Eli Lilly and Company (LLY) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the 2013 Financial Guidance Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I'd now like to turn the conference over to our host, Vice President of Investor Relations, Phil Johnson. Please go ahead.

Thank you, and good morning. We hope your 2013 is off to a good start, and we thank you for joining us for Eli Lilly and Company's 2013 financial guidance conference call. I'm Phil Johnson, Vice President of Investor Relations, and joining me on today's call are John Lechleiter, our Chairman, President and CEO; Derica Rice, our Chief Financial Officer; and Ilissa Rassner and Travis Coy of the Investor Relations team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and those outlined in our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions. Our call today will focus on our 2013 financial guidance. Please note in the press release issued earlier this morning, we indicated that our 2012 financial expectations remain unchanged, excluding the impact from the delayed enactment of the American Taxpayer Relief Act of 2012. Details on our 2012 results will be provided on our Q4 earnings call on January 29. Now I'll turn the call over to Derica, who will discuss our 2013 financial guidance, and then we'll open up the call to answer your questions. Derica?

Thanks, Phil. As you all know, we are now in the middle of the period we call YZ, when we face patent expirations on some of our largest products, including Zyprexa in late 2011 and Cymbalta in the U.S. in December of 2013. We've been working to bridge this period and return to sustainable growth, and we've begun to see the fruits of our efforts. We will continue to focus on the 3 strategic priorities we shared back in 2009: One, advancing the pipeline; two, driving growth of our countercyclical growth areas as well as of those brands not affected by patent expirations; and three, increasing productivity. On the first priority, we've rebuilt our mid- to late-stage pipeline to position Lilly for growth after 2014, with 13 assets now in Phase III, including the recent addition of baricitinib for rheumatoid arthritis. We also have over 20 molecules in Phase II, with a good mix of small molecules and biologics, and we're maintaining our discovery research effort to ensure a more sustainable flow of innovation for the long term. On the second priority, our countercyclical growth engines and our marketed brands not affected by patent expirations continue to support our financial performance during YZ and our expected return to growth after 2014. We will appropriately invest to drive continued growth in these areas. On the third priority, we've streamlined our infrastructure, and we've increased productivity across all areas of the business. This positions us to compete more effectively as a leaner, more focused enterprise and to fund R&D that will drive the future growth that will increase shareholder value. The progress we've made on each of these 3 priorities has increased our confidence in Lilly's future prospects and has contributed to our decision announced on December 17 to initiate a new $1.5 billion share repurchase program. In summary, we are executing the plan we first outlined for you in December of 2009, and we will continue to do so. Now, I'll run through our line item guidance and provide some commentary on the dynamics driving our expected 2013 results. Let me begin by noting that we are still working through the impact of the American Taxpayer Relief Act of 2012, specifically amounts related to 2012 that will be recognized in 2013. So, our 2013 financial guidance is stated without the discrete benefit related to 2012 items that we anticipate will be recognized in the first quarter of this year. Our 2013 guidance does, however, include the current year benefit of the R&D tax credit for 2013. On our Q4 earnings call later this month, we expect to be in a position to provide you with the 2013 line item guidance that fully reflects all the impacts of the recently enacted legislation. We anticipate 2013 revenue of between $22.6 billion and $23.4 billion. This includes continued growth from Japan, Emerging Markets, Animal Health and when viewed from a product perspective, includes broad-based growth from Humalog, Humulin, Cialis, Strattera, Forteo, Alimta, Effient, Tradjenta, Axiron and Cymbalta outside the U.S. We expect that these products will drive revenue growth. While our 2012 results are not yet final, we expect overall corporate revenue in 2013 to increase in the low-single digits over 2012. This low-single digit growth is expected despite headwinds from the initial impact of the U.S. Cymbalta patent expiration in December, the loss of the anticipated revenue sharing payment of 15% on worldwide exenatide sales and the residual impact of the loss of Zyprexa patents in the U.S. and a number of o U.S. markets. Now moving down the income statement, we expect gross margin as a percent of revenue to be approximately 78%. While this percentage is similar to our guidance for 2012, please keep in mind that the 2012 percent has benefited significantly from that FX effects on international inventory sold. At the exchange rates assumed in our guidance, we expect the benefit in 2013 to be substantially less. As we've discussed in the past, currency movements make the gross margin percent the most dynamic line item in our guidance. Through continued expense controls, we expect total operating expenses, being the sum of SG&A and R&D, to be flat to slightly decreasing in 2013 when compared to 2012. Growing revenue while containing cost means that we intend to drive operating leverage in our P&L, leading to high-single digit growth in operating income. Now looking more closely at operating expenses. We anticipate SG&A expenses to be flat to declining, while we expect R&D expenses to be flat to increasing. In absolute terms, we expect SG&A expenses of between $7.1 billion and $7.4 billion and R&D expenses of between $5.2 billion and $5.5 billion. SG&A expense in 2013 will be affected by the expiration of exclusivity for Cymbalta in the U.S. in December. As we go through the year, we will reduce spending behind Cymbalta, including our significant direct-to-consumer advertising spending. Also, as we mentioned on last year's guidance call, the 1-year lag in the calculation of our exposure to the industry fee in the U.S. Health Care Reform means that in 2013 we would expect Lilly's portion of the Pharma fee to decline as a result of the Zyprexa patent expiration in 2011. As for R&D, with the recent start of Phase III trials for evacetrapib for high-risk vascular disease and baricitinib for rheumatoid arthritis, expenses for these 2 molecules will be higher in 2013 than in 2012. However, a number of other molecules have seen trials complete in 2012 or will have trials complete during 2013, leading to lower expenses in 2013. This dynamic, as well as continued rigorous prioritization and improvement in productivity, will enable us to keep total R&D spend flat to slightly increasing. Moving on, we expect other income and deductions for the year to be in the range of flat to a net expense of $150 million on a non-GAAP basis. On a GAAP basis, including the deferred income related to exenatide of approximately $490 million, other income and deductions is expected to be in the range of a net income of between $340 million to $490 million. We anticipate the 2013 non-GAAP tax rate to be approximately 21%, assuming a full-year benefit of the R&D tax credit for 2013. On a GAAP basis, which will include the deferred income related to exenatide, we expect the 2013 rate to be roughly 22.5%. With respect to earnings, when modeling our EPS going forward, it will be important to factor in our share repurchases. Specifically, in Q4 we completed our previously authorized share repurchase plan, acquiring 8.8 million shares for $419 million. As we announced in mid-December, our Board of Directors authorized an additional $1.5 billion share repurchase plan. In December, we repurchased 8.1 million shares for $400 million under this new plan, and we expect to complete the remaining $1.1 billion in 2013. As outlined in our press release, we expect 2013 non-GAAP EPS to be between $3.75 and $3.90. Driven primarily by strong growth in operating income and aided by the reduced share count, this represents double-digit growth compared to our 2012 EPS guidance range. In terms of GAAP earnings per share, the estimated $490 million of deferred income from exenatide should represent approximately $0.28, bringing our GAAP EPS guidance range for 2013 to between $4.03 and $4.18. Finally, we expect operating cash flow to be more than sufficient to fund capital expenditures of approximately $900 million, to pay the dividend which totals roughly $2.1 billion, to complete our previously announced $1.5 billion share repurchase program and to fund potential business development. Our expected financial performance in 2013 positions us very well to meet or exceed our minimum financial performance expectation through 2014, placing us on track to outperform the current 2014 consensus EPS. As has been our practice for some time, we are not providing specific quarterly guidance for 2013. However, I would like to provide some color commentary for those of you who are looking to refine your Lilly models by quarter. First and foremost, the loss of x U.S. exclusivity for Cymbalta in December 2013 is expected to result in substantial accruals for future returns. Also, wholesalers may look to decrease their inventories and therefore their purchases of Cymbalta prior to the loss of exclusivity date. Both of these factors could have a significant negative impact on our revenue and income in Q4, causing both the absolute level of our financial results and the growth rates compared to 2012 to look much different in Q4 than in the first 3 quarters of the year. Second, in terms of our GAAP guidance, we expect the transition of o U.S. commercial rights and responsibilities to Amylin to be largely complete at the end of Q1. This means that we would expect to recognize in Q1 most or all of the outstanding $490 million in deferred income related to exenatide. This will be recognized in other income and deductions and will only affect our GAAP results. Now, I'd like to offer a preview of key events for the year. We anticipate that 2013 will be another eventful year for Lilly, with many Phase III trial completions, data presentations and regulatory submissions. Specifically, we anticipate a number of potential external data disclosures at scientific meetings. These include presentation of detailed data from some of the Phase III trials for dulaglutide and in collaboration with Boehringer Ingelheim for empagliflozin, both potential treatments for type 2 diabetes. Disclosure at the ASCO GI meeting later this month of data from the positive Phase III trial of ramucirumab as monotherapy for second line gastric cancer. Presentation of data from the Phase III trial of ramucirumab in first line breast cancer. Note that the data we expect to receive in 2013 from this trial will be the final progression-free survival data and the interim overall survival data. And finally, presentation of data for the Phase III trial of enzastaurin as maintenance therapy for patients with diffuse large B-cell lymphoma. There are also a number of Phase III trials that may produce data in 2013, although presentation of detailed data at medical meetings would likely occur later. I'd highlight the following: The initial Phase III trials of our novel basal insulin analog for both Type 1 and Type 2 diabetes; the pivotal trials of our new insulin glargine product; the Phase III study for -- of ramucirumab as combination therapy in second line gastric cancer; and finally, the initial trials of edivoxetine or NERI as adjunctive therapy for major depressive disorder. In addition, we'll conduct interim analyses of Phase III trials of Tabalumab for rheumatoid arthritis. In total, that's Phase III data readouts and/or detailed data presentations on 8 of our 13 Phase III assets. We also anticipate multiple regulatory filings during 2013. As listed on Slide 5, potential filings include: 3 diabetes assets, dulaglutide, empagliflozin and our new insulin glargine product, and 2 oncology assets, ramucirumab as monotherapy for second line gastric cancer, as well as enzastaurin for DLBCL. Other key events to watch for in 2013 are: We plan to initiate another pivotal trial of solanezumab in patients with mild Alzheimer's Disease; in August, we'll have the U.S. District Court trial for the Alimta method-of-use patent; and in December, we'll lose U.S. exclusivity for Cymbalta. We're excited about 2013 and the opportunities we have to continue to advance our pipeline and to share data that will help investors better judge our growth potential post 2014. In summary, we continue to implement the 3 primary elements of our strategy: First, we're replenishing and advancing our pipeline. This is our future, and it's our first priority. Second, we're investing to drive growth in our countercyclical growth areas and in our marketed brands that retain patent protection. And third, we continue to drive productivity gains across our business to fund the R&D necessary to fuel our future growth, recapitalize our physical assets, maintain our dividend and complete our share repurchase program. We have made substantial progress in each of these areas in recent years, and we expect 2013 to continue that trend. We'll generate and disseminate data on a number of Phase III assets and could have a number of regulatory submissions on potential new medicines. We expect to drive revenue growth across a broad range of products, geographies and businesses. Combined with our continued efforts to drive productivity, as well as our share repurchase program, we expect this will drive double-digit non-GAAP EPS growth in 2013. Our expected financial performance in 2013 places us on track to meet or exceed our minimum financial projections through 2014, as we still expect annual revenue of at least $20 billion, net income of at least $3 billion and operating cash flow of at least $4 billion. We believe our strategy is the right one for Lilly to create value for patients, physicians, payers and our shareholders. And our track record gives us increasing confidence in our ability to execute this strategy successfully. As always, we look forward to keeping you apprised of our progress. Now, for the Q&A session, we like to take questions from each of the individuals in the queue. [Operator Instructions] Operator, first caller, please.

Tim Anderson, your line is open. Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division: A couple of questions. Your tax rate guidance for 2013 is 21%, essentially flat year-on-year if we ignore the slippage in the tax credit. Previously, you said that your tax rate would rise to the mid-20s percent in the 2012 to 2014 time frame because of patent expiration. I'm wondering if that mid-20s percent tax rate guidance is no longer relevant and might be too conservative? Second question, one of your slide showed Phase III data readouts, but I'm hoping to ask about a Phase II data readout specifically on your BACE inhibitor. You started enrolling for your program ahead of Merck. Merck is saying that they'll have their Phase II data in late 2013, can we therefore assume that we'll see your data by 2013 at the latest?

Thanks for the questions, Tim. Derica, if you'll take the first one and then Ilissa the second.

Tim, good question. On the tax rate, and if you think about our longer-term minimum guidance, what we stated was is that the maximum rate or the worse rate that we should experience through this period of 2011 to 2014 could be as high as the mid-20s. As you know, we did not give specific guidance on a per year basis. And so, I believe that guidance is still relevant. And yes, it is possible that through this period, we could be below that mid-20s maximum.

Ilissa?

Tim, regarding the BACE program, you are correct, it is in Phase II, we're excited about that program and if you look on ct.gov you'll see that it has a completion date in February of 2014.

Chris Schott. Christopher T. Schott - JP Morgan Chase & Co, Research Division: Just 2 questions. First, Cymbalta, I was just wondering if you can comment a little bit on how much spend went into that asset in '12, how much is going to fall in '13 and then how much more of a step down we'll see in SG&A simply due to Cymbalta going away in '14? Basically, what I'm trying to do is deconstruct a little bit of your underlying SG&A spend trends versus just simply Cymbalta-related declines. The second question was just looking for your assumptions on insulin trends in '13, talk a little bit more about the payor dynamics for the business this year. I think, recently, you commented also the overall insulin market was seeing a little bit slower growth, and I'm just wondering if there's any updates or change in expectations as we head into 2013?

Thanks, Chris. Derica, you want to take the Cymbalta spend question, and I'll handle the insulin question.

Sure. Chris, as far as Cymbalta, we've never specifically quantified exactly what the specific amount of spend is behind the Cymbalta brand, and so we're not in a position to do that here today. What I can say is that if you look at some of the key elements behind Cymbalta and specifically the DTC advertising campaign, clearly, that is one of the more expensive elements of the promotional mix behind that brand. And what we would anticipate is that as we progress through the year, we will begin to ramp down spend in that area. Likewise, obviously, we'll also look to reduce other areas of spend behind that brand as well. What we do know is that Cymbalta continues to be highly promotion-sensitive. And so as long as we continuing to get growth out of that brand, as we've seen even up until today, we will continue to put support behind it.

Just completing the thought on Cymbalta, while we haven't quantified ourself the numbers, for example spend for things like DTC, there are some external parties that give some of that information. I think you'll consistently see that Cymbalta is one of the top 2 or 3 brands in the industry in terms of DTC spend, so it is a pretty substantial number. In terms of insulin trends, and the payor dynamics, Chris. In 2011, there were a select number of accounts that were a little bit higher control that went into Lilly's favor, led to an uptick in our share of market during '11. We had the opposite dynamic with a little bit larger account, the Caremark account that switched to be Novo preferred to the exclusion of Lilly that led to share declines. As we head into '13, while there may be some slight changes on the margin, we don't expect those types of changes going into '13, so I think you'll probably see more stability in terms of the payor access side of things. It will continue to be a competitive market in terms of pricing, rebates and discounts. I think that's something we're seeing across multiple therapeutic areas here within the U.S. I know many maybe 4, 5, 6 years ago probably any list price increase that we would take, you might give up 1/3 of it in terms of additional rebates and discounts. In more recent years, we're probably seeing that more like 1/2, and that's why you're seeing our net price increases in the U.S. that you see reported significantly lags the list price increase that I know that you and other analysts follow.

Our next question will come from the line of Mark Schoenebaum.

I was just wondering if I could maybe ask a question around your long-term guidance targets post 2014. I noticed that statement wasn't -- there was no statement in the press release just around the language you introduced on your 2Q call around long-term margin expansion, I just wanted to look for a reiteration on that. And also if there's any way you could comment on the pace of that margin expansion after 2014, that would be really helpful. And then if -- I don't know if you're willing to do this, but one of the issues as I guess Washington reapproaches the budget over the course of the year is that the dual eligibles get an additional rebate. Would you be willing to help us at all quantify the impact that might have on your business in 2013 or in 2014, either qualitatively or quantitatively if that were to happen?

Great. Thanks, Mark. Derica, you may take the first one on the long-term and then John, the dual eligible piece.

On the long-term guidance, we still are committed to that. And as you know, in July on our 2Q earnings call, we stated that we would expect post 2014, to begin to return to margins more commensurate with what you've seen in the past from Lilly, so both on R&D as a percent of sales as well as our SG&A as a percent of sales. We still see ourselves progressing in that way. I can't give you specifics in terms of the pace, because it's depending upon 2 variables. One is both the number of new brands that we may be launching during that period, both the investment behind it but as well as the revenue uptake. And then likewise, also, how well we continue to make progress in terms of our continuing productivity efforts. Clearly, as we work through this, we will work to make sure the math stays commensurate and consistent with the guidance that we gave. And that if we're successful with launching our pipeline, you will see that margin expansion coming as a function of both growth in the top line, as well as continued prudent expense management. If we're not successful launching molecules from our pipeline, then we'll have to take more aggressive actions in terms of our expense management.

Mark, with respect to any proposal that might contemplate moving the duals or the LIS folks to Medicaid-type pricing for example from Medicare, I can't comment specifically on the impact on Lilly, but I would say that this proposal could have a significant impact on revenue for the industry. Just to compare this to the original healthcare reform proposal that in the early days at least was expected to cost the industry about $80 billion over 10 years, the actual bill that was passed is probably closer to $115 billion over 10 years, this is the Affordable Care Act. Now the CBO has estimated the impact -- the industry-wide impact on the dual eligible LIS proposal to be around $112 billion over 10 years. So it's an amount that's very similar to the original Healthcare Reform cost. And obviously, we believe that any move like this would place a disproportionate share of the expected healthcare cost savings or any such expected savings on our industry and would obviously have a very negative affect on investment R&D, and we're going to continue to fight that proposal tooth and nail.

Our next question will come from the line of Jami Rubin.

Just to follow up on an earlier question on margin expansion, encouraging to see SG&A as a percentage of sales come down this year, although on the other hand R&D as a percentage of sales has sort of ticked up relative to your long-term guidance. And I'm just wondering, as you look at R&D where you probably have less control, it's really driven by the number of assets in your pipeline, do you expect R&D post 2014 to be flat, up or down? And then my second question really relates to the solanezumab trial design. If you can provide some granularity as to what that looks like, how many patients? Is there any changes at all to end point? How long you expect that trial to last? And when we would expect to get a readout?

Thanks, Jami, for the questions. Derica, if you'll handle R&D expectations post 2014, and I'll comment on the solanezumab trial.

As I said a little bit to Mark, it's difficult to give you specifics at this stage because it depends. And clearly, as we look at the output from the current payout from our pipeline, if we're successful, then that gives us capacity to make increasing investments in R&D, assuming we have good prospects. Likewise, if we're not successful, then we, as I stated earlier, will have to relook at our expense base and figure out how to make the math work. So to say whether R&D will go up or down or stay flat, I think we'll have -- it will be determined by what the payout from our existing Phase III portfolio and what that looks like and how much of that materializes. What I can say is that we know that if you look at us in that, approximately that $5 billion range plus or minus a few hundred, that's kind of where we see ourselves going forward in terms of operating in that kind of sphere until we see the outcomes of our current Phase III pipeline.

One other thing on R&D to keep in mind, Jami, is we currently do have 13 assets in Phase III. A number of these, as Derica mentioned, will be producing data over '13 and into '14. Probably a more steady state number for us is going to be around 9 or 10 assets in Phase III as we sort of project things out. So you could have a little bit different profile of sort of preclinical Phase I, Phase II and Phase III to alleviate some of the upward pressure compared to this most recent period when this bolus of products is working its way through the pipeline and is now sitting in Phase III. On the sola trial, we're still working through with different regulators what some of the features of the additional trial would be to meet some of their potential needs. So at this time, we don't have any additional details to provide on number of patients or length. I can certainly reiterate what we've said in the past, we would anticipate that this would be a trial in mild Alzheimer's disease patients and we'll provide an update on the specifics of the trial design as soon as we're in a position to do so. I would guess that's still going to be some time, so I'd probably indicate that I wouldn't be expecting something by, for example, the January 29 call. It will be later in the year that we'll probably be in a position to provide some more clarity for you on that.

Seamus Fernandez.

So first up, can we just get some visibility on updates around the Alimta patent challenge, particularly in Europe? And would Lilly ever consider settlements with the U.S. challengers given its already strong position post the Markman hearing? And then the second question, Derica, again, kind of on the 2014 guidance, maybe just asking the question slightly differently, if you could just maybe highlight the 2 biggest impacts that you would say increase your confidence in the historical trough guidance and ability to beat consensus estimates in 2014, that will be very helpful.

Thanks, Seamus, we'll have Ilissa handle your first question on Alimta, and then Derica the 2014 piece. Ilissa?

Seamus, just to remind you where we stand in the U.S. on the Alimta patent and this is the method-of-use patent, we had the Markman hearing back in April that went in Lilly's favor, and now we are awaiting the Indianapolis District Court trial, which the date has been set for August 19. In Europe, a similar patent challenge has occurred. In the first instance, it went in Eli Lilly's favor. And at this time, there has been an appeal but no trial date has been set.

And just for clarification, that European proceedings within the European patent office itself, the appeal is going to the board of appearances within the European patent office. Just to set expectations, if we take the assumption that we're successful in the European patent office, which is our assumption, we would still potentially face, we've already got a couple of these litigations that have been initiated in individual member countries as well. So there will be, I think, quite a bit to play out still on the method-of-use patent in Europe. The other thing that I would say in terms of your question on, would we ever consider a settlement, we have not done so to date, but I do want to stress that's not a dogmatic position. Each and every time one of these situations comes up, our group goes through lots of different scenario and role-playing exercises to figure out what we think the best alternative is, taking into consideration the strength of our patent, arguments for the generics, other factors that would weigh into that decision. So again, I think nothing is off the table, but clearly, we do not have a history of having entered into those kinds of agreements. Derica?

Seamus, in regard to 2014, my statement in my earlier comments that based upon our outlook, we see ourselves meeting or beating the current consensus. It appears to me, Seamus, to be more driven by revenue. And what we've consistently stated is that when we look at our own internal projections, we absolutely see ourselves staying -- meeting or beating those minimal financial hurdles that we put out there starting with $20 billion in revenue and clearly, translating that into $3 billion in income and $4 billion in cash flow. When I look at the consensus estimate, it seems to be that consensus currently has us below the $20 billion mark in revenue. I think it's closer to like $19.5 billion. And so, for us, I see that as being the biggest difference. But we absolutely remain committed and believe and confident that we'll be able to meet those minimums that we put out there.

Tony Butler.

Two brief questions. Derica, if we can go back to R&D expense, you mentioned some commentary around business development as well. Does your R&D expense include payments which may be made to existing partners, and one I can think of maybe Incyte? And second, any potential future partners that you may have in this calendar year? The second question is around ramu in breast cancer. Would it be safe to assume that those data for progression-free survival in the interim overall survival data would be presented at ASCO or is that too early? Would it need to wait until the San Antonio Breast Meeting?

Great. Thanks, Tony. We'll have Derica will take the first question, and then Travis will handle the ramucirumab breast cancer question.

Tony, our R&D projections does include any anticipated milestone payments associated with partnerships that we may have entered into or expect to enter into in 2013.

This is Travis. Thanks for that question on ramucirumab in breast cancer. To your point, we do still expect the final progression-free survival as well as interim overall survival data mid this year. ASCO is likely too early for us to get that data out there to the external public. However, we are targeting that we would be able -- hoping to disclose that data later this year. San Antonio Breast would be one of those potential venues.

Catherine Arnold. Catherine J. Arnold - Crédit Suisse AG, Research Division: Two questions. First of all, could you clarify that your assumption for ramu in gastric is that it launches in 2014 so that an accelerated approval would be an upside to your expectations at this point? And then secondly, if you could talk about what your capacity is for business development given all of the programs that you have in late stage development given capital and competing needs of capital?

Great. Thanks, Catherine, I'll take the first question, and Derica, the second. So on ramucirumab gastric, we're still in the process of working through what might be the regulatory strategy. Clearly, this was upside surprise in terms of the data, as we had anticipated that this trial would really be a supportive trial to the combination second line gastric cancer trial that will report out later in '13. So I think it's probably safe to assume, yes, if we were to have that kind of an accelerated timeline, that, that also would be upside. Clearly, we're enthusiastic and looking forward to these discussions with regulators and hopeful that we'll be able to have a very strong submission of the standalone indication, which is different than the initial expectation. And once we have clarity from regulators, if that's possible, what the timelines would be, if that's a standard or accelerated, we'll be able to provide you an update on that. That will probably be coming here later this year, probably in the first half, hopefully we will provide that update to you. Derica?

Catherine, in regards to R&D and business development, let me first say that our prioritization around our capital allocation strategy has not changed. It continues to be first priority is funding our internal pipeline. The second priority is maintaining our dividend. And the third has been, yes, if we can find business development opportunities that are additive or adjunctive to our existing footprint or complements our existing pipeline, we will absolutely pursue. Even with our share repurchase program and with our current R&D spend, we still have capacity to go out and pursue selective business development opportunities. I would expect us to continue to be active in the Animal Health space as you've seen from us here recently. And in regards to in-licensing opportunities, we will continue to pursue those as well. One of the things that helps us in that regard is how we do portfolio management. So whether we're looking at internal development projects or we're looking at external opportunities that we look to potentially bring in, we get to weigh all of those relative to each other and make good portfolio management trade-off decisions. And that's how we're able to both make those decisions and stay within our funding capacity that we've outlined.

We'll go to the line of Steve Scala.

I'd like to follow up on Tim's question on the tax rate. What factors would push the tax rate to 25% in any time in years YZ? Might the Cymbalta patent expiration alone lead to this type of increase or are a multitude of factors necessary to push [ph] the tax rate this much and what are those factors?

Steve, this is Derica. In regards to tax rate, again, we did not give specific yearly guidance on the tax rate. What we said is just looking at all the factors and depending upon how things play out, the worst we could see getting is the mid-20s. Now obviously as we go through this period, there are the key things like the patent expiration and where those products, like the Cymbalta and the Zyprexa are manufactured, and most of those are in low tax regions. So when we lose patent on those products, it has an adverse effect on our tax rate. Likewise, the other key element of this -- contingency of this, is the mix of our external o U.S. income. So obviously that's the other dynamic piece here that is that mix changes over time as we're having patent expiration, that also impacts and can adversely impact our tax rate as well. So those are some of the factors that we're having to manage through, and we believe we can stay within that range. And as I stated earlier, it is possible that we will stay below that mid-20s guidance that we provided earlier.

Derica, why does the Zyprexa patent expiration have no impact on the tax rate?

Well, it's both the Zyprexa patent expiration as well as the other factor I highlighted, which was the mix of our o U.S. income. You also had impacted in our tax rate the excise tax from Puerto Rico. So when you look at those factors, those are things that's allowing us to keep our tax rate at the 21%.

Yes. And for those of you, I think as I have mentioned, Steve, in terms of the dynamic, if you remember, a couple of years ago, the Puerto Rican government, to raise revenue, imposed this excise tax on exports leaving the island. That essentially led to additional cost of sales for us with the benefit coming in the tax line. So essentially, when that hit in the bolus basically, it reduced the tax rate compared to what it otherwise would have been and it increased our cost of goods sold. Now as you move forward, they actually had that rate that was applied to the exports decrease over time. So one of the things that will driving up a little bit, and providing some pressure upward on the tax rate, is the reduction in that excise tax. It will be less cost of goods sold, but less of a credit on the tax line, if that helps.

Next, we'll go to the line of David Risinger.

I have 2 questions. First is more of a high-level vision for absolute cost-cutting. When I looked at your guidance, I saw that the operating cost guidance for 2013 is pretty flattish versus 2012, maybe slightly down given a little bit lower SG&A. But if you could talk about 2014, the net cost reduction that you expect and then beyond '14, I'm assuming that Lilly is projecting cost to rise given you're assuming pipeline success, and that could be revised in the future. But if you could comment also on the cost beyond '14 and whether we should be modeling them going up or flat. And then finally, just a quick minor question on the new sola trial, is PPG Axin [ph] and Quintiles going to continue to help fund that or not?

Dave, thanks for the questions. I apologize in advance for doing this, but since it was 3, I will go ahead have Derica answer the first 2, you're going to go back into the queue for the third one and one of your colleagues to pick it up, we're happy to do that. If not, I can follow up with you off-line. Derica?

David, in regards to the cost-cutting, again, we provided specific guidance for 2013. '14, we have the medium-term guidance that we have out there, those minimums. So I can't give you specifics for '14. But let me just give you some commentary on some of the dynamics that you should expect to see. We will continue to have some expenses associated with Cymbalta in '13. The DTC ads will not go away as of January 1, 2013. So when you do the '13 to '14 compare, you'll be comparing 2014 with 0 Cymbalta promotional spend versus decaying spend pattern as we march through 2013. Likewise, as Phil and I stated earlier, when you look at our clinical trial spend, our R&D spend, there are some key trials that either concluded their spend, there trials -- excuse me, key studies that were concluded in '12 or that will conclude in '13 such that when we get to 2014, some of our more expensive Phase III trials may be behind us. So that will impact also our R&D spend. So those are things that will probably look to drive our R&D and total OpEx spend down. Now beyond 2014, as I stated to Jami earlier, it depends. To say whether our cost will be increasing, flat or declining is going to be highly dependent upon the payout of our pipeline. If we're in a mode of launching several new molecules, then obviously that's going to put upward pressure on our SG&A spend. Likewise, it also allows us to then solve from what's our capacity in terms of the size of the portfolio that we want to develop from that point going forward as well and how, what impact that has on our portfolio management decision. So I'm not able to give you any more specifics beyond 2014 at this stage until we see how some of the cards play out in terms of our pipeline.

One of the dynamics I might highlight for you Dave is as Derica had mentioned a little bit ago in 2014 as we look at the Street consensus for revenue, it's down around that $19.5 billion, $19.6 billion level, and we're clearly expecting to be meeting or exceeding the minimum $20 billion that we had laid out. As we've looked through the models, there's very little to no new pipeline revenue in '14 in those models. So essentially, the difference that we're seeing is related to currently marketed products. So the other opportunity that we have that we've been very focused on is driving sales in those currently marketed brands. To the extent we can drive higher sales in those, that also gives us additional investment capacity. So it's not just the pipeline, it's also the continued focus that we've had on driving growth in the marketed products.

We'll go to the line of Greg Gilbert.

Sorry if I missed this, Derica, but did you comment on what level of pricing headwinds in the EU you're assuming in '13 versus what you saw in '12? And secondly, just to set the stage for the Analyst Day later in the year, will the intent there to be to take the long-term guidance construct out a couple of years or will there be some new elements to how you've talked about long-term financial goals?

In regards to, Greg, in regards to the EU pricing, in our guidance we have not anticipated any new pricing actions that has not been announced at this point in time in the EU. So we would see a continuation of actions that have already been put in place. One thing you will note that if you've been looking at our price rate volume sales chart that we provide on a quarterly basis, you'll see throughout -- through the first 3 quarters of 2012, we had stated price erosions in that 7% to 8% range. Now that 7% to 8% was comprised of 2 pieces: One was the impact of the Zyprexa price erosion due to the patent expirations in Europe. And then the underlying price erosion trends that we continue to see on an ongoing basis. If you just look at that ongoing trend, it's probably -- it's more like 3 to 4 percentage points versus the 7% to 8%, and that delta or that difference is the impact of Zyprexa. In regards to what to anticipate for October, we're still working through, obviously, at this stage what we are planning to share at that time, and I don't have any specifics I can share, is that -- but one of the things we do know is that hopefully by the time we get to October and after you having had an opportunity to see 3 quarters of performance from Lilly, that it will give maybe the market more confidence in our ability to meet those minimums, especially when I look at the current consensus that's out there today that has us below the minimums that we stated.

Marc Goodman.

Yes, can you talk about Japan, Emerging Markets, Animal Health and just your thoughts on sales growth there? Are these all double-digit areas of growth for this year?

I'll go ahead and take the question. Derica, feel free to chime in. So we've been having very strong growth over a number of years in Animal Health in Japan. We've talked in the past about being on a pace essentially to be doubling those businesses within a 5-year period, that's roughly sort of mid-teen kind of growth, 15% kind of growth. We envision that kind of growth continuing in '13 for those businesses. In the emerging markets, we have seen some slowdown compared to a couple of years ago in the market growth rate and a bit stronger actions taken by government as they're working to balance some of their budgetary issues with regard to pricing as well as adoption of generics. We've been seeing and expecting more, sort of depending on the year, high-single to low-double digit growth from emerging markets and that would also be the case for 2013.

The question will come from the line of Andrew Baum.

Quick 2 questions. First to Derica. Sorry to be a tax rate bore, perhaps you could outline for us how an increased share buyback as well as some of the European measures to incentivize pharma companies to invest such as the U.K. patent [indiscernible] also feed in into your longer-term tax rate projections. I assume the more you repatriate, the more upward pressure it puts on your tax rate. And the second question relates to Alimta. I wonder if you can share with us your expectations for what percentage of European Alimta you expect to lose through non-disodium salts of Alimta which may not be covered by your patent depending on interpretation within different countries.

Andrew, this is Derica, I'll take the first. In regards to our tax rate and implications of either tax repatriation or some of the tax rules outside of the U.S. In terms of the EU -- excuse me, the U.K., it has some impact but not materially. It does impact our tax rate in terms of the amount of cash we repatriate. But one of the things I've highlighted numerous times on previous calls is that we bring back to the U.S., through various forms, over $5 billion of cash from our o U.S. operations to the U.S. on an annual basis. And we're able to do that within the constraint of our 21% effective tax rate. Now, as we bring that back, some of it comes back as royalty payments for IP that's held in low tax regions. Some of it is coming back as reimbursement for expenses incurred in U.S. on behalf of o U.S. operations. And then, yes, the third element is just straight dividend, income outside the U.S. that we dividend back to the U.S. All 3 of those elements is what comprises our aggregate to the roughly $5 billion of cash that we bring back to the U.S. That has been more than sufficient to fund our U.S. operations, to pay our dividend, as well as helping now to actually fund the additional $1.5 billion share repurchase program. And we also have the benefit of the U.S. cash we receive as a result of the termination of our arrangement with Amylin around exenatide. So those are things that's creating more than sufficient U.S. cash to fund our operations and still allow us to keep an effective tax rate at 21%.

Andrew, on your question for Alimta, very good question. We've had some initial discussions with the team, but not in a position at this point in time to give any kind of a quantification what we think this is a real risk and if so, by market what kind of exposure there might be. We'll be doing some more follow-up with them as things evolve and potentially have some more to comment on at a later date.

We'll go to the line of Jeff Holford. Jeffrey Holford - Jefferies & Company, Inc., Research Division: So, I have a little bit of a question about longer-term gross margins, because you've talked a bit about SG&A and R&D spend there. And to my mind, there might be a few downward pressures on the gross margin whilst those other lines might be looking better. So I'm thinking about things, like the Boehringer Ingelheim alliance, which you might lower your SG&A and R&D cost, but in theory should have some negative impact on your COGS line. You might have increasing payaways [ph] from the parties on the new products you're launching and it sounds like your portfolio going forward will have more biologics in it and more products being sold outside the x U.S. So I wonder if you can comment a little bit on downward pressure on gross margin post 2014?

Okay. Jeff, this is Derica. Regarding the gross margin, before I get to beyond '14, let me at least reground us on where we thought we'd be through 2014. And in that medium term guidance that we put out there, we said that our gross margin should deteriorate to a position no worse than mid-70s, okay. And as you see in our guidance for 2013 as well as what we stated in '12, was we're looking at around that 78% range, approximately. As we think about post 2014, the margin expansion, both once again, at the gross margin line as well as the operating income line, is going to be geared towards 2 factors: One, what's the mix, the product mix of the new portfolio that we're launching that complements our existing portfolio base, okay. Those -- that's the biggest factor. So if we are launching a series of insulins. The gross margin on those products tends to be less than on a Cymbalta or Zyprexa. So that mix effect will be quite instrumental in determining what our gross margin percent looks like beyond that 2014 timeframe.

One of the thing that will help to expand margins going forward we talked about in the past is the insulin technical agenda that we had said would complete probably in that '16 to '17 timeframe and could expand margins, gross margins, in the insulin portfolio by several percentage points. So that also would help to offset, Jeff, some of the potential headwinds that you were citing.

And that would come in that post '14 timeframe.

Damien Conover.

I just wanted to follow-up on the outlook for SG&A expenses for 2013. I just want to get a better sense of the magnitude of the leverage coming from there. Is it largely Cymbalta? Or are you picking up 50-50 from Cymbalta versus cost-cutting? And the question is in the context of potentially looking at how much potential there is for cost-cutting going further, especially in the post 2014 time period just in case some of that sales leverage doesn't play out? Just want to see how much leverage is still potentially there for cost-cutting?

Sure, Damien. In regards to 2013, our reduction isn't just coming as a result of Cymbalta. We've been driving productivity, as I stated in my call text, across all areas of the business. We set the goal for ourselves earlier that we would cut $1 billion out of our cost structure by the end of 2011, and we've reduced 5,500 headcount by the end of 2011. We more than exceeded both of those goals. And those cuts or those reductions came across almost uniformly the entirety of our business mix. So it wasn't just in R&D, it wasn't just in manufacturing, it wasn't just in back office, it was almost uniform across our business in terms of its proportionate. We see continuing opportunities going forward to continue to drive future productivity improvement. We've employed tools like Six Sigma, which has generated over $1 billion of benefit to Lilly, and it helped to offset some of the cost increases we're seeing as we were looking to fund an ever-increasing size portfolio in terms of Phase III. So that's how we've been able to accommodate a portfolio today that's more than 5x what it was in 2004, yet our R&D spend is about 2x as what it was in 2004. So that's how we've been trying to drive productivity across our business, and we continue to be diligent in that area and quite vigilant in our efforts to maintain that kind of momentum.

We have no further questions coming from the phone line.

Okay, great. Well, thank you very much to all of you for your participation in today's call. And hopefully, this new format definitely allowed us to get to a lot more of the callers that were in the queue and exhaust it. So hopefully you find that helpful. We look forward to seeing a number of you probably next week on the West Coast and being back on the phone with all of you on January 29 for our Q4 2012 earnings call. Have a great day.

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