Ladies and gentlemen, thank you for standing by and welcome to the quarter two 2019 earnings call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Kevin Hern, Vice President of Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Eli Lilly and Company's Q2 2019 Earnings Call. I'm Kevin Hern, Vice President of Investor Relations. Joining me on today's call are: Dave Ricks, Lilly's Chairman and CEO; Josh Smiley, our Chief Financial Officer; Dr. Dan Skovronsky, President of Lilly Research Laboratories; Anne White, President of Lilly Oncology; Enrique Conterno, President of Lilly Diabetes and Lilly U.S.A and Patrik Jonsson, who is joining us for the first time as our Incoming President of Lilly Bio-Medicines. We're also joined by Kim Macko and Mike Czapar of the Investor Relations team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 3 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. As we transition to our prepared remarks, a reminder that our commentary will focus on non-GAAP financial measures, which exclude the financial contribution from Elanco during 2018 and 2019, and present earnings per share as though the full disposition via the exchange offer was complete on January 1, 2018. Now I'll turn the call over to Dave for a summary of our progress in Q2.

Thanks Kevin. Well, it's an exciting morning for us here at Eli Lilly and an important day for women around the world living with breast cancer. As we have just announced the positive results showing that Verzenio extends life of the women with breast cancer in the MONARCH 2 trial, more on that in a few minutes, but first let me make a few comments on the overall performance in the quarter. We continue to execute on our strategic objectives, focusing on launch excellence, progressing our pipeline and improving productivity and our capabilities. Second quarter revenue grew 1% and 3% in constant currency, despite the loss of U.S. exclusivity for Cialis late last year and the impact of Lartruvo’s impending product withdrawal. Q2 marked our 15th consecutive quarter of worldwide revenue growth. Our performance was driven by volume growth of 6% excluding the Cialis loss of exclusivity and the impact of Lartruvo volume grew nearly 15% led by our key growth products which accounted for 43% of the company's revenue. Q2 non-GAAP operating margin was 27.9%, representing a 250 basis point decline versus last year. This reflects a decrease in gross margin and increased investment in both our launches and our pipeline. Operating margin improved by 170 basis points versus Q1 of this year, reflecting progress toward our margin goals for 2019 and 2020. We achieved milestones on several pipeline assets since our last earning call, including the FDA approval of Emgality for treatment of episodic cluster headaches in adults. The FDA approval of CYRAMZA as a single agent for patients with High-AFP Second-Line Hepatocellular Carcinoma and FDA approval of Baqsimi, our nasal glucagon for the treatment of severe hypoglycemia in patients with diabetes. We're pleased to note that for all three of these approvals, the Lilly product represents a…

Thanks, Dave. Slide 6 summarizes our presentation of GAAP results to non-GAAP measures. And Slide 7 provides a summary of our GAAP results. Looking at the non-GAAP measures on Slide 8 you'll see revenue increased 1%. Gross margin as a percent of revenue increased to 81.0%, excluding the impact of FX on international inventory sold, gross margin as a percent of revenue was 80.2%, keeping us on track to achieve our long-term goals for manufacturing efficiency and profitability. On the same basis our gross margin declined approximately 60 basis points compared to Q2 2018 driven by unfavorable impact of product mix and a negative impact of price on revenue, partially offset by manufacturing efficiencies. Total operating expense increased 8%, with marketing selling and administrative expense increasing 7%, driven primarily by higher marketing investments to support the recent launch of Emgality in the U.S. as well as other key growth products. R&D expense increased 10% reflecting higher development expenses for late stage assets, including tirzepatide, our RET-Inhibitor and mirikizumab. Total operating income decreased 7% compared to Q2 2018 driven by all the investments that I just mentioned, which put our operating income as a percent of revenue at 27.9% for the quarter. As our recent launches continued to drive revenue and operating leverage, we expect income growth and improvements in operating margins, while we remain on track to achieve our full year guidance of 28% as well as our 2020 target of 31%. Other income and expense was expense of $32 million this quarter compared to income of $21 million in Q2 2018. This was driven by higher net interest expense primarily related to the Loxo acquisition. Our tax rate was 10%, a decrease of 670 basis points compared with the same quarter last year, driven primarily by a net discrete…

Thanks Josh. It's been an exciting quarter for R&D results, really capped off with a big news this morning that Verzenio’s MONARCH 2 trial demonstrated positive efficacy at the interim analysis, improving overall survival for women with HR-positive, HER2-negative breast cancer. A bit more color on Verzenio and its important results in a minute. But first I'll summarize some of the other R&D highlights for the quarter. Slide 18 shows select pipeline opportunities as of July 25th. Movements since our last earnings call includes the regulatory approvals that Dave mentioned earlier, the regulatory submission of empagliflozin in collaboration with Boehringer Ingelheim for type 1 diabetes and the regulatory submission of CYRAMZA for first-line EGFR-positive non-small cell lung cancer. The initiation of Phase 3 testing for baricitinib and alopecia areata. Iinitiation of Phase 1 per five assets including our Oral GLP-1 Receptor Agonist and the attrition of two Phase 1 molecules. Moving to Slide 19, since the last earnings call, we've made progress on a number of key events that we're monitoring for 2019, including the approvals, submissions and top line disclosures that Dave and I have already mentioned. New this quarter, we've added the top line readout for pegilodecakin SEQUOIA trial to the Phase 3 trial in combination with FOLFOX with second-line pancreatic cancer. And we expect this event driven trial to read out later this year. We'll recall that ARMO had moved this program into Phase 3 based on limited data for Phase 1, this was driven by the high unmet medical need in second-line pancreatic cancer. As we've shared in previous updates, we still see lung and renal cancer as the key indications for this molecule. Later this year, we'll initiate a study in renal cell cancer, as well as a biomarker driven studies in lung cancer. In…

Thanks, Dan. Before we go to Q&A, let me briefly sum up the progress we've made in the second quarter. We delivered volume growth of 6%, despite the continued erosion of Cialis due to generic competition and the withdrawal of Lartruvo, key growth products Liberty impressive volume growth of 15%, which now represents 43% of our revenue. We made strategic investments in commercial and late-stage pipeline products to reach more patients today, and improve the standard of care in the future. Meanwhile we continued to progress towards our margin goals as operating margin improved to 170 basis points versus Q1 2019. We made progress with the pipeline this quarter, including three regulatory approvals, along with the exciting MONARCH 2 overall survival readout for Verzenio. In addition, we moved one asset into Phase 3 development, while also advancing multiple assets into the clinic. Looking ahead, we're excited about the data disclosure for our RET inhibitor at a major medical meeting and subsequent submission later this year. We also returned over $600 million to shareholders via the dividend, and completed our $3.5 billion accelerated share repurchase program. Finally, last week, the Senate Finance Committee released details of its plan to address drug pricing and improve patient out of fund cost for patients. This is of course just the latest in a continuing discussion in Congress and the administration, and it won't be the last word we'll hear from the Senate on this subject. I know there may be a lot of questions about this particular package, so let me make a few points here in the hopes of allowing our Q&A to focus on the solid Q2 results we delivered and the strong prospects for Lilly's future. First, I want to assure investors that the industry has and will continue to focus…

Thanks, Dave. We'd like to take questions from as many callers as possible, so we ask that you limit your questions to two or to a single question with two parts. Cynthia, please provide the instructions for the Q&A session. And then we're ready for the first caller.

Certainly. [Operator Instructions] And our first question will come from the line of Umer Raffat with Evercore. Your line is open.

Hi. Thanks so much for taking my questions. First, I read the blog post with a lot of interest on Medicaid Max rebate caps. And my question is what's the dollar impact if that cap is raised to 125% and what's that dollar impact if there is no capital? I think this is one of those questions every investors is very curious about given the exposure here. So that's first. Secondly on R&D, I was curious on Cyprus 1 trial for ARMO which is due this fall. I understand it's an open-label trial, how would you set the investor expectations going into that readout knowing that IO-IO of late, has been very disappointing? Thank you very much.

Thanks, Umer. We'll have Dave take the first question and then Anne, your second.

Okay. I appreciate the question. Although I was hoping to head most of these off in my prepared remarks, Umer. As I said the – any version of a Medicaid M catalyst, we think is a regressive policy. It punishes companies by forcing us to underwrite state Medicaid, actually giving a rebate in excess of our list price. But policy issues aside, I think you're asking with the exposure of the Company. As I said this almost exclusively impacts our insulin portfolio across the Lilly medicines. And we are in the low teens in terms of total volume for Medicaid as a percent of that – those businesses. So that would be the theoretical cap on the impact of those businesses. 25% of that is a smaller number related to insulin and insulin related to the total of the Company. So it's a concerning policy because of the nature of it. The absolute financial impact for the Company is capped in a way by the volume in Medicaid and the 25% with the phase-in is certainly a better version of a bad policy in any case, we advocate for leading to Medicaid MCAP at 100%.

Pegilodecakin, so it's – Dan mentioned, we look forward to completing the studies and sharing that data at the beginning of Q1. We are particularly looking forward the results in Cyprus 1. So this is a patient population where we've added the Keytruda in high-expressers, so those are the PD-L1 over 50%. So positive data from those trials would trigger additional long trials, potentially registration trials. We do continue to believe that the greatest opportunity for pegilodecakin is in lung cancer in the first line setting and then also in later lines whether following or combination with other IO agents. And then the other area of great interest is renal cell cancer. Both lung and renal had encouraging data in the Phase 1 study. So as Dan mentioned, we do see this as a rapidly evolving landscape and then working on our plans to optimize peg in that setting. And so look forward to starting those studies at the end of the year, as well as biomarker driven studies in lung cancer and other tumor types. So more to come and Cyprus and pegilodecakin.

Thanks Umer. Next caller, please, Cynthia?

That will come from the line of Terence Flynn with Goldman Sachs. Your line is open.

Hi. Thanks for taking the questions. Maybe first just would love some perspective on Trulicity growth in the second half given the dynamics you saw in the first half, there. And then can you help frame for us, the high dose data for Trulicity in the context of tirzepatide? And then my second question is on the LOXO-292. You mentioned you're going to have data presentation later this year. Just would love high level thoughts on kind of the durability and safety, tolerability, you're seeing to date. Thanks.

Thanks. So we'll go to Enrique for the first question, and then Anne on that 292.

Very good. Well, we are pleased with the performance of Trulicity. We got sustained strong volume growth. We saw a 41% prescription growth in the United States when we look at the second quarter of 2019 relative to the second quarter of 2018. As we look at that, our sales growth was below that. Clearly there was some price erosion. The bigger pieces of this price erosion were the high rebates that were somewhat offset by modest list price increases. And then about seven points was the incremental funding of the donut hole, going from 50% to 70%. Clearly, when we look at relative to Q1, we did see good continued sequential growth when we look at volume. I think importantly, I think the fundamentals of the business are very strong, as we look at both class growth of about 30%, and when we look at their share performance. We do have, as you mentioned, significant catalyst with REWIND, and of course when it comes to the higher doses 3.0 milligrams and 4.5 milligrams for Trulicity. We are excited about the opportunities with both. When we think about tirzepatide, we sort of think of tirzepatide being in a completely different zip code when it comes to efficacy. That's why we utilize in the worse of resetting expectations of treatment for people with type 2 diabetes. When we look at both A1C and wait, so we continue to be very excited about that particular asset.

And then with LOXO-292, thank you for that question. We will present as you said, an update on the registrational data in the second half of 2019 at one or more a medical meeting, and that's an advance the regulatory filing, which is on track for the U.S. by the end of the year. And we really do look forward to sharing that robust data set. It's now over 500 patients enrolled and it's rolled across tumor types with RET fusions or mutations. And we continue to be very excited about the profile as both a first and the best in class RET inhibitor. So LOXO-292 is highly potent and we've seen robust response rates and exciting emerging durability as well. And also a safety profile that doesn't carry the burden of cytopenia that can require costly supportive care interventions. So again enrolments continue to be strong. The LOXO team is continuing to do a fantastic job in this program. And so we're very much looking forward to sharing that data at upcoming meetings.

Thanks, Anne. Thank you, Terence. And next caller, please?

That will be from the line of Andrew Baum with Citi. Your line is open.

Thank you. First question, could you break down for us the initial versus subsequent lines of CDK 4/6 therapy for the entire market, and give us some idea whether you can use the MONARCH 2 data to cure formally status on that this commercial and Medicare plan for 2020? And then second, if we take the inflation cap is something that will happen with the Medicare Part D. Is it possible that could relate concerns about rising insurance premiums to allow rebate reform to research as part of the proposal? Thank you.

Thanks. We'll go to Anne for the initial question and then Dave for the inflation cap question.

Well, thank you, Andrew. And you asked a really good question and thought about this carefully. So in a trial like this, the reason it's so difficult to show a survival advantage is because of patients crossing over. And the fact that we were able to demonstrate significance at a pre-planned interim confirms the strength of Verzenio, and we do believe differentiates our product. We do expect increased growth across all lines of therapy based on these results. And importantly, we will certainly share this data with those making access and treatment decisions. As we've heard overall survivals, the most important outcome and most objective outcome as well, so this really verifies the importance of Verzenio to achieve that best outcome for patients. And we've heard repeatedly from patients that overall survival is the most meaningful one for both patients and the physicians who are treating them. And this is an incredibly devastating disease and women who are living with this disease want to do everything they can to be with their families as long as possible. So we're really glad to have delivered this result for women with metastatic breast cancer.

Thank you. Thanks for your question, Andrew. And I think you – I didn't quite make it up. I think you're talking about the Part D CPI cap as it relates to the impact on the rebate reform score. Look I – the Senate finance package, which is sort of the leading integrated package we've seen generates a huge amount of savings to the government, most of which does not go back to the patients. This is our primary issue with it. Even the reform within Part D that is on the table, the AF proposal pretty much pays for itself, maybe generates a little bit of surplus action, really. So the question we're posing to policymakers is how do we reinvest that? For yes, premium stability, premiums are already extremely low in Part D and have been stable for years, but more importantly, directly leave at the pharmacy counter more relieved than this package delivers with the various proposals. One of those is as you indicate is to go back to the idea of passing through some or all of negotiated discounts with seniors and indexing their co-payments, their deductible to net pricing not list. I think pretty much everyone is closely as you think this is a good idea, as you point out the issue has been the score. Now, if we can find into Part D and make it in connection with the rest of the Finance Committee package, I think there is a huge potential to achieve all those goals. One could also look at phases, phasing it in or even partial rebate pass through stepping up through time. So all these ideas are – ideas we've had as pharma that we're actively pushing on. And maybe the main thing about all this is, although this package, got a lot of ink, we're far from the finish line here and there'll be a lot of discussion, probably with policies we really don't like and some we like better like the one you're suggesting. And we'll do our best to try to shape this into something workable that addresses the fundamental issue, which is out-of-pocket costs for people who use innovative medicines.

Thank you. Andrew, thanks for the question. Cynthia, next caller, please?

That will be from the line of Steve Scala with Cowen. Your line is open.

Thank you. I have a couple. First on tanezumab, how would you describe your level of confidence that the 2.5 milligram can be approved in OA, why are you no longer a filing in chronic lower back pain and where does cancer pain stand? So that's the first question. And then secondly, AbbVie's IL-23 SKYRIZI seems to be off to a great start, and AbbVie specifically said they were taking share from IL-17. So just curious what you're seeing. Thank you.

Thanks, Steve. Dan will have you take the tanezumab question, and Josh, if you can handle SKYRIZI.

Yes. Thanks Steve for the question on the various tanezumab indications. In a sense, you're right, in the order that you put them in, which is that we sort of prioritize based on the data that we have and the overall benefit risk in each of those populations. So based on that as well as the unmet medical need in osteoarthritis, we've prioritized moving that forward with the regulators. Overall, we wouldn't be proceeding with regulatory submissions and announcing that we're proceeding unless we had confidence in the overall benefit risk that this medicine provides in that population. That's based on the trials that we have recently disclosed. It's also based on the totality of the evidence and that's a decision that we've come to together with our partners. At Pfizer, the chronic lower back pain we've decided not to pursue at this time for almost exactly the same reasons, given the unmet medical need in that population and the benefit risk in that population. Cancer pain is the third here in line and we don't have that trial. It's taking a bit of time to read out and so it's hard to comment on what the benefits could be there given that we don't have that data yet.

Okay. On SKYRIZI, it's Josh. The launch is really in line with what we expected it to be. It's a good launch, if you look at it relative to Taltz and time normalize Taltz is a little bit better in terms of prescription trends. But in terms of what we see in the market place right now Steve first, we saw really – we're pleased with Taltz's performance in the U.S. In Q2 we saw TRx volume growth of 61%, and really we see share growth. Really as we look at SKYRIZI, we see – it looks like share coming primarily from the store, in the IL-20 – IL12/23 class, maybe some from Cosentyx. But our growth continues and we feel good about the share performance that we're seeing. Of course for later this year, we're looking forward to releasing data on our head-to-head trial against Tremfya and I think that will be an important competitive positioning for us. So we – overall, the biggest thing that we need to see is continued growth in the class. I think still majority of prescriptions are happening in the TNF class. So I think anything on the – both of IL-17 and IL-23 classes are able to shift to the better more modern treatments is good for patients and it will be good for us.

Thank you.

Thanks, Josh. Thanks, Steve. Next caller, please?

Go to the line of David Risinger with Morgan Stanley. Your line is open.

Yes. Thanks very much. So I have two questions, please. First, Dave, you had mentioned that out-of-pocket costs for people who use innovative medicines are a challenge. But could you talk about what the industry is doing if anything with respect to such costs outside of Part B because the government's actions will likely only applied a Part D, that's where the government can affect drugs. And the industry has a major public relations problem with the majority of the population that is outside of Medicare Part D that struggle with out-of-pocket costs. So is the industry doing anything i.e. with the Chamber of Commerce or with major employer groups to try to change the dynamic of the out-of-pocket cost challenge? And one final thing I'll just make a statement which is that it does seem that the industry has not been able to overcome the unfair treatment of drug coverage, i.e. the fact that people pay too much out-of-pocket relative to the out-of-pocket costs for other healthcare utilization such as physician visits, hospital visits, et cetera. So anyway, sorry for the long diatribe but I did want to understand the industry's agenda outside of government reimbursement. And then second, could you just talk about Lilly's evaluation of oral GLP-1s as a potential pipeline product opportunity? Thank you.

Thanks. Dave will have a – Dave will take your first question, and then Dan will talk about glutathione oral pipeline.

Yes. Thanks, Dave for the question, a lot in there. But I think in general we agree that – I mean, we need to improve the rhetoric in the – around the industry, we're working hard to do that. But mostly we need to improve the experience of patients at the pharmacy counter. You correctly point out that a lot of the discussions about government programs, but for Lilly's business more than half our business in U.S. is commercially reimbursed in whatever we are doing there. That is an area of increasing focus for us. And I think there is probably four things that I would point to that we're both doing in ramping up. The first is how we design and implement our own healthcare coverage. As a healthcare company, I think we can begin to shape the market by our own purchasing behavior. And I think we have – with that we are going through it here, one of the most progressive policies for our own employees as it relates to drug cover, including first dollar drug coverage on products like insulin and the way the deductible gets funded et cetera. And these are all physicians having years of experience, doing it, we're in a position to recommend to our peer companies as well as to insurance providers as best practice. As you know, probably that – recently there was an IRS ruling that is quite important maybe subtle thing that allows for the first time clarity around the question of whether medicines can be classified as a preventative treatment under HRA – HSA designs and high deductible plans. And the answer from the ARS is yes, they can. So we will use that as I think, a new point to help those that are purchasing insurance products…

Thanks, Dave. Dan?

Great. Thanks for your question on oral incretins. It's obviously an area of interest for us. And maybe speak generally about our strategy here, which is that we want to be able to offer oral incretin therapy that meets sort of one of two criteria. First, it could have a significantly improved bioavailability versus what's currently under development. And that's important because that will translate to more convenient experience for patients, more convenient dosing with more reliable efficacy. The other option is to offer greater efficacy in an oral product than the currently available once weekly GLP-1s. So we're pursuing those two tactics with different approaches. So to get something that's very highly bioavailability you need to move to small molecules. And so here we have a program, which is characterized by molecule just moved into Phase 1 this quarter, we call the GLP-1 NPA or non-peptide agonist, which is the product that was invented by Chugai, and we partnered with them on that. So we're excited to see Phase 1 data from that. We'll quickly learn what kind of bioavailability we get, and that will determine how we pursue that project. The other avenue to get better efficacy than currently available injectables really relies on next generation incretins. So these are by specific molecules like our tirzepatide GIP/GLP where we are seeking to get the peptide to become orally bio-available. And we have a number of purchase to accomplish that and look forward to moving those programs into the clinic soon.

Thanks, Dan. And thank you, Dave. Next caller, please?

We will go to the line of Seamus Fernandez with Guggenheim. Your line is open.

Thanks very much. So just two very quick questions, first on Verzenio and HER2-positive disease. Can you just give us a quick sense of Lilly's definition of a clinically meaningful if the data registrational? And then just maybe give us an estimated market size or path to thinking about the market size? And then separately, on Taltz, gross to net, can you just give us the gross to net currently? And given the Company's need to reposition the product for growth in RA, should we anticipate further price concessions in the next formulary negotiation cycle? Thanks a lot.

Thanks, Seamus. Anne will review for the Verzenio question and then Josh will take the Taltz question.

Yes, Seamus, thanks for that question on the HER2-positive data. And as Dan mentioned in his opening remarks, we're extremely pleased to have a positive result in that study. And so as you mentioned, this is the first randomized controlled study to have positive results in HER2-positive breast cancer. And this has been a very difficult-to-treat population. And so finding opportunities for them to avoid chemotherapy has certainly been the goal of this study. And so we do believe that the positive result and the meeting of the primary endpoint of PFS are clinically meaningful. And while I can't show the specifics of the data and we'll be presenting that at a scientific meeting later this year, we do believe that it's clinically relevant for patients, particularly those that want to avoid chemotherapy in this setting. We do – the next step really is to discuss this data. And that's our plan, to discuss this data with regulators as we share at the scientific meetings. So I can't comment any further at this time on regulatory strategy. On the market size, so as you probably know, this is about 15% to 20% of breast cancer. So this is not an insubstantative market. So we do believe this is a significant opportunity as we go forward for these patients who have that particularly hard-to-treat type of breast cancer. So again, together with the overall survival data and the robust result that we had in the China registration study, I think all three just reinforce the strength that Verzenio brings. And again, the only CDK 4/6 that has continuous dosing, the only one with a monotherapy indication, and it's continued to help patients, particularly those with a poor diagnosis. So I think we're very pleased to share these updates on Verzenio today.

And Seamus, on Taltz and price and gross to net, really in the second quarter, neither of those were major factors in terms of U.S. growth. Our price and gross-to-net rates have remained pretty steady. As we mentioned in Q1, about two-thirds of Taltz prescriptions right now in the U.S. are reimbursed, and that really didn't change in Q2. We're pleased with the share performance in psoriasis. I think as you mentioned in the room space, we're looking forward to indications in AxSpA, which we think will make us more competitive and open up significant growth opportunity there. And we're focused on access, and we would like to see that improve. But really, in terms of price and availability today, not significant changes in the first half of this year.

And maybe just to comment to add to that, PsA is the indication, not RA. I think we see – the way we see this is these additional indications actually will enhance our leverage in payer access discussions, not erode it. So actually, I think it works the opposite way from the way your question was phrased. The more volume we can build on PsA, the more indications like AxSpa we get, the more unique the product is and the more leverage we gain. So I think we're optimistic about both the growth of the product but also the pricing power in this market.

Seamus, thanks for your questions and next caller please.

We will go to the line of Chris Schott with JPMorgan. Your line is open.

Alright, great. Thanks very much for the questions. First one is, there seems to be lingering investor concerns about Trulicity and GLP-1 pricing as we look out to 2020 and beyond with the launch of oral sema. Can we maybe just get your latest thoughts in terms of how you see payers reacting to new entrants in the market? And should we be anticipating a more challenging pricing environment for Trulicity going forward? So that's the first question. Second question was on tax. I think you mentioned some discrete items and a lower tax rate this year. Just any thoughts about how we should think about normalized tax rate for Lilly as we look beyond 2019? Thanks very much.

Thank you, so Enrique and Josh for the tax question.

Appreciate the question. I know we get this question often on Trulicity and the outlook of price. And I'm unable to provide that, but I think it's important to think about the value that Trulicity is delivering today and the incremental value that we can deliver as we think about REWIND, as we can think about the higher doses that Trulicity will be launching because all of that is basically additional value that the product will be providing. We think we have a strong foundation with the performance of the product. I'm not going to speculate on how Novo would price the product and what the potential responses from payers, maybe.

I think on tax rate, our prior guidance for this year on a non-GAAP basis was between 14% and 15% as we reduced that by a point, given the discrete tax benefits that we saw in the second quarter. I think from a long-term perspective, that 14% to 15% range is reasonable. One of the things – the swing factor here is the calculation around guilty and depending on where and how our income flows that again can move that a little bit. But we're comfortable in the sort of low-to-mid teens as a sustainable rate given the tax structure that we have today in the U.S. So as long as that's maintained, we think we can maintain at somewhere in that range with again – on any given year depending on where we're launching, how sales are moving, we could see a 100 basis point swing one way or another.

Thanks Josh. Chris, thanks for your questions. Next caller, please?

We will go to the line of Tim Anderson from Wolfe Research. Your line is open.

Thank you. On Trulicity, where is the Lilly Diabetes team expect that Novo's oral semaglutide source of business will come from in terms of drug classes? And when that product launches, do you think that will lead to a slowdown in the scripts for Trulicity that will be palpable by investors, or is the class growth high enough such that Trulicity may not really budge at all? And then second question again on reform, sorry, Dave. I was surprised to learn from someone who is well-informed in this area that AARP was a key stakeholder in killing the proposed rebate reform because of their alignment with the drug industry where they supposed to get something like half of their funding. My question is, whether you think rebate reform still be brought back on to the table or is that permanently off the table?

Okay, thanks. So Enrique for Trulicity and then Dave for the policy question.

Yes. It's – honestly it's very difficult to speculate given that we need to see when we think our source of business, we will need to see basically how Novo will price the product, what type of placement, what is the message and so forth and so on. I think what we see, though, I think just generally when we think about diabetes is that, patients do tend to go to an oral first, right as we think about orals. So right now I think the product that we basically have, that we are commercializing is Jardiance, which has an incredible evidence and incredible benefit. My sense is depending on how product positions, how they price this product, and that's going to be a pretty big barrier for them to overcome. I think we're extremely well positioned with the product. We're investing well behind it and we have a great partner on Boehringer Ingelheim to make that extremely successful.

Dave?

Yes. Okay. Thanks for the question, Tim. I think I guess we can declare the experiment of heading off questions in advance in prepared remarks that we missed our primary endpoint. Anyway, I think it’s true, AARP was a strong opponent of rebate reform. We can all speculate why, but it's also true that the majority of their revenue, I think more than half comes from royalties from the Part D program. So easy to get cynical when you spent time in Washington. That said, we still think it's a good idea. Is it possible to come back? Well, probably in some other form. I think the broad-based pulling of the Anti-Kickback Statute gets harder because of the way the scoring happen and the politics around it. But as it mentioned by Dave Risinger earlier or perhaps it was Andrew, that inside of a Part D benefit redesign, the idea of patients linking out-of-pocket costs to something other than list price is a good idea. And there is a sliding scale, we don't have to go all the way. That could change the scoring and make it more affordable and create a model for insurance design in the commercial market and other segments. So we're far from giving up on this idea. And as you know, given a retail portfolio like Lilly's, with big gross to net spreads, over 50% on average across our portfolio, this is a single quickest and most efficacious way to save patients' money at the point of sale, and restructure the incentives of the payers to work on behalf of patients directly versus work on behalf of all beneficiaries, including non-patients, which is kind of how it's set up today. So we got a long way to go in this debate and this is an idea we have might go.

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

We will go to the line of Louise Chen with Cantor Fitzgerald. Your line is open.

Hi. Thanks for taking my questions. So my first question is on tirzepatide. I wanted to ask you what you think or what level of GI side effects is considered acceptable by physicians? And then on your NASH and obesity product, how do you plan to differentiate your product from others in development, are those that are failed? And then my second question is on the CGRPs, the potential entry of these oral CGRPs. And do you think the prophylactic ones would interfere with the growth of the injectable CGRPs and then what about the acute CGRPs if there is any overlap there with your products? Thank you.

Thanks. We'll go to Enrique for the question on tirzepatide and then Dan, if you want to talk about the CGRPs.

I think, we already have an excellent in-market experiment here because we've seen the success of GLP-1, so we know that with the level of side effects of the GLP-1 class, we can have significant success. We do believe that we are not going to be trading off. In the case of tirzepatide, we will get the additional efficacy and we believe that we will have a comparable side effect profile to the GLP-1 class. When it comes to NASH and obesity, honestly we are bidding to be best-in-class product. We're not bidding to be first-in-class or we are thinking that we are going to reset the expectations of what's possible in both obesity and NASH with tirzepatide.

Thanks, Enrique. Dan?

Great. Thanks for your question on the CGRP market and the potential impact of oral CGRPs coming to market. Of course, as you know and pointed out the injectable CGRPs like our Emgality are approved and marketed for prevention for prophylaxis of migraine, whereas the initial indication for the oral CGRPs is likely to be in the acute treatment or a broader use of migraine. I think there is a couple of questions about the oral CGRPs that are still outstanding, and probably first I would go to safety. One of the great things I think about the drugs like Emgality is the great safety data that we've been able to generate here. Remember, this is a relatively young and otherwise healthy population with somewhat chronic disease and so safety has got to be a key factor in choosing a medication in this population. There are questions about the safety of the oral class and we'll just have to see how that ends up with regulators. I think there is also a bit of a mechanistic question here which there's just not data to address yet. So the question though is, if you've got chronic blockade of CGRP because patients on a preventive antibody already, and we know we pretty much maxed out on the dose response curve here. The question is whether adding an additional oral agent will have any effect if it will even work as and part of and people are already on chronic treatment. So for that reason, we've looked for other mechanisms for migraine and part of that won't clash with CGRP antibodies, but rather are likely to be complementary. So we're excited about the potential that we can offer with lasmiditan and that's currently under FDA review. And I think will be an important new treatment in the broader space coming soon.

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

We will go to the line of Jason Gerberry with Bank of America. Your line is open.

Good morning. Thanks for taking my questions. Just two questions from me. First on tirzepatide, just thinking about, absent the reporting of Phase 3 data, do you think we'll learn anything in the next 12 to 18 months as it pertains to the diarrhea side effect, and whether it's a GIP-driven side effect? And then my second question just on the Olumiant detailed Phase 3 BREEZE data in atopic dermatitis, the IGA scores relative to dupilumab were a bit lower, so just sort of curious, based on the data we have so far in hand, how do you think Olumiant could be positioned in the atopic dermatitis market? Thanks.

Okay. Thanks. Enrique for tirzepatide, and then we'll go to Dan for the Olumiant question.

Yes. My sense is I'm sure that we are going to be waiting for the Phase 3 trial so what we see basically on some of the Phase 3 trials for us to understand this dose titration actually delivers when it comes to tolerability. And as we mentioned, we feel very comfortable given the modeling, given the studies that we've done that we are going to have a product that has unsurpassed efficacy resetting expectations for A1c and weight loss, and at the same time a product that is tolerable and comparable to GLP-1s.

Thanks, Enrique. Dan?

Yes. Thanks for the question on Olumiant for atopic derm. Just specifically comparing it to dupilumab, I’d just point out, obviously that it's tough to compare in this case, an oral medication with injectable biologic for atopic derm. I think Olumiant has some advantages in the repetidy of action and patients may like that. But really I think the important comparison here is versus other orals for atopic derm and there are none yet. So, we have the potential to be the first oral for atopic derm and I think that's encouraging. We've got more data to come here and we'll see how that comes out.

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

We'll go to the line of Navin Jacob with UBS. Your line is open.

Hi, Thanks for taking my question. Just on Taltz, wondering if you could give any color on the underlying volume growth of the overall psoriasis market and psoriatic arthritis market? AbbVie is planning to double-digit underlying market growth in terms of dynamic that perhaps some of us are missing, I am just wondering if you're seeing that level of growth. And then with regards to your SG&A line, you came in a little bit higher than expectations raised your guidance for the year. Over the next couple of years I know you're launching a bunch of products, wondering how you're thinking about that line, how we should be thinking about it? And then finally with regards to capital allocation, we've seen several companies in this space do large deals and/or just yesterday, a large spin-off, any color on how you're thinking about your business whether there is any potential for restructuring that we may not be necessarily thinking about and your continued interest in bolt-on M&A deals? Thank you very much.

Okay, thanks. So we'll go to Josh for the Taltz and SG&A questions and Dave talking about the capital allocation structuring.

Okay, great. So first on the overall derm market, we're seeing low double-digit growth in total across the class, the IL-17s are of course growing faster than that and I think we'd expect to continue to see with the launch of SKYRIZI, the IL-23s grow. And again I think that's what's probably most important is moving, as I mentioned earlier, moving patients from TNFs to the modern IL-17s and IL-23s. So we're looking forward to the data that we will generate later this year on our head-to-head versus on Tremfya. And again we're focused on Taltz in psoriasis is on 100% clearance and acting fast and being durable. So we're looking forward to continued growth in that market. As we move to SG&A, our guidance for the second half of the year really implies a pretty flat, absolute level of SG&A with the first half of this year. We're comfortable with that. As you look with our new product launches, we've got a lot of variable SG&A expense. We do a lot of direct-to-consumer advertising in the U.S., both television as well as digital. So we've got a good handle on how we pulse that investment and we've clearly in the second half of last year, as our new launches we're scaling, we're putting a lot of money behind them. We've continued that the first half of this year, but in an absolute basis, we feel comfortable with sort of flat to moderate growth in SG&A as we look out over the course of the next few years. We think we're well invested behind our new launch products and mostly we'll see a mix of tactics, but a pretty good absolute envelope where we are now. And again that reinforces as I talked in the prepared remarks, so we look at operating margin for 2020 with the kind of sales growth that we'd expect headed into 2020. We do expect to see good operating leverage there and are very confident with our 31% operating margin target for 2020.

Thank you, Josh. Dave?

Yes. I mean on capital allocation nothing changes for us. I think we've said for quite some time, we don't believe in large scale merger activity generates value for shareholders. We still don't believe that. In terms of spin-outs yesterday's news, we don't have such an entity to spin out. We had one in animal health and we executed that transaction. I guess of the thinking being similar in that we think human innovative pharmaceuticals is the business to be. And then it's what we do well and where we can generate a lot of value for all stakeholders, patients, society and shareholders if we execute. So our focus in terms of capital allocation is really on funding organic R&D, and then looking outside for opportunities, bolt-on’s mostly that would fall within the pipeline, building type exercise where we can add value where it fits within our therapeutic focus, and where we see value for shareholders and patients. So that’s what we've been focused on for some time. We had the Centrexion deal announced this quarter, Loxo in Q1, those types of things are what we're interested in and where our focus lies. And I don't see there's a change from even the past 10 years. So we'll continue on that path.

Thanks Dave. Navin, thanks for your questions. This ends the Q&A portion. I'll turn it over to Dave for the close.

Great. Thank you. We appreciate your participation in our call today and your interest in Eli Lilly and Company. As we begin the second half of the year, we reflect on the meaningful progress we made in the first two quarters and the opportunity that lies ahead on the balance of 2019. We are committed to our revenue and operating margin goals in 2019 and 2020, while we continue to invest in our innovation-based strategy. With a pipeline full of exciting opportunities and a diversified volume driven growth in the market, Lilly continues to be a compelling investment. Thanks for dialing-in. Please follow-up with our IR team if you have follow-up questions that we didn't address on today's call. Hope everyone have a great day.

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