Ladies and gentlemen, thank you for standing by. Welcome to the Q2 2018 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] We do remind, today's call is being recorded. Replay information will be given out at the conclusion of the conference. Your hosting speaker, Dave Ricks. Please go ahead, sir.

Good morning. Thank you for joining us for Eli Lilly and Company’s Q2 2018 earnings call. I’m Dave Ricks, Lilly’s Chairman and CEO. Joining me on today’s call are Josh Smiley, our Chief Financial Officer; Dr. Dan Skovronsky, President of Lilly Research Labs; Enrique Conterno, President of Lilly Diabetes and Lilly USA; Dr. Sue Mahony, President of Lilly Oncology; Jeff Simmons, President of Elanco Animal Health, and unfortunately Christi Shaw, our President of Lilly Bio-Medicines is ill and won’t be joining us today. We’re also joined by Kristina Wright, Jim Heaney, Kevin Hern and Phil Johnson of the IR team. This will be the last earnings call for Sue Mahony, President of Lilly Oncology who will retire at the end of August. Sue led Lilly Oncology through the integration of ImClone, successfully launched several key brands, including most recently Verzenio; and has now refocused our Oncology R&D strategy. I want to thank Sue for her leadership over the past 18 years at the company and for her inspiring passion for helping patients. Please join me at a round of applause for Sue. During this call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially, due to a number of factors, including those listed on Slide 3 and those outlined in our latest Forms 10-K and 10-Q filed with the SEC. 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 it is not sufficient for prescribing decisions. We continue the strong start to 2018 with the second quarter revenue growth of 9%, non-GAAP operating income growth of 28%, and non-GAAP EPS growth of 35%. New pharmaceutical products continue to be the driver of our worldwide revenue…

Thanks Dave. Slide 8 summarizes our presentation of GAAP results and non-GAAP measures. While Slide 9 provides a summary of our GAAP results. I’ll focus my comments on our non-GAAP adjusted measures to provide insights into the underlying trends in our business. So please refer to today's earnings press release for a detailed description of the year-on-year changes in our second quarter GAAP results. Looking at the non-GAAP measures on Slide 10, you'll see the revenue increase of 9% that Dave mentioned earlier. Gross margin as a percent of revenue decreased to 76.1%. This decrease was due to the effective foreign exchange rates on international inventories sold. Excluding this FX effect, gross margin as a percent of revenue actually increased 130 basis points, primarily driven by manufacturing efficiencies, partially offset by the timing of manufacturing production. Total operating expense decreased 1% with marketing, selling, and administrative expense decreasing 4%, offset in-part by an increase to R&D expense of 5%. Total operating expense as a percent of revenue declined 450 basis points, compared to Q2, 2017, driven by our continued efforts to reduce our cost structure and increase our margins, accelerated by the restructuring actions we took late last year. Total operating income increased 28% compared to Q2 2017, which put our operating margin at 29.1% for the quarter. And as Dave mentioned earlier, excluding the effect of FX on international inventories sold, our operating income was 30.6% of revenue, an improvement of nearly 600 basis points versus last year’s quarter. Other income and expense with income of $12.2 million this quarter compared to income of $60.4 million in last year's quarter. Our tax rate was 17%, a decrease of 470 basis points, compared with the same quarter last year, driven primarily by the impact of U.S. tax reform. At the…

Thanks Josh. Slide 19 shows select NME’s and NILEX as of July 17. In my summary of the quarter at the beginning of the call, I mentioned the positive movements for Nasal Glucagon and the Phase 3 addition of pegylated IL-10 from our acquisition of ARMO BioSciences. The ARMO acquisition also includes Phase II studies for pegilodecakin, which are now reflected in the pipeline. Additional movements at our earnings call include the start of Phase 3 studies from mirikizumab our IL-23 antibody in both psoriasis and all ulcerative colitis. The start of Phase 2 for our Tau antibody for Alzheimer's; the addition of the Aurora A kinase inhibitor into Phase 1 with the completion of the Orca acquisition. Attrition of lanabecestat, the BACE inhibitor for Alzheimer's diseases we were studying in collaboration with AstraZeneca and the attrition of one Phase 1 diabetes asset. On Slide 20, we provide an update on expected key events for 2018. In addition to the pipeline movement I’ve already noted, you will see that we have added a new line to reflect our expectations that the U.S. Alimta label could be updated before the end of the year for the Phase 3 KEYNOTE-189 data. Under regulatory submissions, you’ll see the submission of Nasal Glucagon and the new indication for Cyramza, second line liver cancer, as well as Lilly and Boehringer Ingelheim's revised expectation that the U.S. submission for the combination of empagliflozin, linagliptin and metformin XR will occur in 2019. In the Phase 3 data presentations at publication section, we reflected presentation at ASCO of the REACH-2 study of Cyramza, as well as the presentation at the American Headache Society of the Phase 3 cluster headache trials for galcanezumab. And in the Phase 3 topline data disclosure section you’ll see the announcement of positive Phase…

Great, thank you Dave. We would like to take questions from as many callers as possible. [Operator Instructions] Kevin, if you can please provide the instructions for the Q&A session and then we are ready for the first caller.

Thank you. [Operator Instructions] First question is from the line of John Boris, SunTrust. Please go ahead.

Thanks for taking the questions and congratulations on the operating results in the quarter. Dave, first question just has to do with the blueprint, obviously proposed by HHS secretary and the White House administration, what do you view as the base case scenario potentially coming out for the industry and or best case scenario that could come out of that blueprint? And then just any thoughts on this issue that’s rising on copay accumulators that are certainly blunting manufacturers ability use copay assistance against co-pay accumulators, it seems to be very detrimental to patients getting access to medicine, so, any thoughts that you have around that? Second question just has to do with the emerging pain, franchise, just to your optimism over that franchise, especially galcanezumab, which seem to have hit some pretty decent data in cluster headache, which is an area where nothing seems to have worked in that area, so just your thoughts on that and Lasmiditan, the timing profiling of Lasmiditan here in the back half? Thanks.

Hi, John, thank for the questions. Dave if you want to go ahead and comment, and then Dan if you want anything on the pain franchise that would be great. Dave?

Okay, great. Thank John and thanks for the questions. Just on the policy side, of course blueprint was rolled out in May. And recently, and all actors in the industry seemed to have responded to the requested information. So, you asked me to guess where this will land, that is a really difficult thing to do at this point. Because there is dozens of ideas in there. I think we can comment on actions that have been initiated though because I think that indicates where the administration might be going first and of course many of you may have noted, last week the administration sent to OMB a proposed rule change for the Anti-Kickback safe harbor, which relates to rebates. We don’t know the substance of that rule change, but this is heavily commented on through the archive via questions and I think you’ve right to assume that there will be some changes to the Anti-Kickback Statute as it relates to rebate treatment. We don’t know what those are and I think we’re preparing for all scenarios there, but this is consistent with the broad theme of looking at ways to reduce the growth in that spread in the industry and to allow patients to have more – a price point in high deductible or without insurance that is closer to net pricing. Overall, we support that. I don’t think that’s a bad thing for innovators and we’ll have to watch how that rule develops. We don’t have any specifics as of today. You also saw the administration move on putting a task force together related to addressing off-patents, brands, who take super inflationary price increases. In the absence of IP this is really a regulator failure from our perspective, the administration is talking about importation. We think that’s the…

Dan do you have any additional comments to make or…?

Yes, I will just reiterate that we’re pleased with the data we’re seeing with good galcanezumab of course and I think probably I’ll highlight three opportunities here for Lilly, specifically in the migraine space. First, we’re really quite pleased with the quality of our data galcanezumab works fast and has a prolonged maintenance of efficacy in our clinical trials. I think we’ll be, right now, as far as we’ve seen the only CGRP antibody that has 100% clearance data. So, 100% reduction in migraines. That’s statistically significant in our clinical trials. The second opportunity here is with Lasmiditan, as you heard from Dave having both of these products we think could be important for patients and then of course the third is what you mentioned, which is cluster headache, which is another important indication and we’re pleased with the data that we have there. So, differentiated opportunity for Lilly.

Thanks, Dan. Kevin, if we can go to the next caller please.

And next question is from the line of Chris Schott, JP Morgan. Please go ahead.

Great. Thanks very much for the questions. Just two here, maybe first on tanezumab, can you put this initial Phase 3 data we say into context as you think about your enthusiasm for the program and specifically on safety is there a threshold on rapidly progressing osteoarthritis that the FDA is focused on here, how should we think about that safety profile going forward? My second question was on price increases, it seems like the tone across the industry is a bit more restrained than the past on willingness to take increases, is this a 2018 dynamic or do you see this trend continuing out into 2019 and beyond? And I guess given a disconnect we’re seeing between gross and net pricing, if there is a slow down in list price increases going forward, should we think about that impacting net price increases or is that less corelated than it has been in the past? Thanks so much.

Great. Chris thank you for the questions. Dan if you want to comment on tanezumab and then Dave feel free to complement that answer and then we would take the price increase question. Dan?

On tanezumab, of course we previously said, we have a lot of confidence in this mechanism of action based on the wealth of data that’s been generated in the past, and of course the challenge here is to discharge the safety risk. Having said that, we also changed some aspects of how we minister the drug in the new Phase 3 program on which we’re collaborating with Pfizer. So, this first study was primarily focused on that aspect and so this is a titration study where we’re investing a subcutaneous of 2.5 and 2.5 going up to 5 milligram doses. And we're pleased that we hit our efficacy outcomes here. With respect to RPOA rapidly progressive osteoarthritis your question on thresholds, of course we and others here have thresholds in our clinical trials that we’re watching for, we haven’t spoken specifically around what those might be and our trials continue to proceed. So, we’re excited about that. This study wasn’t designed to discharge the safety risk that study will come with data probably next year or late this year and that’s a next year 3000 patient 56-week clinical trial.

[Indiscernible] Dave?

Yes, I would do that. I think, as I said before the key gating thing is this large safety discharge study we now, I guess more than a dozen Phase 3 trial on tanezumab on efficacy, really the question is, is it safe for long-term use. You know, on price increases it’s difficult to comment on others actions or even what happens long term. We’ve as this blueprint has been rolled out, I think our point of view is, is this a potentially sweeping set of changes let’s see what develops here in 2018 as those changes get implemented or not and then on the backend of this important public conversation about how do we reduce out of pocket cost for patients, while preserving innovation and allowing market forces to prevail, how can we reshape the system on those principles. On the backend of that, of course we’ll reevaluate our strategies. You know net pricing of subject not just to list price changes. And as you know Chris the yield of those is quite different across different categories, but also subject to prior period adjustments on assumptions made in gross to net on current channel mix in many, many other things. So, you will see I think in U.S. we will reflect being a 1% positive, which reflects prior increases, as well as all those other dimensions. As Josh said, we don’t have list price changes in our outlook and it’s still very robust and that’s kind of where we are focused is driving volume of new products here in the U.S. and abroad.

Thanks Dave. Kevin if we can go to next caller please.

And the next question is from the line of Greg Gilbert, Deutsche Bank. Please go ahead.

Thanks. First for Dave. I was hoping you could share with us not a question about the IPO here, but how are the Elanco transaction or transactions in the coming quarters shape your thinking about capital allocation priorities for Lilly? And then shifting gears to diabetes, you touched on this a bit, but given the strong profile for the current injectable GLP-1’s and the emerging oral GLP-1 can you put a little more meat on the bones in terms of that bar you talked about, is that the primary endpoint or the multitude of endpoints that shaped your thinking there and perhaps you can fill in any updates on your own oral GLP-1 work? Thank you.

Great Greg. Thank you for the questions. So, Dave, if you comment on Lilly capital allocation moving forward. And then Dan and Enrique, if you'd like to take the question on what we saw with our GIP/GLP in Phase II. Dave?

Thanks Greg. Well as I said, you know this move is really the result of a deep and thorough analysis at the value maximizing decision for Lilly’s shareholders. We think an IPO produces the after-tax value and also that it will allow more focus, focus for Elanco on its priorities, allocating its capital to the produce to grow that business, and serve its customers and focus for Lilly, which for us assuming this all goes forward as planned will be a human pharmaceutical business with, I think many opportunities to invest in creating breakthrough products for patients. Our strategy on capital allocation doesn't change as a result of this decision, which is really first to invest on our business on our organic ID and the launches in capital needed to manufacture those products et cetera. Secondly, to look at business development, to build our pipeline as the commentary there isn't different than before, which is really we’re mostly interested in clinical stage assets that can build at our core five therapeutic areas. I think you saw a number of moves in Q2 in that regard, most notably the ARMO acquisition as an example of the kind of thing we’re interested. And then finally, if we run out of those ideas, we will return capital to shareholders and this quarter we’re announcing a share repurchase program, which will allow us to continue to do that. As we said, there was 900 million or so in share repurchase activity in Q2 consistent with those priorities. So, I think we have taken a balanced approach on capital allocation. You can expect that to continue and we have more capital to balance. We’ll do just that.

Thanks, Dave. Dan?

Yes, sure. We previously said that we see incretin biology as an important platform for Lilly to continue to build on that there is a lot more opportunities here for patients, and so over the years we’ve invested here and developed and tested now a number of different molecules that could offer differentiated efficacy in this platform. So, for example, the oxyntomodulin molecules, we're now testing a second one of these in clinical trials, the GLP and other molecules that are in earlier development. In each of these cases, we’re really looking for what we consider to be breakthrough efficacy. In the case of GLP here we were encouraged that dual agonism of both of these receptors which we think is very important in our preclinical studies showed highly differentiated weight loss and glucose controls. So, we're encouraged by that. We took it into Phase 1 clinical trials. We commented that we’re encouraged by what we saw there and therefore moved it into Phase 2 clinical trials. And I’ll hand it to Enrique for the future of this module.

Yeah, no. I think you’ve framed it well, but we do have a high bar for any type of next-generation incretin. And this product clearly met that bar, but we won't be able to comment on the specifics of the efficacy just to say that we do plan to have a full presentation at EASD and then an Investor Call following that.

That would be early October.

That’s correct.

Thank you. Kevin you can go to the next caller please.

And that will be Andrew Baum, Citi. Please go ahead.

Thank you. Couple of topics. Just to zoom in on the first question around the blueprint particularly the proposal on rebates. Our understanding is this totally relates to federal forms of the plan. I just want to make sure that’s consistent with your understanding? Second, assuming that is the case, how do you envisage the world working if PBMs could meaningfully amend their structure of that rebates or remove rebates altogether for federal plan. Is it conceivable that the commercial side of the business will remain as is? Or would you anticipate that may change? And finally, timing, we assume that nothing is going to assume happen just given the plan is that until 2020 if the earliest again is that system. And then the second topic, just one question on tanezumab. What are you anticipating in terms of enabling requirement, radiographic scans given in the real-world patients maybe premedicating with NSAIDs, which may increase some of the stakes that you saw in the earlier trials? Thank you.

Okay. So, we’ve had a series of questions essentially on the blueprint, specifically on the rebate program, and is that only applying in our understanding of the federally programs? What will be the impact of PBMs during the commercial business of that same kind of change we you go into effect, earliest timing that we are thinking is 2020 appropriate? And we also had the question on tanezumab in terms of labeling required for radiographic scan. So, Dave if you want to take the first question. I'm not sure as much we can say, but whatever we can see on the blueprint speculation and then Dan if you want to comment on tanezumab?

I was just going to reiterate. Andrew it is difficult to speculate on a proposed real change when all we have is the title of the rule. I think if you read it like we can, which basically says the change to the rebate rules and the Anti-Kickback Statute and replacing it with a new set of safe harbors. Mike Harrington's with us, who is our General Counsel, I think it came about with and I think that statue, the first two, but I believe it is just federal programs, Mike you want to comment on that?

Well I think we’ll have to see. The Anti-Kickback Statute addresses payments made to induce prescribing. So, we will have to monitor it closely, but it is potentially, yes that it could expand more broadly beyond just the federal programs.

Thank you. And then tanezumab and the radiographic labeling?

Yes sure. So, certainly premature to speculate on the labeling on tanezumab, given that we don’t have the primary safety data yet, but as you know we made some changes to the Phase 3 program to try and decrease the risk of RPOA. I think most significant among those is lowering the dose of tanezumab. And so that’s again why this titration study was the first step in demonstrating that. We still have the efficacy that we need. Another change was reducing or eliminating the concomitant use of NSAIDs in OA patients, as well as changing our screening methods as you mentioned. Let's see what the data show and based on that we’ll be able to talk more about where we’re headed in labelling.

Thank you, Dan. Kevin, next caller please.

And next we have David Risinger, Morgan Stanley. Please go ahead.

Yes, thanks very much. I have a few questions. First, with respect to the strategic exits that you mentioned for Elanco, obviously you can't talk about the IPO, but I just wanted to better understand when those strategic exits were completed that had a negative impact on revenue in the second quarter and thus when they will annualize? So that’s the first question. Second and, with respect to Jardiance and Trajenta, both of those products were flattish sequentially, so they were outliers, obviously the rest of the portfolio was extremely strong, could you help us better understand why they were flattish sequentially, despite the prescription growth that we saw? And then my final question is with respect to your Alzheimer's candidates, you have two candidates in Phase 2 with readouts in coming years, can you just provide a framework for those two Phase 2 programs, including the timing? Thanks very much.

Great Dave, thank you for the questions. So maybe Josh if you want to take the first questions on when we've completed some of the strategic exits and sort of what the time course is for those eventually to annualize and then Enrique on the sequential growth patterns for Jardiance and Trajenta, and then over to Dan for the question for our Alzheimer's programs in Phase 2. Josh?

Thanks David. The most significant and the strategic exits would be our Posilac business in the Augusta manufacturing plant in Georgia, but we really just completed that exit over the course of this month. So, as you know Posilac has been declining over the course of 2017 and 2018, so I think you’ll start to see this annualize in total revenue beginning in the second half of this year just as we start to walk through some of the significant headwinds we saw last year. I think it will be totally opposite numbers by the time we get into sort of late 2019, but the majority of the effect that we see for Posilac that’s gone down every quarter because the product before the strategic exit the product was declining pretty significantly. We also announced that we were on a smaller basis exiting a few contracts, including a manufacturing contract that we had around BI when we acquired the vaccine portfolio, low margin opportunity, but on the topline that will start to come out of the numbers in the second half of this year as well. Remember when we gave guidance for Elanco, at the beginning of the year we said, you would see a pickup in growth in the second half of the year as some of these big items began to normalize in the numbers. I think that’s why we are focused on core Elanco business, which really looks at that portfolio, which is not, we’re not exiting from, and is the basis of our growth going forward.

Thanks Josh. Enrique?

Very good. So, let’s start with the easier one. Trajenta net sales in the U.S. reflects the trends that we see when it comes to total prescriptions basically it’s a steady number of prescriptions quarter-on-quarter and that’s basically what we see when it comes to net sales. When it comes to Jardiance just maybe to provide a bit more color, we show in the case of Jardiance a 58% TRX growth versus the previous year quarter-on-quarter. On a sequential basis that growth is 13%, so very solid growth when it comes to Jardiance, but the net sales, there is a disconnect there because the net sales for the quarter versus the previous year only increased 28%. We did have an adjustment due to changes in estimates for rebates and discounts normalizing for the growth versus the previous year would have been 46%. Now, when we look on a sequential basis in the case of Jardiance, some of those changes and estimates for rebates and discounts really belonged in Q1, so you basically have a double whammy effect when you look at the sequential quarter-on-quarter comparison.

Thank you, Enrique. Dan?

Yes, thanks for the question on the question on the neurodegeneration portfolio. We actually have 3 neurodegeneration-targeted molecules in Phase 2 trials starting with D1 PAM. This is designed to be a symptomatic molecule for patients suffering with dementia. Initially, we’re testing it in Parkinson's diseases dementia. We have reason to believe that there is a higher probability of success in that population, but if we get a positive signal there we would very quickly move that also in parallel to Alzheimer's disease. So, that’s the first. The other two that you mentioned, the next one behind it is N3PG that’s an anti-plaque A-beta antibody. Based on what we saw in some pretty standard Phase 1 trials. This molecule can clear plaques really to a very dramatic depth. So, a great degree of clearance and also with a great amount of speed. So, faster clearance I think that we’re seeing with other mechanisms. So, we’re excited about that. We’re testing that as monotherapy. We’re also testing it in conjunction in combination therapy. I believe it’s the first combo trial of two disease modifying drugs and Alzheimer's disease with a base inhibitor, with a thought here that although base monotherapy has been disappointing if you turn off A-beta production, also clear out the plaque that could have added benefits. So, that trial is enrolling and then we also have the Tau monoclonal antibody. This is specific for aggregated forms of Tau and we think this is an important therapeutic morality and Alzheimer's. Both of those Phase 2 or really all three of the Phase 2 trial are designed to give us efficacy signals both on biomarkers and on cognitive endpoints. I think on clinical trials.gov, we show the disease modifying trials ending in 2020, it’s an 18-month treatment period, but depending on enrolment rates and depending on potential for interim analysis this is also potential to have data read-outs earlier, even next year. You will have to wait and see how those trials go.

Great, thank you, Dan. Kevin if we can go to the next caller.

And the next question is from the line of, one moment please, it’s going to be Jami Rubin, Goldman Sachs. Please go ahead.

Thank you. David just want to go back to some of the questions around rebate structures and I recognize that it’s early and it’s hard to predict how this is going to play out, but just when you look at your own numbers and think about different scenarios, looking at filing Lilly's gross to net of 48% is the widest in the industry, largely because of your diabetes franchise. Is there a change to those rebates, what would you expect to happen to volumes, you just said that volumes that rebates are used to induce volumes, so would you expect volumes to go down for that business? Conversely, if rebates go away, Lilly has about 10 billion in rebates, how can this not be a net positive even if you take into consideration lower volumes and potentially lower risk price, how are you thinking about the different scenarios that can play out here? Thanks.

Great Jami, thank you for the questions. Dave?

Thanks Jami. I mean the huge opening caveat here is, we don’t know right. We don’t know what this rule. We don’t know where the system will go. We paused on the list price changes in the U.S. waiting to seeing what is happening here. So, just to get the numbers right, we reported last year of 51% gross to net spreads, you were right in that diabetes segment in particular drug that primarily because you have a very large Medicaid population and you have a very large gross to net spreads and Medicaid approaching the federal capital to 100%. So, we have been pretty open about all that. It depends on how this rule would be enacted, whether it would change the Medicaid system, whether it would treat that commercial et cetera, to really guess at what would be on the other side of it. As I said in my first response though, you know we make innovative products, hopefully products people want and need, I think the current system has resulted in basically a structure of the industry where the hospital systems, insurance carriers, distributors, and manufacturers seem to be fine with the current system, the problem is we're shifting too much costs via list pricing directly to consumers. I have to believe that if consumer pricing came down, it would improve volume, improve medication adherence, improve outcomes for patients. So, we think, that’s why in general we think this direction travels a good way. Now, we have to see all the specifics just clearly there is a lot of room for disruption in a negative way here and it'd be very difficult for Lilly to predict what would happen to their gross to net line you're talking about or, more specifically, without seeing the totality of the regulatory reforms.

Is that a scenario there where this is a net positive for the industry, even if volumes do go down, but your rebates go away as well?

I think it is a lot of scenarios Jami, it is hard to speculate.

Okay, thank you.

Yes, great.

Thanks Jami. Kevin, if we can go to the next caller.

And next we have Geoff Meacham, Barclays. Please go ahead.

Hi guys, thanks for the question. On Olumiant, I would just want to ask you guys a little bit more detail about the strategy going forward for the 4 mg dose in RA. What are the options you are looking at and maybe just put this in the context of the priorities compared to your label expanding studies in atopic dermatitis, psoriatic arthritis, et cetera? And then, Dave or Josh, with the Elanco spin-out, you've – pipeline progress and obviously a few smaller scale deals already done it on oncology, maybe just help us with, you know, is it fair to say BD is now a lower priority, is there a category that you feel like you still need to add assets like for example in oncology to be more competitive? Thank you?

Great, Geoff thank you for the questions. So, Dan maybe if you can comment on strategies going forward for the 4 mg in RA and how that may compare with other NILEX opportunities that we're evaluating and then Dave obviously the comment on the business development priorities that we have moving forward. Dan?

Yes, thanks. We are excited about the potential of baricitinib for patients that potentials being realized, of course, to a greater extent outside the U.S. in places where both doses are approved. At the advisory committee, I think we were clear in our position about the benefits that each doze could have for patients and we are clear that after the outcome in our disappointment, I think in terms of next step for, next steps for the 4 mg dose we are still considering what different possibilities might be internal at this time. I think that in terms of the prioritization here there is great opportunities for baricitinib in RA, but also in some of the other indications, so the lupus data, which was recently published in Lancet, I think, represents a really great opportunity for patients and an opportunity here for us to be first in class here in lupus. We’re also excited about atopic derm where we now have a Phase 3 trial ongoing. So, lots of opportunities for patients with bari remaining.

Yes, I would just add, you know we’ve launched just now sort of promoting in July and in the U.S. with the 2 mg anecdotal feedbacks very positive and we know from the German launch French launches, which are ongoing, that patients have rapid pain relief. This is a different modality than are used to in disease modifiers for RA and we’re far from disappointed with the performance of the molecule at a global basis. More to do in the U.S., we’ll update investors and probably in more detail at the Q3 call on that performance in the life cycle as Dan pointed as potentially quite broad. On the second question of BD priorities, I hate to say this, Geoff, but I think you have it exactly wrong. I wouldn't attribute it all that would satisfy with BD. We are in a position now with, we are growing – the top line, we’re growing income, we’re growing cash flows, we are very interested in acquiring assets that all of our therapeutic areas of interest. We are not plugging a whole here, it is really about building value for the long-term and because we are optimistic about the short and mid-term in terms of growth prospects, we are in a position to do just that. So, I would expect to see a continuous flow of pipeline ads from – hopefully from our own labs, but if not from outside labs as well. And we have more than enough resources to execute that strategy.

Great, thanks Dave. Kevin, if we can go to the next caller please.

The next question is from the line of Jason Gerberry, Bank of America. Please go ahead.

Thanks for taking my questions. I guess just first question on Humalog. You've now gotten first half of the year the benefit in terms of the changes and estimates. But just on the, I guess, rebates, but can you talk about second half where you are in terms of comps and then kind of moving forward into 2019, how comfortable are you at this stage that the biosimilar competitor won’t really represent a meaningful source of competitive pressure to the business? And then my second question, just on galcanezumab. The feedback from the Amgen launch in the CGRP space seems to be pretty favorable. I'd just be curious to get your evolving thoughts on, do you think payers are going to cover multiple CGRP agents on par or parity or do you think that they will opt for exclusive contracts out of the gate? Thanks.

Jason, thank you for the questions. Enrique we’ll go to you for Humalog, I am not sure Dave, if you may want to handle or will it…?

I’d start [indiscernible].

Absolutely. Enrique?

Sure. So, Humalog had an excellent quarter. We did have a benefit in Q2 due to changes in the estimates for rebates and discounts. That benefit was – relative to the previous year was about 9 points, so an important benefit. Now, as we – it is difficult for us to be able to project forward, but we are seeing a bit of a benefit also when it comes to mix. So, when we look at the different segments, which is a positive for Humalog for the insulin franchise. Now, as it relates to Admelog, it's very difficult to – for us to forecast and predict how the competitor would basically play in the market. Clearly at this point-in-time we will basically see them as gaining share in particular in the area of managed Medicaid, but it is difficult for us to predict what type of access and uptake we will be able to have in 2019.

Great. As it relates to the assets in the migraine category, you know it is pretty early days here. I understand mostly payers haven’t listed the new therapy. We’re of course for the guidance in FDA and early conversations with payers about our data and seeking that kind of feedback from them, I could tell you what our strategy is, which is reading broad access to these medications as appropriate and particularly given the population. So, these are mostly commercially insured, working women who are having anywhere between 4 and 20 headaches a month that is our study population, which causes absenteeism, debilitation, lack of ability to predict and schedule and plan, not to mention just the human suffering cost. So, we think employers will be very interested in covering this class. We need to get that message through. It could be a great category for some value and outcomes-based pricing approaches, and we're optimistic long term that the class will have good coverage. Enrique, do you have anything from your conversation with payers to add?

No, I think we are very excited about the opportunity that this new product would represent for us and we are working actively to try to ensure broad access.

Great. Thank you. Kevin, next caller please.

Next, we have Steve Scala, Cowen. Please go ahead.

Thank you, several questions. First, on Taltz. In Q1, inventory was down 33%, how much of the stellar second quarter performance was restocking the trade versus underlying demand? Second, a filing of galcanezumab in episodic cluster headache is not in the events table, so why is it 2018 filings not likely, is this a result of the miss in the chronic cluster headache setting and then lastly, do you have any early reading on 2019 formulary discussions? Are they resulting in similar positions as 2018 or is there a step change in anyway? Thank you.

Okay, Steve. I’m not sure with Christi being ill [ph] if we have a strong answer for you on the Q1, but we'll give at least a short answer for you. We can follow up later if needed, on the Taltz question for Q1. And then maybe Enrique if you would like to also comment on the 2019 formulary question and I’ll be happy to go ahead and provide a comment on the galcanezumab filing for cluster.

I think the short answer is that Taltz performance when we look at Q2 is really demand driven. We have seen improvements on across our prescription trends in both derm and rheumatology. So, we are very encouraged with the Taltz performance. We typically do not comment on specific formulary focus for 2019.

And Steve on your question for galcanezumab and cluster, very pleased with the results that we saw in the Phase 3 studies and certainly will discuss those with regulators but are not making any kind of a comment this point in time on potential filing or timing for such filing. Kevin, if we can go to the next caller please.

And that will be Umer Raffat at Evercore. Please go ahead.

Hi, thanks so much for taking my questions. I had three if I may, Dave, first, someone brought it up early as well and I wanted to make it a bit more specific on a product level as it relates to rebates and I guess my question was, when I look at mealtime influence, Lilly and Novo basically split the market, and Sanofi has minimal share. So, do you foresee any scenario on rebates where Sanofi becomes a more meaningful player in mealtime insulins? So that’s first. And second and third are maybe more on R&D, first on IL-10, my question is in your ongoing Phase 2 trials of PD1 plus IL-10, they are both open label and long. And any observation from that trial to date? And then also on R&D on tanezumab, have you - do we know what the rate of conversion was from Type 1 to Type 2 RPOAs in your prior trials? Thank you very much.

Raffat, thank you for the question. Enrique, maybe if you'd like to comment on the first question about any possibilities we see for Sanofi to become a meaningful player in mealtime insulins? Maybe Sue or Dan, if you'd like to comment on data from the IL-10. And then, Umer, I'm sorry, I actually can't read my own chicken scratch for what you asked on tanezumab. Oh, it's conversion from RPOA 1 to RPOA 2. And maybe, Dan or Dave, if you want to comment. So, Enrique, I'll start with you.

Yes. The premise of the question was under a - some sort of a different structure when it comes to rebates and so forth. It's - and I think Dave already mentioned this, but it's very difficult to speculate what the changes would be and what the competitive dynamic would be as a result of that change. Clearly, we do track Sanofi's products in the mealtime insulin space. But so far, I think, the uptake is very minimal.

Great. Thank you, Enrique. Sue, you want to start on the IL-10 question?

Yes, sure. We have two Phase 2 studies with IL-10, as you mentioned, one in the front line and the - one in the second line. Those - both those dose are currently enrolling. The endpoint is response rate data, and we’re anticipating seeing that next year.

Great. Thank you, Sue. Dan, do you want to add anything, or are you…

It’s fine.

Okay. And then on the tanezumab question?

Yes. So, I understand your question about rates of conversion into RPOA 2 from RPOA 1 in previous trials. I know there's a lot of interest in comparing what will be seeing in this current trial and future trials with tanezumab with the past experiences. But there's some really important differences, I think, that should lead us to avoid those kinds of comparisons, primarily around the way that we screened and for events and adjudicated events, which is quite different in this trial. And understandably since we knew what we're looking for, much more thorough. So, we don't have relevant data from the past to compare to. With regards to this current trial, we're not disclosing any more details at this point in time. But that should happen in a future meeting.

Right. Thank you, Dan. Kevin, next caller, please.

Next is from Vamil Divan, Credit Suisse. Please go ahead.

Great. Thanks so much for taking my question. So maybe just two on the oncology side. One, on Verzenio, the performance is pretty good this quarter. Just if you can give a little more color on which patients are getting Verzenio relative to IBRANCE or to Kisqali? And then second one, on Alimta, you mentioned you're open to have label update to include the keynote 189 data later this year. Just if you can comment on what you're seeing in terms of adoption of that regimen in practice to date, which Alimta uses now in combination with Keytruda in the frontline setting? Thanks.

Vamil, thank you for the question. So, Sue, for you on both Verzenio and Alimta updates.

Sure. Yes, thanks for the question. Yes, we're really pleased with the update on Verzenio today. The sales this quarter was $57.7 million, so that's a $20 million increase versus last quarter. What we’re seeing is, as you know, we're the third-to-market CDK, but we are second now in terms of both NRx, so new to brand and also in TRx. In this quarter, our NBRx share was 18.7%, and we continue to see that increase. So, we are pleased with the uptake. What we're seeing is when physicians are using the brand, they like it. So, our focus is in ensuring that we continue to get trial of Verzenio. And so far, we have about 1,500 physicians who have trialed Verzenio. The patients that they're using in is across the spectrum in the frontline and mainly in fulvestrant. And we do have some single-agent activity. But really, we’re starting to see much more now uptake in the frontline. So, with aromatase inhibitors as well as with the second line in fulvestrant. And the things that are resonating is the continuous dozing. The single-agent activity is clearly a differentiator. People are also interested, and I think the data is resonating in the fact that we see positive data in patients who’ve got concerning clinical characteristics. So, we feel pretty good so far about the uptake in Verzenio. We see opportunity to continue to grow that brand. The market is growing about 22%, and we - and only about 50% of patients are still getting a CDK4/6 inhibitor. With regards to Alimta, we've got the data uptake now in - for the KEYNOTE-021G data is now in the label. We have also submitted to the FDA to include the KEYNOTE-189 data. What we’re seeing is, as you heard, we are growing Alimta in the U.S. We have a 2% growth based on volume, 1% price, so 3% overall. And although the data was only presented at ASCO fairly recently, since that time, we are seeing an increase in new patient prescriptions. So, sort of as a reminder, about 50% of Alimta use is in the sort of in promoted areas. We do have Alimta - some of the use for the KEYNOTE-189 regime is sort of in addition to Alimta use that we've now. But we're clearly also seeing an increase in the typical use and we continue to believe that we'll see that going forward.

Great. Thank you, Sue. Kevin, next caller, please.

Next is from the line of Louise Chen, Cantor. Please go ahead.

Hi, thanks for taking my question. So, first question I had was, what gives you confidence that you will hit stat sig versus just non-inferiority in the REWIND trial for Trulicity? And even if it's not stat sig, can Trulicity still continue with robust growth trajectory that you see currently? And second question was just back on tanezumab. How do you think the FDA will balance the side effect profile of your drug versus the need for alternatives to opioids? Thanks.

Great. Louise, welcome to the call. So, Enrique, if you'd like to handle the question for REWIND. And then, Dan, over to you for the question on tanezumab. Enrique?

So Trulicity today is having fantastic growth. Clearly, the GLP-1 market is growing very fast at 26%, but Trulicity is also having continued share growth over the last few months. We have an excellent access position and quite frankly, an unmatched patient experience when we look at the real-world efficacy that Trulicity delivers. So, we'll look at patient adherence and very simply delivered. So very excited about the core performance of the product. Clearly, REWIND, as we said before, is an important trial for us, and we believe that we've designed this trial in the appropriate way. We expect that we're going to have a top line sometime by the end of the year. But we - one of the differences for REWIND versus other trials is the time the patients are going to be on the product. This is not a short product. It's fairly long, and we expect that the patients would be on average over five years on Trulicity. So, we look forward to the results of the trial. But at this point in time, we're not going to speculate.

Great. Thank you, Enrique. Dan?

Yes, they're strict with tanezumab. But of course, with Pfizer, our priority here in the current slated trials is to demonstrate the benefit, risks of this drug for patients in a variety of settings. Having said that, your question was sort of broader about the societal impact here of the opioid crisis and the need for non-opioid alternatives for chronic pain. Of course, we also see that. That's one of the reasons we're excited by the potential of the pain portfolio, one of the reasons that several years ago we decided to invest in the future for tanezumab. I think how regulators will see the interplay between new molecules for pain versus the opioid crisis is important. And we think that we have an important role to play there in helping solve that problem.

Thanks, Dan. Kevin, next caller.

And we do have a question from Steve Scala, Cowen. Please go ahead.

Thank you. Back on REWIND. On the Q1 call, it was stated that the top line press release could be anticipated in early Q4. Enrique, you just said year-end, so I’m wondering if there has been a change in timing? Secondly, on Alimta, does the ruling in Germany change anything in the market, such as allowing a generic launch? And then lastly, on Verzenio, a Phase 2 study in MCL had completed in March, but there has been no update when might we see the data? Thank you.

Great, Steve, thank you for the question. So, when we came back to you for the REWIND follow-up, and then Sue, to you for the Germany ruling for Alimta and the Verzenio Phase 2 and MCL.

There has been no change in timing. We expect that the top line would be released in Q4.

Okay, great. Thank you, Enrique. And Sue?

Yes, with regards to Alimta Germany, we - we're having junctions in place. So, it's really hard to say what the situation is with regards to generics. I mean, some may go at risk, but it's really hard to say with regards to that.

And then for Verzenio, we have the MCL Phase 2 wrap-up. Any thoughts on plans for MCL going forward?

Yes, I'm going to have to get back to you on that one. I’m not sure the plans with regards to the publication on that, but we’ll certainly get back to you on that one.

Great. And then also just to place in context for our Q2 results, European sales of Alimta were about $145 million less than $30 million of that came from Germany.

Kevin, if we have another caller, well, we’re happy to take the question.

Next will be Hima Inguva, BoA. Please go ahead. And your line is open at this time. Hima Inguva, your line is open.

Can, you hear me okay?

Yes.

Yes, we can.

Okay, great. Thanks very much for taking the question. On Slide 5, you're indicating a potential debt offering prior to the IPO, and not asking in terms of those transaction details. But do you expect this Elanco to be a levering up event for Lilly?

So, Josh, if you want to respond to the question in terms of what would cause Lilly to actually lever up.

So, the debt offering will - the intent at this point is to do that before we launch the IPO of less than 20% obviously over time that that sits on Elanco’s books. I think, if you look at Lilly’s capital allocation priorities and cash flow, we do expect to be more levered over time as a function basically of tax reform. You'll recall that prior to tax reform, we were in a position where we had cash that was restricted in how we could use it. And it was in effect trapped overseas and that has freed up, we don't need to keep as much cash. So, you should expect to see Lilly on a net basis be more levered. And, in fact, in Q2, we moved into a net debt position. So, it’s less an issue of what will happen with a Elanco, because that will normalize over time and more a function of our capital structure, which is now - gives us much more flexibility as we're able to manage and use cash around the world.

And this is Phil. I get to my new role as Treasurer. When we would separate a Elanco should that occur, which is our plan, we would lose a certain amount of EBITDA, there would not be a significant reduction to our debt. So, there would be a modest maybe 20 basis point increase in the debt to EBITDA kind of numbers that we have a very minimal change in terms of Lilly's leverage moving forward. Kevin, do we have any more callers in the queue?

That's very helpful. Thank you.

You are welcome.

No further question in queue at this time.

Excellent. Thank you very much, Dave. If you'd like to go ahead and conclude the call with some comments.

Thanks, Phil. We appreciate your participation in today's earnings call and your interest in Eli Lilly and Company. Our strong first-half growth makes us increasingly confident in our ability to deliver 5% compound revenue growth from 2015 to 2020 and to achieve a 30% operating margin in 2020. While our first-half pipeline accomplishments continue to highlight the depth and breadth of our prospects for growth beyond 2020. As demonstrated most recently by our decision on Elanco, we continue to take concrete actions to focus our resources and allocate capital to best serve our customers and create value for our stakeholders. With a diverse set of new product opportunities to drive growth, a strong R&D capability and a clear path to margin expansion, we believe Lilly continues to be a compelling investment. Thanks, again, for dialing in. Please follow-up with our IR team if you have questions we've not addressed on the call. Everyone, have a great day.

Thank you. Ladies and gentlemen, this conference will be available for replay and that’s starting today at 11.30 AM Eastern time it will run to July 24th of 2019. You may dial the AT&T executive playback service by dialing 1800-475-6701 with the access code 450818. International calls may dial area code 320-365-3844 with the access code 450818. Now that does conclude your conference. We do thank you for joining, and you may now disconnect. Have a good day.