Eli Lilly and Company (LLY) Q2 2020 Earnings Report, Transcript and Summary

Dave Ricks - Chairman, Chief Executive Officer Josh Smiley - Chief Financial Officer Dan Skovronsky - Chief Scientific Officer Anne White - President of Lilly Oncology Patrik Jonsson - President of Lilly Bio-Medicines Mike Mason - President of Lilly Diabetes Sara Smith - Investor Relations Mike Czapar - Investor Relations Kevin Hern - VP of Investor Relations

Ladies and gentlemen, thank you for standing by and welcome to the Lilly Q2 2020 Earnings Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s call is being recorded. I will now turn the call over to your host, VP of Investor Relations, Kevin Hern. Please go ahead, sir.

Thank you. Good morning and thank you for joining us for Eli Lilly and Company’s Q2 2020 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, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific Officer; Anne White, President of Lilly Oncology; Patrik Jonsson, President of Lilly Bio-Medicines; and Mike Mason, President of Lilly Diabetes. We’re also joined by Sara Smith 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 the extent and duration of the effects of the COVID-19 pandemic, as well as other factors listed on slide three, and those outlined in our latest forms 10-K, 10-Q and any 8-Ks 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, I’ll remind you that our commentary will focus on non-GAAP financial measures, which exclude the financial contribution from Elanco during 2019 and present earnings per share as though the full disposition via the exchange offer was complete on January 1, 2019. Now, I’ll turn the call over to Dave for some opening comments.

Thanks Kevin. A lot has changed in the world since our last earnings call. Science has continued to advance our understanding of COVID-19 and efforts across the industry to develop treatments and vaccines are progressing rapidly. While some regions and countries have begun to reopen, COVID-19 cases and deaths are climbing in other places. Despite these challenges, Lilly continues to demonstrate resilience and resourcefulness to progress our mission of making medicines for the millions of patients we serve. I've never been more proud of the company and my 35,000 teammates. This past quarter was unlike any other during my tenure as CEO and currently combating social, economic and public health crises. Economic uncertainty remains as high unemployment persists in many countries. As expected, our business experience headwinds this quarter, with patients unable to see doctors or access healthcare during periods when the economies were shut down to prevent the spread of COVID-19, and by the dwindling or the unwinding afford buying into Q1 that occurred. Overall our year-to-date results are strong and indicative of the underlying trends. I'm proud of Lilly’s efforts to ensure patients have access to their medicines. To find creative ways to ensure we advance critical research, and to advance our ongoing efforts to develop treatments for COVID-19. We continue to staff our manufacturing facilities around the globe with essential personnel, to ensure there are no disruptions in the supply of medicine, and in recent weeks we resumed activity in the majority of our clinical trials where enrollment had been paused. Resuming in-person promotional activities when it's safe on a country-by-country and on a state-by-state basis in the U.S., and we will continue to use these virtual engagement tools we’ve built to augment in-person promotional activities. Throughout Q2 we saw a steady increase in customer contacts and medical education touch points as we leveraged new platforms to reach physicians. We continue to see increased interest in volume of virtual interactions from physicians and expect a hybrid model of in-person remote engagement for some time in the U.S. as well as internationally. We also made good progress this quarter, executing our R&D strategy, launching two new medicines in the U.S., including Retevmo, the first therapy ever approved for patients with RET driven lung and thyroid cancers, and Lyumjeva, a fast acting mealtime insulin for patients with Type 1 and Type 2 diabetes. Taltz and non-radiographic axSpA, Cyramza in combination with erlotinib for EGFR mutated non-small cell lung cancer and Tauvid, our new diagnostic for patients with Alzheimer's disease who were also approved in the U.S. Several positive Phase 3 readouts this quarter include Verzenio in adjuvant breast cancer, now the first and the only CDK4/6 inhibitor to succeed in this population. Mirikizumab and psoriasis compared to both placebo and head-to-head versus Cosentyx and just today in collaboration with Boehringer and Jardiance in heart failure patients with reduced injection fraction, both with and without diabetes. We also continue to make progress on our potential COVID-19 therapies. Notably, the initiation of multiple clinical trials developing neutralizing antibodies, both as monotherapy and in combination. Dan will provide you with more detail during the R&D update. The unprecedented pace at which we're executing this project across our development and manufacturing organizations is evidence of what we are capable as an innovative company. As I mentioned earlier, our Q2 business results were negatively impacted by COVID-19; however, we remain confident in the underlying fundamentals of our business. COVID-19 had a meaningful impact on economic activity and we observed the following trends in the U.S. A sharp decline in the number of patient visits to physicians dropping to roughly 50% of pre-COVID-19 levels. Reduce visits translated into fewer new prescriptions with the peak impact in late April and early May in most therapeutic classes. A slow return to health care activity through a combination of Telehealth and in-person visit as IQVIA data showed patient visits were back to 85% of pre-COVID-19 levels in June, and new prescriptions slowly beginning to recover although some variation across therapeutic areas. While the outlook for economic activity is uncertain, we remain optimistic that patients, physicians and hospital systems will continue to find ways to ensure patients can access the medicines they need. Turning to our Q2 results, as expected reduced patient visits and inventory dynamics were both a drag on otherwise solid total prescription trends. Revenue declined 2% compared to Q2, 2019 and we estimated revenue was negatively impacted by the reversal of largely all of the $250 million of stocking related to COVID-19 that we experienced in Q1. While most existing prescriptions were maintained, new patient prescriptions declined in Q2 relative to pre-COVID-19 baselines. We estimate this impact to have been about $250 million across the portfolio. Taking into account current trends, we are on track to deliver the financial goals we established for 2020. The strength of our new products, our ability to scale them worldwide and our productivity agenda position us well to continue to deliver robust business performance and to create shareholder value. Moving to slide five, you’ll see the full list of key events since our last earnings call. Before, Josh discusses our financial results, just a few comments about the executive orders that were announced last Friday. We all share the goal of making medicines more affordable and accessible to patients and believe concepts such as rebate reform and the sharing of savings within the eligible 340B patient population offer real opportunities to lower the out-of-pocket costs for patients quickly. However, as I've noted before, the concept of international price indexing is a bad policy. This policy will have almost no benefit to patient out-of-pocket costs, but together with reimportation we’ll most assuredly have serious negative consequences for patients for the safety of our supply chain and for the future of innovation. So now is the wrong time to introduce sweeping government actions that will at best distract and at worse, cripple the same industry that's racing to discover vaccines and treatments to defeat COVID-19. Now, I’ll turn the call over to John to review our Q2 results in more detail and provide an update on our financial guidance for 2020.

Thanks Dave and good morning everyone. Moving to slide six and seven, our non-GAAP financial performance in 2Q and during the first half of 2020 was impacted by COVID-19 across many lines of the income statement. As Dave mentioned, revenue declined 2% this quarter compared to Q2, 2019. It was negatively impacted by COVID-19 in two ways. First; largely all of the $250 million of COVID related stock in Q1 reversed as excess supply in the channel and in medicine cabinets was consumed and Q2 closing inventory returned to historically normal levels. Second, reduced patient visits due to COVID-19 resulted in lower new prescriptions across many of our brands, which we estimate had a negative impact on Q2 revenue of approximately $250 million as well. We estimate this impact to be a temporary step down in market size, which we expect will return to pre-COVID levels over the balance of the year, with the pace of recovery varying by therapeutic area. Given the stocking and destocking seen between quarters, our first half performance of 7% sales growth in constant currency is a more accurate reflection of underlying performance. Gross margin as a percent of revenue in Q2 was 79.6%, a decline of 140 basis points versus Q2, 2019, driven primarily by the negative impact of price, which I'll describe in more detail in a moment. Moving down the P&L, selling, general and administrative expenses declined 9% this quarter compared to Q2, 2019, as reduced marketing and travel meeting expenses were only partially offset by investment in virtual tactics. Research and development expenses declined 1% as a pause in clinical trials have shifted activity and expenses to the second half of 2020. In total, operating income decreased 2% compared to Q2, 2019. During the first half – sorry, I'm just having a technical issue here. We just had a system problem. So in total, operating income decreased 2% compared to Q2, 2019. During the first half of 2020 operating income increased by 14% as revenue growth outpaced operating expense growth by 500 basis points. Operating income as a percent of revenue was 28% during the second quarter and 29.1% for the first half of 2020. We continue to adapt the way we allocate resources to efficiently the operating environment, where the threat of COVID-19 is likely to be disruptive for a sustained period of time. We are expanding our virtual capabilities to support executing our strategy and are committed to our 2020 full year operating margin target of 31%. Other income and expense was income of $447 million this quarter compared to an expense of $32 million in Q2, 2019. This quarter’s other income was primarily driven by the increase in value of investments in Asian biopharma companies, as well as previously private companies that went public here in the U.S. We have investments across a range of private and public biopharma companies as a part of our external innovation strategy and these investments allow us to nurture emerging science and access potential new medicines and novel modalities. As we regularly highlight, this line item can be volatile as public market valuations fluctuate. Our tax rate was 13.4%, an increase of 340 basis points compared with the same quarter last year, driven by the mix of our earnings in higher tax jurisdictions and a lower net discrete tax benefit than last year. At the bottom line earnings per share increased 26% in Q2 as a sizable gain on public equities more than offset the decline in operating income. During the first half of 2020, earnings per share increased 29%. On slide eight we quantify the effect of price, rate and volume on revenue. Worldwide revenue declined 2% during Q2 as volume growth of 6% was offset by price. Foreign exchange had an additional 1% negative impact on revenue growth. During the first half of 2020 revenue grew 7% in constant currency and volume grew 13% and price declined 7% or 5% excluding the impact Alimta and Tyvyt had in China. U.S. revenue decline 3% compared to the second quarter of 2019. Volume growth of 4% was led by Trulicity, Taltz, Emgality and Verzenio. As mentioned earlier, we saw destocking at the wholesaler and patient level due to COVID-19 that contributed approximately $200 million of negative impact during the quarter. In addition, we estimate reduced new prescriptions due to COVID-19, negatively impacted Q2 revenue by approximately $150 million. Pricing was an 8% drag on U.S. revenue growth this quarter, impacted by predominately changes to estimates for rebates and discounts, most notably impacting Humalog, which was driven primarily by favorable Medicaid adjustments in the prior period and unfavorable commercial adjustments in the current period. Then to a lesser extent by higher growth across the portfolio and lower net price segment, and increased rebate to maintain our strong commercial access, which was partially offset by reduced copay program utilization for Emgality and Taltz as a function of improved access versus last year. As we previously discussed, our quarterly pricing trends in the U.S. fluctuate based on delayed invoicing from customers, seasonality of copay assistant and our obligations during the coverage gap in Medicare Part D. Excluding the impact of the onetime Humalog adjustment and focusing on trends that impact our business going forward, we saw an underlying pricing trend of low single digit decline in Q2 versus Q2, 2019 and this is consistent with our current expectation of mid-single digit price decline for the year, with the underlying low single digit net price decline, combined with one-time adjustments in the first half of 2020 and modest effects of COVID-19 in the second half of the year. During the first half of 2020 U.S. revenue increased 5% versus last year, volume grew 11% and price declined 6%. We are encouraged by the improving demand trends in recent weeks and more normalized shipping trends. As we conclude 2021 U.S. Contracting negotiations, we remain confident in our strong commercial and Medicare Part D access across the portfolio and our ability to maintain this going forward. Moving on Europe, revenue declined 4% in constant currency as price and volume declined by 2% each. Strong volume growth from Trulicity, Verzenio and Taltz was offset by volume declines from Cialis, Forteo, Olumiant, Strattera and Humalog. We estimate European revenue was reduced by approximately $50 million due to COVID-19 related destocking in Q2, and roughly $35 million due to COVID-19 related lower new prescription. Despite fluctuation across quarters, the underlying trends are very strong as Europe posted volume growth of 11% during the first half of 2020 as our new products continue to scale. In Japan revenue declined by less than 1% in constant currency and 4% volume growth was more than offset by government mandated price decreases effective April 2020. In addition, we estimated reduced new prescriptions due to COVID-19, negatively impacted Q2 revenue by approximately $35 million. The solid volume growth of Verzenio, Trulicity, Olumiant and Cyramza were the key contributors to growth, partially offset by the increased competition for Forteo and the impact of generic Strattera. In China, revenue grew 8% in constant currency, driven by 50% volume growth, largely offset by price. Volume and price were both affected by the inclusion of Tyvyt and Alimta in government sponsored programs, which substantially increased access for patients to these important cancer medications. Outside of the oncology portal in China we saw a rebound in new patient initiation and in person customer interaction as the pandemic's impact began to moderate. Our newest lunches, Trulicity, Taltz and Alimta are seeing good uptake in Humalog, Cymbalta are again exhibiting solid growth. Revenue in the rest of the world increased 7% in constant currency, driven by increased volume from our key growth drivers. Strong performance from Trulicity, Jardiance, Taltz and Verzenio was partially offset by decreased Cialis volume. Revenue was negatively impacted by COVID related reduced new prescription, by approximately $25 million, which was more than offset by the sale of the legacy product in Asia. As shown on slide nine, our key growth products continue to drive impressive worldwide volume growth. These new medicines delivered over 12 percentage points to volume growth this quarter. The strong volume growth, volume trend in our key products was partially offset by a mix of competition and lower utilization of post-LOE products; Forteo and Cialis, as well as reduced [inaudible] royalty from the restructuring of our alliance with Boehringer Ingelheim that we announced last year. We exit the first half of 2020, pleased with a 16% year-to-date volume growth of our key products that delivered despite a challenging environment. Slide 10 highlights the contributions of our key growth products. In total these brands generated nearly $3 billion of revenue this quarter making up 54% of revenue. While 12% volume growth from key products in Q2 is robust, the negative impact on new patient starts from COVID-19 pandemic and COVID-19 related inventory movement across borders were a drag on growth in the quarter. We put both of these impacts to be transient and we're seeing new-to-brand prescriptions recover in June and July. The underlying business is robust and while COVID-19 has impacted our therapeutic areas differently, our product specific trends within the market backdrop are strong. In diabetes, Trulicity remains the market leader in the U.S. GLP-1 market with over 45% share of total prescription. While new-to-brand prescriptions for the GLP-1 class were 32% less than pre-COVID-19 levels at one point during Q2, activity is trending in the right direction and now fits at around negative 16% for the week ending July 17. Total prescription trends have slowed some, but we're still robust to the class and grew by 27% in Q2 compared to last year. As the class leader, Trulicity is well positioned for future growth, and we look forward to regulatory action later this year on the higher doses of Trulicity. We expect the potential launch of additional doses to be an important option to allow patients to realize benefits, while extending the duration of therapy on Trulicity. And another large impact, growing diabetes class Jardiance maintained market leadership in the U.S. SGLT2 class, with over 57% share of total prescription. The SGLT2 class saw a similar magnitude of reductions as the GLP-1 class for new-to-brand prescriptions, as new prescriptions where 38% less than the pre-COVID-19 levels before recovering some in June and July. Current weekly trends are probably 15% below pre-COVID-19 levels. Jardiance continues to be the catalyst for class growth in new and total prescriptions, growing over 12 percentage points faster than the market in Q2, with 32% growth versus last year. We're excited by the recently announced positive results of Jardiance in patients with heart failure and EMPEROR-Reduced trial and look forward to the EMPEROR-Preserved trail readout in 2021. We estimate the addressable market from each trial is up to $3 million additional patients in the U.S., adding a potential new source of future growth for Jardiance. In oncology, Verzenio continues to show positive trends in the metastatic setting as U.S. share of the market in new-to-brand prescriptions continued to increase about 20%. While new-to-brand prescriptions for the CDK4/6 class were more than 30% below pre-COVID levels of 1 point in the quarter, Verzenio fared better at negative 19% and the most recent week of new-to-brand prescription is above the pre-COVID-19 average. Verzenio had positive momentum as the monarchE trail result adds to the compelling existing data package. We look forward to presenting these data at a medical meeting later this year. Tyvyt, our immuno-oncology product in collaboration with Innovent in China posted another strong quarter of performance and was the biggest driver of China's 50% volume growth in Q2. Tyvyt was added to the national drug reimbursement list in January this year and we anticipate strong sales momentum in the second half of 2020. We expect Tyvyt to continue to be an important driver of growth in China. Our newest oncology medicine Retevmo had a strong launch despite the viewing during a challenging external environment. We are encouraged by early demand signals and initial customer feedback on the impressive safety and efficacy profile is very positive. Our sales force and medical science liaisons are actively engaging with 6,000 lung and thyroid specialists through virtual tactics, and our existing relationships with this customer base are leading to a high quality interactions and increased brand awareness for this first in class medicine. While still early in the launch, we are excited about the fast start and continue to believe we have the best-in-class products. In immunology we saw strong new-to-brand trends with Pulse early in Q1, followed by a sizable but more gradual impact of COVID-19. Compared to pre-COVID levels, new-to-brand prescriptions across immunology declined 36%. While this category has also been slower to recover, the most recent weeks have showed improvement in trend. However, new-to-brand prescriptions for the total market are still 21% below pre-COVID levels. Taltz continues to compete for leadership in Dermatology new-to-brand share of market and rheumatology trends are encouraging, although growing from a smaller base. Total Taltz prescriptions grew 11% in Q2 compared to Q1 and 35% versus Q2 2019. We remain confident that our compelling data package of head-to-head trials and recent approval in non-radiographic axSpA will deliver growth in a competitive field of immunology. In migraine we've also seen a more prolonged decline in new-to-brand prescriptions due to COVID-19. New-to-brand prescriptions in the injectable CGRP class have been 15% to 20% below pre-COVID levels since late April and through July. Emgality’s share of market remains strong with over 38% of new and total prescriptions within the class. Although new-to-brand trends have been impacted by COVID-19, class growth for total prescriptions was robust in Q2, increasing 64% compared to last year and 12% versus Q1, 2020. Given the importance of primary care physicians in driving growth, with the return of active promotions from multiple competitors, we expect class growth to reaccelerate in the second half of 2020. Also in migraine or acute therapy REYVOW is significantly impacted by the lack of patient visit and the in-person customer interactions related to COVID-19. While uptake so far has been modest early in the launch, we’ll make investments to drive awareness and focus our promotional efforts in the coming quarters to drive uptake. While the field is competitive, we continue to believe our portfolio of both acute and preventative treatment with two mechanisms of action is a differentiator for our migraine franchise. On slide 11 we provide an update on capital allocation. During the first half of 2020 we invested over $4 billion to drive our future growth through a combination of business development, capital expenditures and after tax investment in R&D. In addition, we returned almost $2 billion to shareholders via share repurchase and the dividend. We remain well capitalized and have the ability to access debt markets at attractive rates. We expect to continue to enhance our long term growth by acquiring first or best-in-class pipeline assets and do not anticipate COVID impacts regarding travel and market uncertainty to affect our efforts. Before we provide an update on our 2020 financial guidance, slide 12 provides an overview of the composition of our U.S. business led by payer segment mix. This is the topic of frequent interest to investors and is permanent [ph] as we monitor the currently high levels of unemployment and the potential for that to negatively impact our business. Based on growth sales during the first half of 2020, within our existing business, commercial plans make up the largest portion at around 40%. Medicare Part D is the second largest segment at approximately 20%, mainly due to our diabetes portfolio. Government and hospital segments make up roughly 15%, Medicaid is around 10%, Medicare Part D is nearly 5% and then non-contracted business uninsured and cash make up the remaining 10%. So as we continue to monitor and analyze the potential impact of unemployment, causing people to lose their commercial insurance and potentially shift to Medicaid, our modeling suggests this will have a modest impact in 2020 and is contemplated in our financial guidance range. We expect these trends to have a larger impact in 2021 and the magnitude will be driven by the size and duration of unemployment in the U.S., the quality of commercial or ACA Exchange Insurance plans, displace of employees move from, the majority of our products as newer products have smaller net pricing spread between Medicaid and commercial plan, and government stimulus or relief plans that may keep patients on commercial insurance. While there is uncertainty on how all these factors will play out, at this time we anticipate increased utilization of Medicaid versus commercial insurance to be a moderate headwind to revenue in 2021 of approximately $200 million. This approximation contemplates peak U.S. unemployment in the low double digits in 2020, a gradual recovery in 2021, to high single digits percent unemployed by year end. We do not have an estimate on the impact of the executive orders on 2021 at this point, but given the uncertainty around them and our modest exposure to Part B, we expect the near term impact to be limited. Given our view of 2021 pricing negotiations, we still expect mid-single digit price impact across the portfolio in 2021. So now moving to slide 13, you'll find our updated 2020 financial guidance. This is based on the best estimates at this time and similar to how we approach Q1. We are balancing transparency and insight into the current view of the business, with the uncertainty we are all facing surrounding the extend and duration of the impact of the COVID-19 pandemic. Key assumptions supporting our updated guidance include healthcare activity returns to normal levels in the second half of 2020 as doctors utilize Telehealth for in-person visits to see patients despite potential additional COVID-19 outbreaks. The recovery in new patient prescriptions improved in the U.S. reaching and then growing above pre-COVID-19 levels by Q4 for most brands, noting the trends will differ regionally and by brand; price headwinds from increased utilization of patient affordability programs and changes in segment mix due to increased U.S. unemployment continue to be modest; clinical trial sites remain open and active in enrolling patients and promotional spend in the second half of the year constitutes a mix of in-person customer interactions, direct to consumer advertising and investment in supporting digital promotion. While uncertainty remains regarding the continued spread of COVID-19 and the resulting impact on the pace of economic recovery around the world, we believe healthcare activity will continue to be a priority and that patients and physicians will find ways to access healthcare. We believe the stocking and destocking activity observed in Q1 and Q2 is largely washed out and we are encouraged by the demand trends and more normal shipping patterns we're seeing with our customers. As a result we're maintaining our revenue range, recognizing additional closures in the healthcare system could cause us to revisit that range later in the year. Moving down the income statement, we are lowering our gross margin as a parent of revenue to be approximately 80% on a non-GAAP basis. This reduction reflects changes in geographic mix and lower realized prices. We expect our GAAP gross margin to be 78%. We are also lowering our range from marketing, selling and administrative expenses by $200 million to reflect savings from reduced travel meetings and in-person promotional activities, which are all partially offset by investments in digital capabilities. Our range for research and development expenses is unchanged. We expect savings associated with temporary pausing of clinical trial starts and enrolment to catch up in the second half of 2020 as we resumed activity in Q2. Of note, we can see positive data in our neutralizing antibody treatments for COVID-19 that supports product development. We plan to fully invest in registration of clinical trial and further scaling of manufacturing capacity. Under this scenario our research and development expenses are likely to be on the high end of our range as Lilly is self-funding all of these programs. We believe these investors are important to help combat the impact of the global pandemic. Our non-GAAP operating income as a percent of revenue goal of 31% remains as a reduction in total operating expenses offset through slightly lower gross margin percentage. We're updating the range for other income and expense the $350 million to $500 million of income, reflecting gains in our equity portfolio as seen in the second quarter. As I mentioned earlier, this number is of course subject to volatility in the capital markets. Now turning the taxes, we're reducing our GAAP and non-GAAP effective tax rate guidance to approximately 14%, driven by the net discrete tax benefits we booked for the first half of the year. So earnings per share is now expected to be in the range of $7.20 per share to $7.40 per share on a non-GAAP basis. Our GAAP EPS is expected to be in the range of $6.48 per share to $6.68 per share. Q2 was certainly an atypical quarter. As I highlighted earlier, COVID impacted our financial results in a number of ways. However, our confidence in the strength of our underlying business and our demonstrated ability to overcome challenges gives us the conviction to reaffirm our robust outlook for sales growth and productivity. So now I’ll turn the call over to Dan to provide an update on our ongoing efforts to develop treatments for COVID-19, a summary of key data disclosures in Q2 and a pipeline update.

Thanks Josh. Since our last call we’ve had major lifecycle readouts for three of our most important new medicines; Verzenio, Trulicity and Jardiance. All three were positive, all represent clinically meaningful advances for patients and all should help drive continued growth for these important brands. I’ll speak briefly about each, as well as the Phase 3 readout from mirikizumab, a molecule still under development. In addition to advancing our existing R&D portfolio, we have devoted significant efforts to creating and testing potential therapies for COVID-19 and here too we have made good progress this quarter. Before I go through the pipeline update, I'll provide an update on our COVID-19 therapies. Moving to slide 14, we provide an overview of the active programs we are pursuing to treat or prevent COVID-19. These programs have moved with unprecedented speed and hopes of finding new medicine to help blunt the impact of the virus. Baricitinib our JAK inhibitor has two ongoing Phase 3 clinical trials in patients hospitalized with COVID-19. The anti-inflammatory activity observed by baricitinib in other diseases is thought to be potentially beneficial in treating COVID-19. The first trial is investigating baricitinib in combination with remdesivir as part of the NIAID’s Adaptive COVID-19 Treatment Trial and we expect to have data from this trial within the coming months. The second trial is Lilly sponsored and is assisting baricitinib as monotherapy. We expect results from this trial later this year. Second, we are pursuing a Phase 2 trial of an antibody that targets Angiopoietin 2, which has been observed to be elevated in patients with acute respiratory distress syndrome or ARDS. Based on trial enrolment we now expect to have data in-house this fall to inform next steps. While these two efforts may inform treatment of symptoms of COVID-19, the approach I’m most excited about is virus neutralizing antibodies for the treatment and prevention of COVID-19, both a single antibody therapies and in combinations. We currently have efforts ongoing with LY-CoV555 which arose from our collaboration with AbCellera and with LY-CoV016 which we licensed from Junshi Biosciences. The development status is summarized on slide 15. Both the antibodies have completed dosing in their Phase 1 studies with safety and PK results that support advancing the molecules. Neither Phase 1 study was designed to collect efficacy data, that is a 555 trail that only enrolled six patients per dose and O16 enrolled only healthy volunteers. 555 is further along in development and is progressed to a large dose ranging Phase 2 study in ambulatory patients recently diagnosed with COVID-19. Here we are focused on reducing viral load. The study is enrolling quickly, and we should have data to report by Q4. This will be our first opportunity to share human efficacy data from the neutralizing antibody program. Based on safety and tolerability data gathered to-date, as well as taking into accounts the gravity of the unmet medical need here, we plan to initiate registrational studies in the coming weeks, even in advance of having efficacy data. We've been in studies across several different patient populations including a Phase 3 study for prevention of COVID-19 in residents and staff at long term care facilities, as well as additional registrational studies for potential treatment indication in both the ambulatory and hospitalized settings. Once underway, the timing for data disclosure from these trials will be highly dependent on patient enrollment and any intern efficacy and safety data we may see. In addition to the monotherapy trials I describe for 555, we intend to test the combination of O16 with 555, in case such a combination is needed to combat viral resistance. We look forward to producing additional data for both programs and we’ll provide updates as we achieve program milestones or data become available. We continue to invest in manufacturing for these potential therapies at risk and we are focused on ramping up our manufacturing capacity as quickly as possible. While developing treatments for COVID-19 is an important priority for Lilly right now, we also continue to advance the rest of our pipeline, to help people with diabetes, immune disorders, neurodegeneration and cancer. One particularly exciting development this quarter was the positive interim readout of the MonarchE trial, assessing the use of Verzenio to reduce the risk of recurrence in (HR)-positive, HER2-negative high risk early breast cancer. Verzenio is the only CDK4/6 inhibitor to show a benefit in this setting, where another competing product failed at our T-cell analysis. Our conviction and the differentiation of Verzenio from the competition continues to increase based on important data, including safety and tolerability data and mechanism of action that have allowed for continuous dosing and therefore continues target inhibition. This is a unique feature of abemaciclib. Clinical efficacy that support use even as a monotherapy in metastatic breast cancer, another unique feature of abemaciclib. The demonstrated benefited overall survival in the metastatic setting in combination with fulvestrant, something not all CDK4/6 inhibitors have been able to show and most recently, positive result in the adjuvant setting, another unique feature of abemaciclib. These data continue to support our convictions, but not all CDK4/6 inhibitors are the same. The positive results in MonarchE could significantly increase the opportunity for Verzenio. Looking at the MonarchE study clinical pathological criteria for enrolment, we estimate that approximately 20,000 patients in the U.S. would match these criteria. This represents a roughly 50% increase over the current addressable market in metastatic breast cancer. Our market projected to reach almost $7 billion in 2020. In addition we anticipate duration of therapy in the adjuvant setting will be longer. We plan to submit this data by the end of the year to regulators around the world and to present them at a major medical meeting in 2020. Moving to slide 17, we also presented important Trulicity data at the virtual ADA and ENDO meetings this summer. In the on-treatment analysis the 3 milligram and 4.5 milligram doses of Trulicity demonstrated statistically significant improvement in hemoglobin A1C reduction and weight loss versus the currently approved 1.5 milligram dose at 36 weeks. These doses could allow our patients to receive additional clinical benefits and stay on Trulicity, but still experiencing Trulicity’s ease of use. We look forward to U.S. any EU regulatory action on the additional doses of Trulicity later this year. At the virtual ADA we also share data which builds upon the existing body of evidence demonstrating the simplicity of the Trulicity patient experience, combined with its powerful efficacy. In this real world analysis of patients after a minimum of six months of follow-up in the U.S., Trulicity demonstrated significantly higher adherence and persistence compared to two other weekly GLP-1. In addition, significantly fewer people discontinued treatment on Trulicity compared to other agents. This real world evidence complements the robust clinical data generated for Trulicity and provides further support for why Trulicity is the market leading GLP-1. Moving to slide 18, you can see our select pipeline opportunities as of July 23. Movements since our last earnings call includes the previously mentioned U.S. approvals for Lyumjev, Retevmo, and Tauvid. The U.S. approval of Taltz for non-radiographic axSpA and Cyramza for EGFR mutated non-small cell lung cancer, the initiation of the Phase 3 tirzepatide cardiovascular outcome study SURPASS-CVOT, the advancement of three new Phase 2 programs, the initiation of three Phase 1 programs and the attrition of our first generation KRAS G12C molecule. While we were excited about our initial KRAS program, we observed unexpected toxicity in the clinic that precluded further development. We are working to understand the mechanistic basis for the toxicity and we are exploring a backup program. Moving to slide 19, we provided an update on our 2020 key events that occurred during the quarter. In addition to the previously mentioned approvals, initiations and pipe in progress, we submitted Alimta [ph] in the U.S. for atopic dermatitis. As Dave mention earlier, we also announced positive phase 3 read outs for Jardiance in heart failure and mirikizumab in psoriasis. Beginning with Jardiance, we were optimistic about the likelihood of success in heart failure based on compelling CV data seen in diabetic patients in the EMPA-REG OUTCOME trial. We were pleased to see a positive outcome for the first heart failure trial to read out EMPERIAL-Reduced and will present the data in August at the European Society of Cardiology and submit to regulators later this year. We look forward to additional Jardiance data readouts, including heart failure with preserved ejection fraction, the EMPERIAL-Preserved trial in 2021 and the chronic kidney disease, EMPA-KIDNEY study in 2022. We also noticed a positive readout from mirikizumab phase 3 in psoriasis, including success on the primary and all key secondary endpoints. It's particularly encouraging to see such robust data from mirikizumab in a head-to-head trial, since trial of such disease are the gold standard for comparing agents. Indeed, we had a number of positive head-to-head trials with Taltz in psoriasis and now we’re pleased to see mirikizumab demonstrate superiority versus percentage at 52 weeks on both about passing 90 and passing 100. Despite growing a competition is psoriasis, Taltz remains an excellent option for patients that delivers clear skin fast. These new data suggest that mirikizumab also has a consensual to be a meaningful treatment for people living with psoriasis. We look forward to submitting mirikizumab in this indication and importantly, these data further our conviction in IBD, where we see the biggest opportunity. Given the relative priority of indications, we've been staging our investments in psoriasis. We work on going to prepare for the psoriasis submission and plan to submit in the second half of 2021. Accordingly, we've also provided an updated timeline for the phase 3 data of mirikizumab and ulcerative colitis and Crohn’s disease. We now expect the topline results production for ulcerative colitis in the spring of 2021 and for Crohn's disease in 2022. Since we announced the pause of new trial starts and enrollment in many programs back in March, I'm pleased to report that we’ve re-opened enrollment in the vast majority of clinical trial and we are again initiating new trials. As we partner with clinical trial sites going forward, we made a number of changes to how we run clinical trials that allow for many chances to be completed virtual. These two capabilities have come from necessity, but are also improvements on the way clinical research is conducted and it’s something we’ll continue going forward. These are challenging times in drug development, but Lilly has demonstrated we have the creativity to adapt to the new environment and we're committed to bringing new medicines to patients. Dave, back to you for some closing remarks.

Thanks Dan. We’re mobilizing our resources to pursue treatments of devastating diseases is a natural part of our history and our company's purpose, on a separate note I think all major employers are realizing we have a bigger role to play in the fight against systemic racial injustice and as a corporate leader in diversity inclusion, Lilly is committed to using our platform to speak up, speak out and work towards solutions to eliminate the racism and inequities that African-Americans and other minorities have experienced for far too long. We are stepping up to bring people and organizations together to acknowledge the trauma of racial injustice, understand its many forms and create lasting change. To underscore our commitment to positive action, we also announced a pledge of $25 million and 25,000 employee volunteer hours over the next five years. The funding in volunteerism will be directed toward combating racial injustice and inequality primarily here in Indiana and we plan to partner with other businesses and community groups to achieve our goals. While there’s nothing easy about the road ahead, we can no longer accept systemic bias in any of its forms and the time for platitudes is now behind us. The time for meaningful actions, specifically by the corporate community to drive lasting change is in fact now, so a busy quarter. Let me conclude with some closing comments on our progress in the first half of the year. As expected, our business experienced headwinds this quarter based on reduced new patient starts and changes in inventory we highlighted earlier this year. With that in mind, we are pleased that in the first half of 2020 we delivered strong volume driven revenue growth of 7% worldwide in constant currency. We are cautiously optimistic about the recovery of both healthcare activity and prescription trends and expect both to accelerate during the second half of this year. We continue to find innovative ways to ensure our patients have access to their medicines and that we can support physicians and hospital systems as they provide care. Our operating margin improved 200 basis points over the first half of 2019 and we made exciting progress on our pipeline this quarter. We saw three top line phase 3 data readouts from important clinical programs. We had five U.S. approvals for NMEs and line extensions and achieved a number of other clinical milestones that Dan just highlighted. The COVID-19 global pandemic continues to be a disruptive force in the way we all work and live. Lilly and the broader pharmaceutical industry are working hard to develop new medicines to treat and to prevent the spread of COVID-19. We anticipate this disruption will continue till vaccines and new medicines can be used to manage the spread of the infection. While near term challenges do exist, we remain confident in the long term outlook for our company and the strength of our fundamentals. Lilly and Lilly people will continue to rise to the challenge and I'm incredibly proud of our efforts to combat the global health crisis, social and economic crises we currently face. This concludes our prepared remarks. Now, I’ll turn the call over to Kevin who’ll moderate the Q&A session.

Thank you, Dave. We’d like to take questions from many callers as possible, so we ask that you limit your questions to two per caller. Kevin, if you can please provide the instructions for the Q&A session and then we're ready for the first caller.

Thank you. [Operator Instructions] We will now go to the first question and that will be from Seamus Fernandez, Guggenheim. One moment please sir. And sir, now your line is open.

Yeah, can you hear me?

Yes, yes.

Okay, great, thanks. So just a couple of quick questions. You know first for Dan. Dan could you help us understand a little bit more about the timing of your CoV-2 antibody data you know and also just wanted to get a little bit of the scientific discussion around your choice of pursuing a single antibody. I know that the AbCellera technology is unique, but just wanted to have a little bit more of a discussion around that. I think that would be helpful for investors as we think about the choice of the single antibody. I know you've talked about manufacturing as a driving choice there, but obviously the efficacy is paramount, so we just wanted to get a full understanding of that dynamic and that choice and how you hoped the study is going to read out. And then you know secondly, just as we think about the margin dynamics in the second half of the year, Josh I was just hoping that you could help us better understand the directional trajectory you know of how you're expecting the margins to shape up in the second half. How much of that is driven by meaningful revenue acceleration versus you know just an ability to kind of manage the expense line. Thanks.

Thanks Seamus. Dan and then Josh.

Great! Thanks Seamus for those questions about the COVID-19 antibodies. Maybe just starting with timing, you know of course the timing of data disclosures depends on how best trials enroll and what the data show. We're committed to getting important information out to the public and the scientific communities as quickly as it's available. With respect to the phase 2 trial, that is focused on viral load, I think this is going to be the first and probably a key indicator of potential efficacy for this approach, and I commented that we expect to have that data to disclose from this 400 patient phase 2 trial in Q4, but again, that just depends on how best we can enroll these patients. Your second question there was around the rational for a single antibody versus two or three or cocktails of even more antibiotics have been proposed, and specifically you have to look around efficacy. So I think we and others have looked at monotherapy versus combination therapy in a variety of preclinical models for the disease and looking at neutralization of the virus infection of human cells for example. And what you’ll find is that combinations don't offer efficacy groups. A single antibody can generally neutralize the virus just as well as combinations of antibody. The reason that people sometimes try combinations of antibodies, because they're worried that over time resistance could emerge. So I don't expect to see any efficacy booster, efficacy denumeration for having a combo or monotherapy in clinical trials. What we’ll be looking for instead is whether or not there's an emergence of resistance. There are some factors that make that somewhat less likely here. I think the extremely high potency of 555 and its ability to effectively neutralize virus very, very quickly may decrease the risk of resistance. We've done some primary studies and we've not seen resistance emerge in those studies at all. But we'll be watching patients carefully and we have the combination therapy that will move forward as a backup if resistance is seen. The advantages of monotherapy are obvious and you commented on them. It’s simply that if you have one antibody, you can manufacture twice as much as a combo of two antibodies, three times as much as three antibodies. In a situation like this, I think they are just starting a tradeoff that might indicate maximizing manufacturing capacity is the key objective and so that's where we're heading here. Thank you.

Thank Dan. Josh?

Thanks Seamus. So if we look at our guidance for the year and think about the margin progression in the second half of the year, just a reminder, you know sales on a constant currency basis grew 7% in the first half and our operating income percentage was a little bit over 29%. So to get to the 31% target we have for 2020, we’re obviously going to see margin expansion in the second half of the year, but I think it's pretty straightforward. When we look at the sales range that we have, you know picking midpoints or wherever you want to pick, we’re looking really at something close to 7% or 8% growth in the second half of the year. So while we expect an acceleration in sort of absolute sales on a half to half basis, it’s not that much of a stretch from where we are. We think a little bit of a pick-up probably in gross margin in basis points and that's just a function of more normalized geographic impact. As you know we saw more of an impact in the U.S. in the first half of the year than outside the U.S. We expect those things to normalize a little bit in the second half of the year and we’re not anticipating any one-time pricing impact either up or down, so we see a little bit of a benefit there. But the big piece will come on the OpEx side. I mean it's not from additional sort of cost saving moves, you know our guidance range we provide for getting and picking wherever you want to pick in that range, a couple $100 million or so increased investment in absolute dollars in combination of SG&A and R&D in the second half of the year. So it's really just the absolute sales benefit that we'll see in the second half against a lower absolute increase, but still an increase in OpEx. That gets us to something over 31% in the second half of the year. Put that together and that puts us at 31, because most of these things are certainly in our control. As I mentioned earlier, and as Dan’s talked about on COVID, we're going to invest fully you know behind those opportunities that is contemplated in our guidance range and to the extent we’re higher on OpEx, you know at the higher end of the range, it’s going to be the – primarily be because of you know seeing good data and continue to move fast there, but we’re confident in the margin expansion opportunity into the second half of the year for the reasons I just mentioned.

Thanks Josh. Seamus, thanks for your questions. Kevin, next caller please.

And that will be from the line of Geoff Meacham, Bank of America. Please go ahead.

Questions, I just had a few. On Verzenio I know we have yet to see data details, but can you speak to the real world duration of therapy today in metastatic and then what you would expect from the monarchE setting. And then a quick drug pricing question for Dave. I know obviously you spent a lot of time on these issues, but you know what are the hurdles to getting IPI implemented and when you look across the Lily portfolio, can you speak to the category that may be more impacted from the executive order, other IPI rebates, etc. Thank you.

Thanks Geoff. We’ll go Anne for the question on Verzenio and then Dave on IPI.

Well Geoff, thanks for the question on Verzenio and the duration question is an important one and something that we're really excited about as part of the additional opportunity in EBC, and so we do expect the duration of treatment to be longer than the metastatic setting. And to your question, what we've seen in the RWE in the metastatic setting is about eight months. Now we’ll need to see what that actually is once the patients are being treated upon approval in the adjuvant setting, but obviously we're encouraged. The fact is the treatment duration in the study itself was 24 months. So we do expect it to be much longer than the eight months that we see in the metastatic setting.

Thanks Anne. Dave?

Yeah, thanks Geoff. Well, I mean you know we all observed last Friday's announcements. I think mostly these are not perceiving new ideas, so my statement’s maybe a repeat from prior calls. But on IPI specifically, you know this is being proposed under the CMMI model, Affordable Care Act, so that by itself is probably a problem. It just seems to regulate the entirety of the U.S. position infused market via that mechanism, and you know you expect the industry to vigorously challenge that authority here as to create new authority. But if implemented, and we have yet to see the tax by the way. I'm not sure the White House has put that out yet, but let's assume it's something like the 2018, a blueprint proposal. We are relatively under exposed to this idea, because it affects part B physician infused drugs. Today you know the two material medicines fit that in our portfolio, Alimta and Cyramza. Of course Alimta, we expect a patent expiry in spring of ’22, so you have a time window impact that’s quite short. And Cyramza, which is obviously longer and a meaningful product, but a part of our growth story but not a cornerstone of it. Going forward, of course if we looked at future medicines in the pipeline, there are you know infused medicines in immunology and notably in Alzheimer's should those succeed that you know you'd be concerned about. But I think drug companies have more ability to navigate on future products than they do one past – products launches in the past, because you can affect your primarily European pricing outlook, perhaps with constrained demand in Europe, but focused on a common floor price for the U.S., so you know we can navigate it. That said, it's a horrible policy and I think we'll – it sends a wrong message at a time when this industry is working literally day and night to help us all escape from COVID-19. Do we really want to be talking about this disruptive force and the most well capitalized companies that are least affected, biotech which you know we're not part of that small company group, but they will be severely affected and investor interest in many of their companies could drop precipitously. I think that would be a real loss for what is an industry that's basically U.S. based. So we'll fight it hard and hopefully it won’t come to be. On rebate, again this is an idea we've pursued before for some time, as well as frankly you know we're not disappointed by the 340B pass through idea that was presented as well. We think that the patients who drive the volume, that plans negotiate discounts on should benefit from those discounts. Frankly as they do in every other part of the healthcare system except medicines, so that we think cost sharing and copay should be based on net price not list and these ideas for that. Again, lots of barriers to implementation on those as well, as your other groups who oppose them, but we’ll continue to support that concept of sharing the savings.

Thanks Dave. Geoff, thanks for your questions and next caller please?

Tim Anderson, Wolfe Research. Please go ahead.

I have a commercial question on CDK 4/6 class. So Pfizer’s hyperensive market leader, but it is the only CDK 4/6 that failed to show survival benefit informal phase 3 trials in metastatic, of course the fail in adjuvant. Did Lilly think that the metastatic share Brent [ph] has is materially at risk. The competitors like Verzenio where realistically the stickiness to the segment either said that its real world studies that show an OS benefit well protected, but wondering what your view is? So it’s really a question on the metastatic segment. But then on to Tirzepatide, how would you characterize your level of confidence that the first upcoming phase 3 results, were going to be data that really wows investors, like the phase 2 trial results did. Its notable that the analysts already carry about a $5 billion estimate for Tirzepatide in a consensus model.

Thanks Tim. We’ll go to Anne for the question on the CDK 4/6 class and then Mike Mason for the question on Tirzepatide.

Well, thanks for the question Tim on Verzenio and we believe we've seen really positive trends will Verzenio in the metastatic setting and I think josh mentioned those in some of the intro, and we’ve really capitalized on the positive overall survival data from one or two in the combination with that strength. And so we’ve seen versus Q2 2019 is worldwide growth of 56% in revenue and U.S. growth is 35%. And then if we looked globally, we now had 49 approvals worldwide and I think probably an important metric is the Japan NBRx share of the market now, it's 58%. So we’re seeing a very strong launch in Japan, and so we believe obviously that with specifically significant survival data, that's really the gold standard in this class and so we believe that more and more physicians will be trying Verzenio and we’ve seen that in the continued increase in the NBRx and so we'll continue to share that message. We believe that this is the best-in-class agent and I think it just goes to that whole picture of the differentiation that we see with Verzenio over time and I just think that that will shift physicians’ minds. Mark has the results from monarchE as Dan mentioned, really do differentiate it from both CDK 4/6 and then we've got the statistically significant results, not just in the overall population, but then in the hard to treat population, those with visceral disease and primary endocrine resistant. And again, you didn't see that with some of the other CDK 4/6’s. So I think we’re starting to feel pretty strongly and I think physicians are starting to agree with us that we have a differentiated agent here, and so you’ll continue to see us press in the metastatic setting, because we have that survival data, and now we get to make the move into the other trend setting.

Thanks Anne. Mike?

Okay, for tirzepatide we’re glad to see that your wowed by our phase 2 data and for patients struggling with type 2 diabetes. You know I think the best thing to really do is to go back and take a look at the phase 2 clinical studies. I mean we saw at the 50 milligram dose up to 2.4% A1C reduction and weight loss up to 12.7% versus placebo in just six months of starting. So we're excited to see how tirzepatide can perform in this patient population and longer studies in phase 3. There's nothing to tell us that we won't see you know exciting data coming out of the phase 3, we don't have any new information that suggests otherwise, so we are incredibly confident about tirzepatide, not only in type 2 diabetes, but also we're excited to see its potential in Nash [ph] and obesity. So our enthusiasm remains very, very high. Thank you for the question.

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

And that’s Umer Raffat, Evercore. Please go ahead.

Thanks so much for taking my question. Dan, I'm just trying to reconcile the positive commentary around your COVID map heading to registrational trials. First is perhaps lack of any data, efficacy data visibility for phase 1 and if you could possibly speak to any trend that you've seen already, that'll be really helpful. And then on KRAS, I might have missed it, but if you could just add some more color on whether you ran into a therapeutic index challenge before efficacy kicked in and if you could speak to what's the highest dose you actually dosed patients with on your KRAS, because it seems like other KRAS users didn't really have any efficacy until a very high dose and all of it kicked in at a certain dose, so it will be really helpful. Thank you.

Thanks Umer. Dan, you’ll take both of those?

Yeah, sure. Umer, thanks for both those questions. So on the COVID map, you should be asking about the rational going into registrational studies without having seen efficacy data; its not something we usually do. You're right, of course here it’s – as I said the gravity of the situation and then look at it with which we desire to test these therapies, that have driven us to that decision. You asked about sort of trends that might have encouraged us from the phase 1 study and unfortunately the answer is we don't have anything to talk about. We had one phase 1 study that was with healthy volunteers, so that they didn't have COVID-19, nothing was due there. The other was so small and in the hospitalized patients six patients per dose group and I think what we saw there is basically what you would expect across doses and placebo. All of the patients actually did really well and got better and left the hospital. That's not atypical for a phase 1 study here that populations of physicians typically pulled into those studies are some of the better patients who might be at the end of their disease course. I wouldn't expect antibodies in any case to have much effect in people whose viral load is already low and their immune system is already clearing the disease, so that's where we are. I think the phase 2 study on the other hand is patients who are early in the disease course. They are just within a few days of getting diagnosed. My expectations go up high and in many cases the increasing viral loads in the absence of therapy and it goes here to show that the therapy decreases the viral loads. So that's important read out, but as I said, we’ll have started the phase 3’s by then. On KRAS, this is an issue of off target toxicity, so it's not related to it. The KRAS target itself is our view, that does therefore killed the therapeutic index and not possible to proceed with that drug. I don't think we at this moment could give details on the exact nature of the toxicity or the highest dose that we tested, but we did feel we could proceed based on the doses at which we saw that tox and we're trying to resolve that in the backup program, make some preclinical models for the toxicity and take care of it now.

Thanks Dan. Umar, thanks for your questions. Next caller please?

Andrew Baum of Citi, please go ahead. Mr. Baum, your line is open now.

Hello! Can you hear me?

Yes.

A question on U.S. drug price reform. There are a number of life oppositions. Obviously the effect of order referencing paper form, which obviously Lilly has supported, but it requires a positive CEO score in order to move forward. The first question is, do you think there's any possibility that could be achieved given the history of the CEO score the belief required of an overall reduction in pricing through market based competitions to get there and the CEOs reflect that, so that's number one. And number two, an alternate proposition has got bipartisan support in the Senate, but is stopping from reaching the Senate floor by O’Connell. I know you have some concerns over that bill, but as a potential way forward to mitigate a more deleterious solution on either of the potential options going forward. Can you see this progressing? Many thanks.

Thanks Andrew. We’ll go to Dave for both of those.

Yeah, thanks Andrew. On the EOs you’re talking about read every form and the pass through and the history here is as you pointed out, the CEO score was extremely negative. In our math largely driven by the one assumption you noted, which is that rebate value which essentially grew back to manufacturers and thus raised premiums. It's a deeply flawed assumption. Of course we’ll compete, but the whole idea would be to move the basis competition from sort of discriminated prices that are private to list price or other means to deliver pricing directly to consumers discounts that pass through for instance. So that of course requires industry actors to change their practices and that's not something that can be coordinated or messaged very well due to the antitrust laws. So we're sort of in this catch 22 on committing to deliver on sharing the savings, but not being able to do that publicly. I think that's a problem. I mean it’s particularly a problem for legislation. Of course the executive order method has other problems in terms of legal power, but if enacted under administrative rules, you know there isn't necessarily a requirement to square the budget, so savings can be assumed in other ways and there's a different authority doing the math. That said, I think there are headwinds on this point, both within the administrative executive branch, as well as on the hill. Nonetheless it's the right thing to do and I think we need to continue to push for ways that everyone would have confidence that the industry would compete in a way that would lower consumer out-of-pocket costs. I can tell you that's the goal when we advocate for this policy, and we need to find ways to provide that assurance I think to get movement. You talked about Senate finance and Grassley reintroduced a version of his bill to try to make one last push. I believe his chairmanship is ending in any case at the end of this Congress, so it's understandable why he's doing that. I don't think that that package has much of a chance to advance. There are always ways stars get align and there’s a number of health extenders do at the end of this Congress, but it's a pretty big piece of legislation to throw on an extenders package. The only possible way is that it does produce a positive budget impact in terms of use to pay for other things, but probably you don’t need the whole package. So I think that's still a narrow path and the most likely scenario is that these EOs can't take the force and don’t take force prior to a new presidential term, a new congression, Congress sitting and the Senate finance doesn't go anywhere either nor does HR3. I think that's sort of a probable planning scenario.

Thanks Dave. Andrew thanks for your questions. Next caller please.

That will be from the line of Louise Chen of Cantor. Please go ahead.

Hi, thanks for taking my questions. So my first question is, is there any way to quantify the operating margins, what we would have seen in the first half ‘20 without R&D COVID spending and also headwinds of sales from the pandemic? And the second question I had was, how do you think about tirzepatide as a single solution for diabetes, NASH and obesity. Thank you.

Thanks Louise. We’ll go to Josh for the first question and then Mike for the second one.

Thanks Louise. I think in the first half as I mentioned, our operating margin was 29.1%. I think if you add back some of the lost prescriptions, but then also keep in mind we had some savings associated with promotions, you know we’re probably closer to 30%. We said as we came into the year, we expected margin expansion through the year. So that’s still on track, but yeah we’re probably off by somewhere in the range of 50 to 100 basis points or something there.

Thanks Josh. Mike?

It’s a great question on tirzepatide and I think we have a, just a phenomenal opportunity to not just be able to provide glucose control for those living with Type 2 Diabetes, but really affect their overall metabolic health. And so I think the contributions of both GLP and GIP can provide the opportunity to really provide improved metabolic health across Type 2 Diabetes, obesity and NASH that are related. And so it's a great question and I think it's a good opportunity for us to expand our focus beyond just helping someone living with Type 2 diabetes, better control their glucose. So a great question and obviously an area that that we will focus on. There will be people living with Type 2 diabetes that are in our NASH and obesity studies.

Maybe just add to that, it goes maybe without saying, to help say it, the current utilization of GLPs in the total diabetes population in developed markets is something like one in eight or one it 10 patients. And so the hope here is that we can rearrange the priorities and the sequence of treatment in a way where this powerful category in here are duel acting GLP, GIP could be used earlier and more broadly to manage disease outcomes in a very different way. Today Type 2 diabetes disease is a failure and perhaps this technology could help doctors and patients find success much earlier in the disease course.

Thanks, Mike, Davis. Louise, thanks for your questions. Next caller please.

Terence Flynn of Goldman Sachs. Please go ahead.

Great! Thanks for taking the questions. Was wondering on another one of Verzenio, if the MonarchE date is going to be an ESMO or Antonio Breast, and if you think penetration in the adjuvant setting will be higher, lower or the same as in the metastatic setting over time. And then Josh, just on contract when you talked about how those discussions are wrapping up now. Anything notable in terms of Trulicity or Taltz that we should consider as we think about those contracts for 2021. Thank you.

Thanks Terence, we’ll go to Anne for the question on MonarchE and then Josh around the contracting.

Yeah, so thanks for the question Terence. So on the presentation we will be presenting at a medical meeting later this year. Unfortunately I can't confirm which one yet, but we will be presenting at the meeting this year. As far as on the penetration, well that’s I think what’s exciting about this opportunity, is that we are the only CDK 4/6 to have positive results in the adjuvant setting. And so I think our penetration for the high risk patients, which is the population that we had in MonarchE will be extremely high. So as we’re hearing people ramp even to the top line opportunity, we're seeing that there's a lot of enthusiasm for having CDK 4/6 this setting, and so we look forward to sharing those results as I said later this year. Again, we see I think Dan and others mentioned in the introduction, we see this as an opportunity of only about 20,000 patients here in the U.S., as we matched our criteria in the study to the Sierra database. So I think we see a pretty significant opportunity. It's really probably half again of what we have in the metastatic setting, which has been significant. So to answer your question, we do expect strong penetration in this space over time.

Thanks Anne. Josh?

As you know Terence, we won't sort of talk specifically about individual contracts or anything at this point. But I think from what we have seen, first to go back to the earlier comments, we see a pretty similar pricing environment in 2021 to what we're seeing here, which would be modest net price decline, meeting we are providing slightly more rebates than what we're anticipating in terms of list price increases and then we couple that with the other dynamic factors that we mentioned. I think if you think about Trulicity, we've said sort of you know expect something plus or minutes 5% net price declined over time. I think that’s how we’re viewing next year. It’s a very competitive environment of course that we are focused on maintaining access, not looking to trade price per share or anything like that. So I think those negotiations are going as expected. With Taltz, we’ve been focus on upgrading our access and so to the extent that were able to do that, you'll see that as a net price decline potentially but compensated for by increased access. Again I think we're happy with the progress we're making this year and continue to focus on improving where we can for next year. But overall, again I’d say the general trend is we have fierce competition in the classes we’re in, but we're focused on maintaining at least the access we have today and you know when we have the chance upgrading in areas like immunology.

Thanks Josh. Terence thanks for your questions. Next caller please.

Next will be Chris Schott, JPMorgan. Please go ahead.

Great! Thanks so much for the questions. Just maybe first on Verzenio, you highlighted 20,000 patients potentially in the US. Maybe just give us similar metrics about how you're thinking about the size of the eligible population in developed ex-U.S. markets? And then second question, very helpful color in terms of kind of a mix of unemployment headwinds for 2021. Any updates in terms of how you're thinking about potential international price pressures from some of the budget deficits we are seeing globally? Is that a ‘21 headwind to think about as well or is that going to take a little bit longer to manifest itself? Thanks so much.

Thanks Chris. We’ll got to Anne for Verzenio and then to Dave on the international question.

Great! So thanks so much for that question on the Verzenio eligible population. So as I said in the U.S. about 20,000 eligible patients, which is about 10% to 15% of the HR positive, HER2- EBC positive. Outside the U.S. the pathology is similar and we estimated. So we estimated patient numbers in Europe about 10% larger than the U.S. and then Japan is about one-fourth of the side of the U.S. So I hope that answers the estimate questions outside the U.S.

Great! And on international pricing, I think we’ve talked about this before, but we don't have that many proxies for this kind of situation, but what we do know is economic activity, particularly in Europe and Japan has fallen like in the U.S. Tax receipts accordingly and if we use 2008 as a proxy, really took almost three years for the policy implications of that to show up in drug pricing health budgets. I think that’s natural because there's a lag in tax receipts and then there's a lag in policy making in response to it. I would expect that to happen, and the normal things that occur are clawback mechanisms and methods to keep the medicines budget within some proportion of the health budget. I think that will be a headwind the industrial will face over the next two or three years. I would say though that, if history follows, and I don't see any reason why it wouldn't, because Europeans in particular were successful at capping drugs, spending growth in the early part of the last decade. The burden of that tends to follow – fall disproportionately on older products that are scaled and perhaps with more competition in the categories, whereas as newer products I think actually weren’t really affected. They are more driven by helping technology assessment and the procedures to get an initial price and they don't really drive much budget pressure versus end of life. As you know, we continually advocate for more biosimilar and generic adoption in these markets is the first lever to pull and so I think also for products they are supposed to buy similar in generics you probably would see more pressure on the back end of this as well.

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

The next question is from Vamil Divan from Mizuho. Please go ahead.

Great. Thank you and thanks for taking the question, so a couple if I can. So one, just on the margin discussion and specifically on SG&A, I was wondering if you have any comments you can share just in terms of your more virtual promotional efforts here the past few months, and a sense of how productive they’ve been and we’re just trying to get a sense as you think about going forward, is your spending in SG&A going to be less than what you are thinking before you go to more of a hybrid model, what you expect within a year or so, your SG&A spending would be essentially; would have been before the pandemic? And then the second one is just maybe more on the business development side, just given some of the volatility you are seeing, [inaudible] COVID and also drug pricing. Do you have change as to how you’re thinking about potential licensing or acquisitions in terms of size and also curious in terms of therapeutic areas, are there any sort of areas where you feel like more need or desire or capacity to bring in additional assets. Thanks so much.

Thanks Vamil. We’ll go to Dave for your first question, and then Josh for the second on BD.

Yeah Vamil, for some now we've been on a journey to build out the capabilities to reach customers where they want to be reached and have relevant information at that time, as well as around launches and key data readouts to be able to expand our capacity beyond just the sales channel to reach customers. That has proven pretty useful through this pandemic and I would say overall the conditions which as I mentioned in my prepared remarks are variable around the world in terms of being able to safely send reps in the field and actually even be able to be let into medical buildings and facilities. I think there's a constraint there. So we’ve leaned into this, we've accelerated some of the plans we had to increase volume and the richness of this capability. Overall, I think the results are – I think we prefer to run the hybrid model everywhere where we have sales reps and these capabilities, where we can't send sales reps these capabilities have been useful. Is it as productive? I think it's certainly more efficient and it's more scalable. Whether it's as impactful, I think we’ll need to watch through time. We have different markets we serve and I can say that in specialty markets where you get a smaller number physicians and you can target your efforts extremely well. We mention Retevmo launch on this call, which is a kind of a first thing for us was an approval and launch during the pandemic. I think we are pretty pleased with the progress there. On the other hand, primary care brands, you know it's a little more challenging, because the way these practices are run and the variability and physicians accessibility. So I think the whole industry is probably learning this, but on the other side of this we’ll have a much more enhanced capability and you can bet we are spending huge amounts of time on a global basis lifting that up now in a way that's a pretty rigorous. So you know more to come there. Productivity to be seen, efficiency yes, effectiveness, you know we probably see a lot of variability right now.

Thanks Dave, Josh?

Yes, so on business development our strategy hasn’t changed. We continue to focus on acquiring potential first-in-class or best-in-class projects or products in our therapeutic areas. There's a high bar there and we've had great progress in our internal pipeline, but we remain committed to finding those kind of opportunities. We have – you know we are generating very strong cash flow. We got good investment grade ratings and good liquidity, good access to capital markets. So even with all the disruption related to COVID, I don't see any change for us and then our ability to interact with you know smaller companies or access potential projects hadn't changed. That’s not impacted by COVID. So it's really just a function of finding the right opportunities and ensuring that we can structure the deal in ways that create value for both sides and will continue to focus on that.

Thanks Josh. Vamil, thanks for your questions. Next caller please.

Next is Carter Gould of Barclays. Please go ahead.

Hi! Good morning. Thanks for taking the question. I guess two for Dan. First, on the baricitinib studies in COVID, can you maybe just sort of frame sort how are you thinking about the study, your level of confidence in light of some of the other agents repurposed from RA that had failed, albeit a 3 month JAK inhibition. And then as far as on the N3pG antibody side, are sort of timelines still in intact? Should we still expect the data readout early next year and any commentary on how you're thinking about the hurdle? Thank you.

Thanks Carter. Dan?

Yeah sure, thanks. On baricitinib, of course we're encouraged and the reason we did this trials is based on preclinical data around the mechanism of action of baricitinib and I think the clinical effects of the immune-modulating in hospitalized patients with COVID-19 has been next as you pointed out, but the [inaudible] have also been some promising efficacy signals and even success, so of course with dexamethasone. So I think we just have to wait and see how this works. Treating patients in a hospitalized setting is important. If we can reduce like the stay or decrease mortality, that will be an exciting result and maybe a stopgap measure until we have the medicines that actually can fight off the virus. So like I hope the neutralizing antibodies will. As for N3pG, yeah, we are still on the same timeline as we've always been. The trial will wrap up at the very end of this year, which means we'll have data internally and likely some kind of top line, just in the very start of next year. I think given that the size of the study, we have a reasonably high furlough rate and we are hoping to see a large effect size. We base that belief on the level of plaque clearingwe can get.We can get deeper and faster plaque clearance than has been shown with any other agent. So if clearing plaque is important stopping disease progression, we should have a strong effect. It's noteworthy that we also designed this trial to select a very careful patient population based on the entire levels at baseline, so we also expect smaller standard deviation, because the population should have a more uniform progression. I’d also note that we started the second trial N3pG already.

Thanks Dan. Carter, thanks for the questions. Next caller please.

Next, Steve Scala of Cowen. Please go ahead.

Thank you. When we see the data from monarchE, can you reassure us that the disease free survival improvement won't be an underwhelming 1% to 2%. Really seems excited about the data, so I would assume it's going to be stronger than 1% to 2%, maybe 3%, 4%, 5%. And then secondly, Roche announced last week that it will have data from a large Phase 2 trial of a TAURIEL antibody very soon. Should the Roche study fail, can you highlight any differences between the Lilly and Roche molecules and/or the study design that could sustain optimism for the Lilly program or if the Roche molecules sales should reassume that the Lilly molecule likely will follow a similar fate? Thank you.

Thanks Steve. We’ll go to Anne for the question on monarchE and then Dan for the question on TAURIEL.

Well Steve, thanks for the question. Obviously we just shared the top line at this time, so I can't go into detailed data as you know, part of the data disclosure. But what I can tell you is that we do believe that the possible results from monarchE are clinically meaningful and will add to the existing body of evidence that’s presenting, differentiated from other CDK 4/6s, and this is a major milestone for presenting you know and we believe does have the potential to change the paradigm of how early breast cancer is treated. So we really look forward to sharing the data with you at a meeting later this year.

Thanks Anne. Dan?

Yeah, thanks and with respect to TAURIEL antibody, again here, I just say we’re still on track for the data readout. This will come in the second half of the next year. I'm excited about this mechanism, but we don't have clinical data yet. The Roche readout will be important and we’ll be watching it carefully and of course on behalf of patients and the mechanism we’ll be hoping for their success. But there are some differences as you pointed out, both in molecule and trial design that make read through more complicated. One I think important aspect of molecule design is that there's lots of different species of tau in the brain. There’s a lot of soluble Tau that is monomeric and probably not involved in the pathogenesis of Alzheimer's disease that can sop up antibody and sort of reduce the effective amount of antibody available to get the bad kinds of tau. Our antibodies are designed specifically to bind the aggregated tau. So we think that should improve its ability to actually hit the target. Very high doses of these antibodies are generally used to overcome this soluble monomeric tau problem. So that's one difference between that Roche antibody and in fact all of the competitors and ours. The second difference is there are on trial design and here again, we use our unique expertise in tau imaging and biomarkers to select a patient population that we think (a) will be more uniformity in its disease progression [inaudible] better and (b) be more likely to be responsive to Tau therapeutic. It’s like these therapies will be effective – they are effective at stopping the spread of tau rather than removing pre-formed Tau and so I think it's important to have patients who are in the midst of the spreading tau, not patients that tau has spread throughout the entire brain. So we'll watch them carefully, but they'll be cautious on read through.

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

Navin Jacob, UBS. Please go ahead.

Hi, thanks for taking my questions. Just a couple on some launch products. We talked about some baricitinib. Just wondering how that launch is going. What is the diagnosis rate for RET right now and where do you see that will reach over the next one to two years. And then, just time lines for Retevmo in ex-U.S. markets. And then separately with regards to your migraine franchise, just want to get some color how you view the CGRP market growing from here going forward, as well as tied to that Lyumjev, I know it’s still early in the launch, but the launch does seem to be a little bit slower than some of the competitors out there. Just wondering what the dynamics that you're seeing in understanding that COVID-19 is also making things a little bit challenging in the neurology setting. Thank you so much.

Thanks Navin. We’ll go to Anne for the question of Retevmo then Patrick on migraine.

Well, thanks Navin for the questions on Retevmo. So the launch is going well as Dave mentioned in his introduction and so we're encouraged by the early demand signals that we've seen with Retevmo, and his customer feedback on the data has been very positive. So they're impressed by the efficacy and safety data across multiple indications and lines of therapy that we're able to get into the label, and it’s the largest obviously RET inhibition population that's been studied in 700 patients. We don't have Rx data to report yet, but we're aware of patient starts in a number of our top accounts, which is supported by the downstream channel orders. So it's clear that our first to market advantage is resulting in the treatment of patients who have identified even in previous testing. So that kind of leads to your question around diagnostic testing. So what we've seen historically is that RET is showing up on panels probably about 30% of the time. So you’ve hit on one of the key criteria’s of the launch is to continue to drive that testing right up and so it's been very much a focus of our efforts, both to work with the pathologist out in the U.S. on making sure that they have RET on their panels now. We have a very actionable biomarkers for them to test against. Our goal is essentially to eventually see testing rates like we see in some of the other targeted therapies, which approach 80%. Now the question that we’ll all have to assess is how quickly we can get there, but our goal is to drive that up as quickly as we possibly can, and so that's a big focus of the launch. And we have a partnership with Thermo Fisher and Illumina and other things in the works to really drive that up across the industry. Because we do believe that that's actually the best care for patients regardless they were treated with Retevmo or other targeted therapies that we want patients to get the right therapy for them. As far as the time lines, so as you know we've submitted in Europe and so we are waiting regulatory action there. That submission was accepted at the beginning of this year, and then we looked to submit in Japan and China either late this year or early next, so still working with regulatory authorities there.

Thanks Anne. Patrick.

Hey, thank you very much. Well the overall CGRP market continues to grow very nicely and when we look at from the market growth, year-over-year, we are about the growth of 64%, plus this last year. While in Emgality he actually continues to significantly out-perform the market with growth of 151%. And even if you look at the last quarter, we see that CGRP market continued to grow with 12% despite the significant decline in terms of new-to-brand. And we continue to remain very confident in the future of Emgality and aiming for a market leadership in the preventive market and we see also strong market leadership, I think that in primary care where we have expanded our effort in 2020 and with quite a few new trail. So very, very optimistic in terms of the CGRP market for Emgality. If we look from the Retevmo launch, I think it’s fair to say that we are not pleased with the performance so far, but we need to have in mind that we had approximately one month in the market place prior to we were hit by COVID-19 and we made the conscious decision to actually pull back from our promotional efforts, both in the field, as well as in terms of seasoning promotional growth. We have started to start-up virtual proactive detailing and we remain very confidence in the molecule taking into account that it’s the only one, but actually can offer a strong relief from the most painful physical symptoms, as well as the most problems in symptoms associated with the migraine, and we know there is a huge opportunity. Out of the 6 million people being treated in the U.S. today, 35% to 40% of those are not responding to the treatment, and in terms of efficacy really, with one single dose we believe we have the unique value proposition, but still work to be done, lot of work to be done.

Thanks Patrick. Navin, thanks for your question. I think we have time for one more caller please.

And that’s from the line of David Risinger, Morgan Stanley. Please go ahead.

Thanks very much. So I have two questions please. First for Dan. If you could just help us understand a little bit better regarding the AbCellera antibody 400 patient Phase 2 which was initiated mid-June. Just curious, given the primary endpoint is that day-11, why would results not be revealed until the fourth quarter. And then second for Josh, could you comment on the swings in other income. I guess it's really more on a go forward basis that you already discussed what happened in the second quarter just to maybe provide any modeling suggestions to us for modeling other income in future quarters? Thanks very much.

Thanks Dave. We'll go to Dan and then Josh.

Yeah Dave, thanks for the question on the timing of the Phase 2. Your right, it’s a 400 patient study that initiated last month. It got up to a bit of a slow start. I think as we at that time, in the country the pandemic shifted in geographies, we shifted our efforts accordingly. It's now enrolling very, very quickly. The timing of data disclosure depends on that rate of enrollment though. So it could in fact be sooner than Q4. I think I'm confident it will be by of course sometime during Q4 at the latest. As you point out, the day-11 time point is a critical point. So 400 patients enrolled and then 11 days later, need differential swabs and a viral assessment and then database lock and then analysis and reporting, all-in-all it’ll just take probably a couple of weeks from the end of the study. So we'll keep investors updated and the community updated on the progress of the study. That's where we are today.

Thanks Dan. Josh?

Thanks. On our OID, of course in the first half of the year and particular in the second quarter as I mentioned, what we're seeing there is the mark-to-market gains from the roughly $2 billion of investment securities we hold. Again, we hold these as a function of business development deals and venture capital deals to stay abreast of breaking science and obviously making good decisions there, at least as of Q2. We don't anticipate or we don’t forecast gains going forward there. So really, if you keep that neutral Dave, what we are really thinking about then is, we are in a net debt position, so we pay interest costs on the debt and then that’s the only way we see anything that’s positive is if we see investment gains change. So I think for modeling purposes, look at our sort of net debt position. We've got great rates again the debt and so it’s pretty modest negative cost. But that's sort of what we assume and then you know any unusual items that flow through there, of course we’ll report and we tend to just as you saw in Q2 let those upload though. But we are not anticipating anything significant in the second half of the year. So mostly you're just going to see the negative impacts of our net-debt position.

Thanks Josh, David. Thanks for your questions and now we’ll go to Dave for the close.

Thanks Kevin. Well, we appreciate your participation in our earnings call today and a remarkable quarter and thank you for your interest in Eli Lilly. Please follow-up with our IR team if you have any additional questions that we didn’t address today and hope everyone stays well. We’ll talk to you soon.

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day!