October and the flow for the first nine months of this year. You can see that we now have 49 new molecular entities in development. So far this year, 11 new molecular entities have entered Phase 1 testing, placing us on track to achieve our goal of 15 NMEs entering the clinic this year. Also, four NMEs have advanced into Phase 2 testing and one compound, the gamma secretase inhibitor for Alzheimer's disease has moved into Phase 3. We recently initiated our second pivotal trial for this molecule. In addition, we have seen movement in a number of important line extensions or new indication of currently marketed product, including the approval of Alimta in first-line non-small cell lung cancer and Cymbalta in fibromyalgia as well as the submission of Alimta for maintenance therapy of non-small cell lung and Cymbalta for the management of chronic pain. One aspect of drug development to be expected is attrition, and we are committed to making timely go, no go decisions and terminating molecules quickly that do not show promise. This year, we have terminated development on ten new molecular entities; six in Phase 1 and four in Phase 2. Importantly, the net flow so far this year is positive. More compounds have entered the portfolio than have been removed from it. We expect four additional compounds to be added to the front end of our pipeline before year end, and the proposed acquisition of ImClone will serve to bolster our mid to late stage pipeline with five additional antibodies in development. I am confident in the strength of the pipeline and the flow we are generating. This pipeline along with our business development efforts will place Lilly in a solid position to deal with the patent expiration challenges of the next decade. I'll now turn the call over to Phil to review the performance for the quarter. Phil?

Thanks John. We posted solid results in Q3, with the volume driven sales growth and increasing gross margin percent and leverage between sales and ongoing operating expenses. Our Q3 results set us up well for a strong finish to the year. Let's start our more detailed review of third quarter results on slide six, with sales volume trends for the quarter. This slide summarizes price and volume trends back to the year 2000. The 14% growth in sales in Q3 is comprised of 6% from volume, 4% from foreign exchange rates and 3% from price. The volume growth of 6% in Q3 continues solid volume performance and was achieved despite the drag from the entry of generic versions of Zyprexa in Canada and Germany, and of Actos in Canada. Excluding these situations, volume growth would have been over 2% higher. On slide seven, you can see how our major products contributed to worldwide volume growth of 6%. All of our growth products are contributing positively, with Cymbalta leading the way and Alimta assuming an increasing role. As in prior quarters this year, you will see that Zyprexa shows a volume decline, reflecting the impact of generic entries in Canada and Germany. We'll now review the sales performance of selected products and then discuss the income statement. Slide eight shows worldwide Zyprexa sales have increased 2% in Q3 to $1.19 billion. Sales in the U.S. increased 3% to $556 million, driven by higher net effective selling prices, partially offset by lower demand. International sales were up 1% to $634 million, due to the favorable impact of exchange rates, partially offset by decreased demand and lower prices. Demand outside the U.S. was unfavorably impacted by generic competition in Canada and Germany, offset by solid growth in Japan and several other European markets. Moving to slide nine, Cymbalta sales in the third quarter were $716 million, up 40% compared with the third quarter 2007. U.S. sales increased 34% to $597 million, primarily due to increased demand and to a lesser extent, higher net effective selling prices. International sales totaled $119 million, an increase of 73%, driven primarily by higher demand and to a lesser extent the favorable impact of foreign exchange rates. Higher demand outside the U.S. reflects the increased demand in established markets as well as recent launches in new markets. On slide 10, Humalog sales grew 19% to $433 million. U.S. sales increased 13% to $245 million, driven by higher demand and to a lesser extent increased selling prices. Sales outside the U.S. increased 28% to $188 million, driven by strong demand and a favorable impact for foreign exchange rate. Slide 11 shows the growth rate in total prescriptions for Humalog in the U.S. for the past two and a half years. As you can see, total prescriptions were declining to early 2007. Growth finally hit positive territory in mid to late 2007, and has accelerated significantly during 2008. The positive demand trend reflects the numerous efforts to reaccelerate Humalog in our largest market, including the recent launch of the Humalog KwikPen. While we are encouraged by the growth in total prescriptions, we remain committed to increasing not just the absolute number of prescriptions but market share in the rapid acting and mixture segment of the analog insulin market. Slide 12 shows the Cialis sales, which were up 21% in the quarter reaching $377 million. Sales in the U.S. were up 20% to $140 million, due to higher prices and to a lesser extent increased demand. While sales outside of the U.S. increased 22% to $237 million, driven primarily by the favorable impact of foreign exchange rates and increased demand. Moving to slide 13, Alimta sales in the third quarter were particularly strong, coming in at $340 million, an increase of 46% over Q3 2007. U.S. sales increased 35% to $149 million, due primarily to increase demand. Sales outside the U.S. were up 58% to $165 million, due to increased demand and to a lesser extent the favorable impact of foreign exchange rates. Ronica [ph]?

On slide 14, Humulin sales for the quarter were up 12% to $272 million. U.S. sales increased 5% to $95 million, driven by higher net effective selling prices. International sales increased 16% to $177 million, due to the favorable impact of foreign exchange rates and increased demand. Slide 15 shows worldwide Byetta sales for the quarter were $201 million, a 22% increase. Lilly reports half of the growth margin for U.S. sales in Byetta plus sales of pens to Amylin and 100% of International sales. Total Byetta revenue recognized in Lilly's income statement was $109 million, a 25% increase. Slide 16 shows quarterly Forteo sales in the $193 million, up 7% over Q3 last year. U.S. sales declined 6% to $117 million, due to the changes in wholesale buying patterns partially offset by higher net effective selling prices. International sales of Forteo were up 36% to $76 million, due to higher demand and a favorable impact of foreign exchange rate. Slide 17 shows the revenues for the products Lilly has launched this decade; Alimta, Byetta, Cialis, Cymbalta, Forteo, Strattera, Symbyax, Xigris, Yebtreve. These products collectively grew 28%, reaching $1.9 billion or 37% of our sales. Before looking at the rest of the income statement, let's look at slide 18 which shows the impact of price, exchange rates and volumes on the sales results. As mentioned earlier for the quarter, Lilly sales growth of 14% was driven by volume impact of 6%, a favorable foreign exchange impact of 4% and by a 3% impact from higher net effective selling prices. As john mentioned earlier, volume growth was strong across all geographies. In a challenging market, animal health posted strong volume gains as we saw a positive impact from our efforts to expand sales in emerging markets like Brazil and China and continued growth in companion animal health sales. In addition, Q3 benefited for the timing of customers buying ahead of price increases in U.S. Now let's look at the income statement. To facilitate our analysis of our results, we have provided two distinct views of the income statement. One view shows our reported results according to Generally Accepted Accounting Principles. This view reflects our earnings from the Lilly ICOS joint venture, net of tax and OI/D up to including January 2007. After that date, all ICOS and Cialis related revenue and expenses are shown in the respective line items of the income statement. This view also includes charges taken for significant items. The pro forma non-GAAP view uses GAAP methodology to restate our results as if Lilly had owned ICOS as of January 1, 2007. In addition, this view excludes the impact of charges taken for significant items. We will focus on the pro forma non-GAAP results as we feel it provides better insight into the underlying trends in our business. Slide 20 shows the income statement for Q3. Sales grew 14% to $5.2 billion. Gross margin as a percentage of sales, in this quarter was 77.8%, an increase of 0.8 percentage points compared to Q3, 2007. This increase was due to higher net effective selling prices as well as manufacturing expenses going in a slower rate than sales. Marketing, selling and administrative expenses were up 12% to $1.6 billion. The increase primarily driven increased marketing and selling force expenses included pre-launch expenses for Effian [ph], marketing cost associated with Cymbalta and Evista, the impact of foreign exchange rate and increased litigation related expenses. R&D expense grew 13% to $953 million or 18% of sales. The increase was primarily due to increased late stage clinical trial and discovery research cost. The total of marketing, selling, administrative and research and development expenses increased 12% in the quarter; two percentage points lower than sales. You can see that the expansion of our gross margin percentage and the leverage between sales and operating expenses drove a robust 20% increase in operating income. The adjusted effective tax rate on pro forma non-GAAP basis was 22% for the quarter. Net income and fully diluted earnings per share showed strong growth of 14%, slightly below the operating income growth rate due to lower other income and the slightly higher tax rate. Slide 21 shows third quarter other income and deductions, which decreased by $47 million to $3 million primarily due to lower out-licensing income offset partially by lower interest expense. Other income was also modestly impacted by the recent financial crisis. While our investment exposure to the firm most impacted was not large, our other income line for Q3 does include a $10.9 million write-down of certain investments. Slide 22 shows our reported EPS as well as significant items affecting net income and earnings per share. These items include charges totaling $1.477 billion related to the pending Zyprexa investigation with the U.S Attorney for the Eastern District of Pennsylvania as well as the resolution of the multi-state investigation regarding Zyprexa involving 32 states in the District of Colombia. These charges decreased earnings per share by $1.33. A charge of $182 million or $0.11 per share for asset impairments and restructuring, primarily related to the sale of our Greenfield Indiana site and a $28 million charge for acquired in-process R&D associated with the SGX acquisition. This charge decreased earnings per share by $0.03. The table also shows the impact of similar items from 2007 for comparison purposes. For information, we have provided a reported earnings statement on slide 23. Details about our reported earnings are available in our earnings press release dated today, October 23rd 2008. Now let me turn the call over to Derica to update you on our financial guidance.

Thanks Ronica. Slide 24 provides a summary of our full year 2008 guidance on a pro-forma non-GAAP basis. Compared to our prior guidance, you will notice that we have narrowed our guidance range from $0.15 to $0.05. In addition, we have raised our guidance for earnings per share from a range of $3.85 to $4 to now a range of $3.97 to $4.02 per share. We are also revising two other aspects of our 2008 full year financial guidance. Specifically, we are increasing our guidance for gross margin as a percent of sales, and we are reducing our guidance for the contribution of other income. Pro forma sales are still expected to grow in the high single to low double-digits. We now expect substantial improvement in gross margin as a percent of sales for the full year 2008, compared to 2007, on the order of magnitude of a full percentage point. Our previous guidance had been for modest improvement. This change is largely driven by a weakening foreign currency and continued tight control of manufacturing expenses. Marketing, selling and administrative expenses are still expected to grow in the high single-digits and we still expect research and development expenses to grow in the high single to low double-digit. As a result, operating expenses are still expected to grow in the high single-digit. Importantly I might add at a slower rate than sales. Therefore, we expect to deliver positive leverage between sales and ongoing operating expenses, as well as between sales and cost of goods sold. Other income and deductions are now expected to contribute approximately $50 million. This is a change from our previous guidance of less than $100 million. We still expect the tax rate to be approximately 22%, excluding the impact of significant item and to be approximately 23% on a reported basis. Capital expenditures are still expected to be approximately $1.1 billion. Please note that our revised guidance does not reflect the impact of our proposed acquisition of ImClone Systems. Finally, on slide 25, you will find a reconciliation from pro forma non-GAAP EPS guidance to reported GAAP EPS guidance. This concludes our review for the third quarter and we will now be happy to take your questions. Operator? Question And Answer

Absolutely. [Operator Instructions]. And your first question is from the line of Tony Butler, Barclays Capital. Please go ahead.

Thanks very much. John, it would appear that Gemzar or Strattera and Evista may have actually peaked in sales, and I am curious if in fact you are being continentally reducing marketing and selling cost in those... for those particular products, that's the first question. The second question is, the Alimta sequential growth is extremely impressive than first, again that's primarily in the second-line indication thus supporting even higher growth and that was your first-line. Thanks.

Tony, I'll take both your questions. I think first of all, when you look what Gemzar is in its life cycle; it's pretty amazing that we're still getting double-digit growth. I think that reflects the fact that we've plenty of a range of tumors that the Gemzar has indicated for around the world, that go beyond lung obviously. With Strattera, I think the fact that we recently got a maintenance indication for that product in the U.S., it's positive. With respect to Evista, obviously, we're still in the relatively early days of promoting the products for the approved... the two approved indications that include two types of breast cancer risk reduction. So you can expect, we are going to make investments that are commensurate with the opportunities here. But with Strattera still early on in this OUS trajectory and I think with Gemzar, we really get a complimentary detail with that product because as we are calling on oncologists, each one of our sales reps really essentially has Gemzar and Alimta in the bag. With respect to Alimta, I think there is probably... some of that growth probably does reflect use in first line, notwithstanding that we didn't... we did not begin to promote that obviously until we got the indication, I think at the very end of September. But it's... clearly, I think the data in the non-squamous histology is going to make Alimta increasingly the drug of choice in treating that type of tumor in the first-line setting.

One clarification as John had mentioned, we did receive approval for Alimta in first line non-small cell lung, we have submitted but not yet received approval in the maintenance indications. Also further in this call is what you know that we have been joined by Dr. Steve Paul, the Head our Research Laboratories, is available for your questions as well. Next caller please.

Next question is from the line of Bert Hazlett, BMO Capital Markets. Please go ahead.

Thank you. I have got a couple of questions. First the... what do you expect in terms of current operations? The impact of Cialis QD, is Cialis becoming a bigger product for you folks? What do you expect in terms of the trade off between pricing and volume growth for QD? Secondly, in terms of the pipeline, Dirucotide for secondary progressive MS, when should we see data for that? And if you could just, may be if Dr. Paul could give us an update on the Gemzar pro-drug program. What are the gating issues there to be able to replace Gemzar over the long-term? Thanks.

Bert, I'll take your first question on Cialis QD. We think we've got the two forms of Cialis price right, the cost per week of therapies for the QD is going to be equivalent to a person taking... the price per week of therapy of a once a day is going to be equivalent to I think three times, three individuals uses of the PRN product. So I don't think we are really looking at a sort of a negative situation in terms of any kind of trade off. At the same time, we've seen since the launch of the once a day, some pretty decent growth in terms of not only that, that individual product format, but the current 5 milligram... what am I trying to say, the episodic use of version of the product as well.

Bert, this is Derica. I'd just to add to John. Since we got the once a day indication, our Cialis share market increased by about 0.8 percentage points and then subsequently since we launched the DTC TV ads around once daily, we've increased about another 0.6 percentage point. So in total, about 1.4 percentage points of share market increase during that time period. So we've been quite impressed that we've been able to get some balance right between the once daily in terms of the pricing relative to as John said the episodic use for the normal usage.

You said that much more eloquently than I do.

We have Ronica handle the Dirucotide question and Steve, the Genpro question.

With respect to Dirucotide, when you look at first secondary progressive indications, hopefully we should have some data on that trial by the second half of 2009. Recently, you just had a 200 patient interim analysis on that plus several data safety monitoring news that were positive. With regards to the relapsing and remitting, the MINDSET trial is due to have data by the end of this year, hopefully by Q1. We will have data produced externally. So that's where we stand with both the Dirucotide indication. Steven M. Paul, M.D. - Executive Vice President, Science and Technology; President, Lilly Research Laboratories: Bert, Steve Paul. On Genpro, of course this is the old prodrug version of Gemzar and what I can say at this point is the compound is on track. Recall that we are developing it for slightly different strategy in indication as we treat cancer, thinking more as a maintenance kind of drug moving down the path. So the development strategy is a bit different obviously and hopefully we'll be able to provide a bit of an update for you later this year in the analyst meeting in December.

Thank you.

Next caller please.

Next question is from the line of Seamus Fernandez, Leerink Swann. Please go ahead.

Thanks very much. So just wondering, can you give us some little bit of feedback on the deal with Amylin that you recently signed and was this entirely a new deal that haven't been previously negotiated or if this was a change to an existing deal? Can you give us some feedback and color on the changes to the structure of the deal. And then secondly on Alimta, can you give us a little bit of color on whether or not that product is being used complementary to or in competition with Avastin in the first-line non-small cell lung cancer indication? Thank you.

Derica will have the first one and then we'll have John handle the second part on Alimta.

On the Alimta deal, really it was just a continuation of the ongoing discussions we were having with Amylin. And as we're working through the successive launch of launching BID, we had concluded much of the needed discussions around that how we would partner. And then as we've been preparing for the potential launch of Byetta LARGEST, obviously due to construction of the higher facilities we were working through how to work out the arrangements there. So what you are really seeing here with the recent announcement is that the conclusion of those discussions that's been ongoing for some time.

With respect to your second question, we think we're in a good position with Alimta in that first-line non-squamous histology because the other combination that's often used that includes Avastin is not indicated per se in that type of cell histology. So we think that the data that's being underpinned that first-line approval is going to be very helpful for us. We think the other than non-squamous histology account for maybe 60% to 70% of diagnosed non-small cell lung.

Next caller please.

Yes sir. Our next question is from the line of Steve Scala, Cowen. Please go ahead. Steve Scala - Cowen & Company: Thank you. In the last month, Lilly has issued at least three releases which mentioned prasugrel. The September 26th release stated the review was very far along, neither the October 16th or today's release reiterated that language. Based on all your discussions with FDA do you still believe the review is very far along, which we might interpret as a month or two until approval? Or was that language intentionally deleted and if so, why was it intentionally deleted? And secondly, on the tax rate of 22%, to my knowledge that excludes the R&D tax credit, perhaps you've been cracking it that's wrong. So what is the tax rate guidance with the R&D tax credit. Thank you.

Steve, this is John. I'll answer your first question quite simply. Nothing has changed from the press release we issued on February... on the September 25th saying that the review is very far along. However, I don't think we characterize that in any specific way for example, I don't think we've acknowledged that that means, as you said that is a month or two before approval. We'd been indeterminate on that, that's the FDA's call. But yes, the review is still very far along.

And Steve, this is Derica, on the tax rate question. Q3 and our first nine months of the year results did not include the impact of the R&D tax credit. As you know, on a non-GAAP basis, our effective tax rate is 22%. Our guidance on a non-GAAP basis of 22% for the year does include the impact of R&D tax credit. It also includes our consideration as we look at the balance of our U.S. versus OUS operation and our cash needs as we work through various elements of our business. So all of that has been taken into account in terms of our tax rate guidance for the... on a non-GAAP basis of 22%. Steve Scala - Cowen & Company: Thank you.

Thanks, Steve. Next caller please.

Our next question is from the line of Catherine Arnold, Credit Suisse. Please go ahead.

Thanks very much. I've two questions, first about Cymbalta. Could you remind us of the overlap between patients who have depression and fibromyalgia and in your early experience in that indication, fibromyalgia, are patients coming from newly diagnosed or just satisfied therapies? And then secondly on price, it seems that this quarter had higher pricing than we've seen in prior quarters and I wondered if you could comment as this is an anomaly going forward given the economy and to what extend this helps your gross margin versus underlying productivity efforts? Thanks.

Thanks, Catherine. Let me handle the price question first. The year-on-year comparison does show a slightly higher price impact in this quarter than in some of the prior quarters. If you do remember, last Q3, there had been an adjustment made that covers Q4 of '06 through Q3 of '07 for Cymbalta. So you are seeing a bit of an uptick in the way we'll report on this year's sales compared to last year's sales that shows up as a price impact. You will also see in some market traditionally where we've had either zero or negative price contribution, like in rest of the world grouping, we actually see a price increase this quarter. That is a couple of small situations that we've talked about to be in a positive 2% price increase in those regions. Specifically with the ruling on the Concerta price, we even have released some price accruals that we had for Strattera and then secondly the way we work with our accounting on sales in Russia with those sales coming in more heavily this Q3 of '07 that shows up an additional pricing benefit in that particular geography. For your question on where the patients are coming from; I will need to follow up on that. We don't have that information here in the studio with us. And as for your first question, Catherine, could you remind that, I apologize, I missed that.

Based on the overlap of patients of depression and fibromyalgia. Steven M. Paul, M.D. - Executive Vice President, Science and Technology; President, Lilly Research Laboratories: So Catherine, this is Steve Paul. Couple of comments here. First of all, depression is really quite common in patients with fibromyalgia. So there is comorbidity. But, fibromyalgia clearly is a separate syndrome. If that actually benefited well by SSRI, let's say the SNRI are treatments of choice in our view. So there is substantial comorbidity. But again, it is a condition. It is a pain condition primarily that's treated with SNRIs, and other agents, but it's not treated effectively just by the sort of traditional antidepressants.

One information I can share with you Catherine in terms of the overall sales of Cymbalta. We would have roughly about 8% of the sales coming from patients who are new to therapy. They would not be on therapy essentially in the last year or so. About 6.5% coming from switch, from other products, about 78 from continuing and then a little bit less to remainder, less than 8% from either add-on to an existing therapy or a restart of the prior Cymbalta. Next caller please.

Yes. Our next question is from the line of Chris Schott, JPMorgan. Please go ahead.

Great thank you. Just a quick question on currency. Can you talk about the currency impact to earnings in the quarter and looking forward, can you sort of give your exposure to changes in currency? Looks like you are clearly getting a benefit on the gross margin side. But how much of a natural hedge is kind of built into P&L if we do see a strengthening dollar? Maybe, asked in different way, what percent of the top line benefit are impact from currency falls to the bottom line? And just quickly on the Tippecanoe manufacturing facilities, what... can you just remind what products are produced there and what type of cost savings could be generated if you are to close that plant? Thanks.

Well, Derica will take the currency piece and then John, Tippecanoe question.

Chris, this is Derica. In regards to the currency impact in Q3, we did see a benefit in Q3 due to currency even though the dollar began to weaken. If you recall from our previous quarter's results, as the dollar was weakening significantly, or the euro was appreciating significantly rapidly, while we were getting the tailwind in our sales line, you will see that we had a disproportionate effect in our gross margin line and that was as we were having to revalue our inventory level. Now that you're seeing the currencies go the other way where the dollar is quickly strengthening, you are seeing the opposite effect. And that's what's now showing the after effect in our gross margin line, while we are not giving as much tailwind in our sales line. As we look forward, our inventory turns is about 12 months, and so once the exchange rate stabilizes, we're essentially neutral at the bottom line in regards to FX impact.

With respect Chris your question about Tippecanoe, it's a large manufacturing site with a mixed mission today, small molecule. Chemical synthesis, I think probably the main stay of Gemzar, the manufacture of Gemzar and intermediates in Gemzar final product. We also some fermentation capacity there that supports our animal health business. The site originally was sort of a key part of our cephalosporin manufacturing going back to the 50s, 60s and 70s. So it is quite a large site. We're using only a portion of that site today, which is why we've said one of our options is to sort of reduce the scope of the site mission. The other options are obviously to try to sell the site or eventually to close it down. If we closed it down, we would obviously have to contract out manufacturing of some of the products there including Gemzar. I can't speculate on or comment on the potential cost savings there, because we really haven't determined which option we are going to pursue. We expect in the next six to nine months, we'll get that decision made.

Thanks Chris. Next caller please.

Yes. Our next question is from the line of Tim Anderson, Sanford Bernstein. Please go ahead.

Thank you. Just going back to the foreign exchange question, you mentioned when foreign exchange is stabilized and when inventories, I guess inventory turns normalized, but with such a rapid change in the strength of the dollar. To me it still makes me wonder if there is going to be a substantial negative impact on '09 EPS, if you just keep rate constant from where they are today. So I guess my question is, are you saying yes, there will be not much of an impact to EPS in '09 if you were to keep rates constant. And then second question on prasugrel, my understanding is that, it may actually be Lilly who is asking for an FDA advisory committee meeting, I'm wondering if this is tree?

Tim, this is Derica. I'll take the first question. Regarding currency, if you recall when we had to go back to this and look at the fourth quarter of 2007, where you saw a really rapid increase or appreciation in the euro versus the dollar. And you will see it during that period that we had a significant decline in our gross margin percentage. And that was due to the significant reevaluation of our inventories at that time. Once we work through those turns, we essentially are neutral. We are now in a period where we are seeing obviously the rates go to the opposite direction, as now you're seeing that benefit in our gross margin line showing that. So even if you look at Q2 of this year versus our Q3 results of having 0.8 percentage points of gross margin benefit. So, when we look towards 2009, for which we haven't given any guidance, but we are basically neutral at the bottom line. So while, we are looking at movement in the top line in our expense base and gross margins, they pretty much net each other.

Tim, on the advisory committee meeting... potential meeting on prasugrel, this is obviously entirely up to the FDA. Let me just say that if there is one, we have not been told that there will be one. But if there is one, we'll be very prepared to date on this product, the potential product is very compelling as you know, and we'll be there if there is one.

I guess my question is have you asked for one?

No.

Okay, thank you.

Thanks Tim. Next caller please.

Our next question is from the line of Roopesh Patel, UBS. Please go ahead.

Thank you. Two quick questions. First for John, as you look for other opportunities beyond the ImClone acquisition to pursue a diversification strategy, I am curious on your thoughts on the size of deal, the areas of interest and the appetite for near-term earnings dilution? And then my second question is on Cymbalta. Since U.S. market share trends seem to be flat on a year-to-date basis, don't seem to have noticeably benefited from the approval in fibromyalgia and looking ahead I am wondering, what's going to change that trend and I was wondering if you could please address that? Thank you.

Roopesh, this is John, I will answer your... try to answer your first question. I think that for several years now, we've been very clear, I believe with our investors that our primary use of our cash and our strong balance sheet after funding our internal operations and our internal R&D of course would be to look for in-licensing opportunities or deals like the ones we just announced that it will bring adequate abilities, greater geographic presence or help strengthen our presence in key therapeutic areas plus take into consideration the challenges we're going to face with the patent approval in the next decade. We believe the ImClone acquisition really fits nicely in that context. We are also, the last 15, 18 months we've made two animal health acquisitions; IV Animal Health. We recently acquired Posilac from Monsanto. That's the business we are going to continue to build and grow. On the other end of the deal spectrum, we acquired SGX, essentially a company that brings us some important research tools and technologies based in San Diego. That deal was under $100 million. So I think ImClone probably defines the large end of the spectrum in terms of the kinds of deals we've been looking at. We are very clear that we don't believe large combinations, mega mergers with other major pharma companies makes any sense at all. But we are going to be... you can expect, we are going to be aggressive in pursuing our strategy through a combination of internal organic things making this pipeline of 50, nearly 50 NCEs that mature, matriculate and then obviously looking for opportunities and I believe there continue to be good opportunities out there for us to consider. Right now though, our main goal is to get the ImClone Systems acquisition complete with that company and its products effectively integrated.

Okay, we'll pass this to Derica and he will respond to your question regarding Cymbalta's performance. Just to remind you, if you look at our Cymbalta shares quite a bit of today our share market and the major depressive disorders is about 6.7% and our share market is pain is about 14.1%. If you look at the pain side of Cymbalta, we've actually been quite encourage and pleased with the uptake given the fibromyalgia launch. And today we're seeing about a 20% increase in unaided awareness of Cymbalta's approval for fibro. Also if you look at just in our ex-volume was in line with rheumatologist at about 25% and PCP is at 5%. If you look on the MDD side or depression side, we were still, Cymbalta still the only branded antidepressant that's growing and gaining share. What you're seeing on the MDD side is the overall market been depressed as the increase of generic utilization by many of the payors.

In addition, just to add some additional color to Derica's comment. Another positive trend we've seen with our NRX trends versus Lyrica, that's been accelerating since the launch and some of that gets lost in the competitive nature on the question filed with the generics.

Great.

We have time for one more call and then we will have John close up the meeting. Next caller please.

Our last question will be from the line of David Risinger, Merrill Lynch. Please go ahead.

Yes, thanks very much. A couple of quick questions. First, could you update us on the timing of when you will disclose the [indiscernible] seizure risk study? And second, can you update us on what's to watch with respect to Evista and Gemzar patent litigation over the next six months please. Thank you. Steven M. Paul, M.D. - Executive Vice President, Science and Technology; President, Lilly Research Laboratories: David, this is Steve Paul here. On your first question, we will update you at our December analyst meeting on the seizure risks ready. For the four litigation we have outstanding, as you'll follow there we've got Gemzar essentially that's already been ruled on by the judge, when she denied our motion for a stay of the 30-month period. And when she said that Teva would need to give us a 90-day notice before they would launch. We have still not received notice of their intention to launch and therefore trending towards the... I mean core date in July of next year. On Evista, the 30-month stay expires in mid November, so just in a few weeks time. We have filed motions stay of the 30-month period as well as for preliminary injunction hearing. We are still waiting word from the court on both of those requests. I'll now turn it over to John to wrap up the meeting.

Okay, thanks Steve. And thanks everyone... thanks to everyone for your time this morning. Let me summarize a few of our key point. Improving productivity at Lilly remains the key focus and we accept to deliver operating leverage for the year, growing sales faster than our cost and expenses. Results this quarter demonstrate our ability to use a variety of actions to prudently control our expenses including the systematic application of Six Sigma. At the same time, we will continue to invest to maximize the range and value of indications on important growth products such as Alimta, Cymbalta, Cialis and Byetta. We remain on track to deliver on our pipeline goals for the year. We've made significant progress in the first nine months with solid movement into and through our pipeline. We made further progress on executing on our strategy with the announcement of our offer to acquire ImClone Systems, provisioning Lilly with an increased focus on biotechnology and helping us to meet the challenge of patent expirations in the next decade. Our next key pipeline event remains FDA action on prasugrel. We continue to work productively with the agency in our continuing efforts to gain approval for this product. We remain confident in our data package and the value this medicine could bring to patients. 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. We are not standing still at Lilly. We are moving, taking actions in accordance with our strategy, all the while insisting on solid operational results even as we build our future. Thank you for joining us this morning and I look forward to my continuing interaction with our investors.

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