John E. Elicker - Bristol-Myers Squibb Co. Giovanni Caforio - Bristol-Myers Squibb Co. Charles A. Bancroft - Bristol-Myers Squibb Co. Francis M. Cuss - Bristol-Myers Squibb Co. Murdo Gordon - Bristol-Myers Squibb Co..

Gregg Gilbert - Deutsche Bank Securities, Inc. Christopher Schott - JPMorgan Securities LLC Jami Rubin - Goldman Sachs & Co. Marc Goodman - UBS Securities LLC Jeffrey Holford - Jefferies LLC Timothy Minton Anderson - Sanford C. Bernstein & Co. LLC Seamus Fernandez - Leerink Partners LLC Andrew S. Baum - Citigroup Global Markets Ltd.

Geoff Meacham - Barclays Capital, Inc. Vamil K. Divan - Credit Suisse Securities (USA) LLC Steve Scala - Cowen & Co. LLC Mark J. Schoenebaum - Evercore ISI.

Good morning. My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bristol-Myers Squibb 2016 fourth quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

John Elicker, you may begin your conference..

Charlie Bancroft, our Chief Financial Officer; Murdo Gordon, our Chief Commercial Officer; and Francis Cuss, our Chief Scientific Officer. Giovanni and Charlie will have prepared remarks, and obviously Murdo and Francis will be available for questions. I'll take care of the Safe Harbor language first before I turn it over to Giovanni.

During this call, we'll make statements about the company's future plans and prospects that constitute forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's SEC filings.

These forward-looking statements represent our estimates as of today and should not be relied upon as representing our estimates as of any future date. We specifically disclaim any obligation to update forward-looking statements even if our estimates change.

We'll also focus our comments during the call on our non-GAAP financial measures, which are adjusted to exclude certain specified items. Reconciliations of these non-GAAP financial measures to the most comparable GAAP measures are available on our website.

Giovanni?.

our international business; our non-lung business in the U.S.; and our lung business in the U.S. With respect to our international business, our teams have done a great job with access and reimbursement. You've seen that in our full-year results. Specifically in the quarter, we completed price negotiations for France and Germany.

Overall, I expect to see continued growth internationally in 2017. Regarding our non-lung business in the U.S., 2016 was a great year in the U.S., driven by the combination regimen in melanoma and our very competitive position in renal cancer.

For 2017, I expect to see continued growth for melanoma and renal as well as from our recently launched head-and-neck indication and the expected bladder approval. And regarding the third element, our lung business in the U.S., in 2016 we did a great job establishing Opdivo.

We know our second-line business will face increasing competitive pressure in 2017, and our teams are focused on defending our position. Murdo can talk more about our global commercial opportunities. From an R&D perspective, in 2017 we expect to continue to advance our Opdivo program at the same time as we make progress on our next wave of I-O assets.

With 11 clinical stage I-O molecules in the clinic, we have a broad program where we expect to see important early data readouts, including IDO, GITR, and LAG-3. I am excited to see how these progress. Francis can provide more details.

Taken together, we are very proud of our innovation in immuno-oncology, and I remain convinced of our significant long-term opportunity in I-O. Importantly, we announced last week the positive resolution of patent litigation with Merck for PD-1.

It's important to note that the strength of our patents have been publicly acknowledged, and I continue to feel very positive about our PD-1 and our PD-L1 patent estate. Going forward, we will continue to protect our innovation and defend our IP. I also want to comment on our 2017 priorities outside of oncology.

We will build on the strength of the brands we've established with Eliquis and Orencia in the near term. Longer term, we are advancing our efforts to diversify our portfolio with new pipeline agents in heart failure, immuno-science and fibrosis. Later this year, we expect early data in house from assets in systemic lupus, NASH, and psoriasis.

Francis may provide additional details on this progress. In closing, let me say that I am proud of the strong performance we delivered in 2016 and excited about our prospects for 2017 and beyond. Charlie will now provide additional comments on our 2016 performance and 2017 guidance..

one, foreign exchange; and two, the potential for an earlier than expected entry of the Keytruda/chemo combo in May. With respect to FX, as you know, the U.S. dollar has strengthened since the election against most currencies, including the euro and yen, which represent our biggest exposures.

Based on current FX rates, our 2017 EPS outlook has been negatively impacted by about $0.07 from the guidance we provided in October. Regarding gross margin, similar to our trends in the fourth quarter, our 2017 guidance takes account of the continued declining contribution of virology and the growth of Eliquis, which is somewhat offset by Opdivo.

And with respect to OpEx, as we've said, we expect to keep total operating expenses roughly flat through 2020 compared to 2016, but with an increase in R&D this year. Included in our guidance is the impact from our recently announced IP settlement with Merck.

This was assumed when we provided guidance in October, given the state of negotiations at that time. Our share of the royalties will be recorded in other income and our share of the upfront payment will be excluded from our non-GAAP results.

I did want to point out that we expect a decision on our appeal of a European ruling on our Sprycel composition of matter patent in early February. We've disclosed this previously in our quarterly filing. And although we feel confident in our legal position, I wanted to highlight given it's within a couple of weeks of this call.

I will finish on capital allocation. Our business development priorities have not changed. During the quarter, we executed several business development deals across our therapeutic areas of focus as well as translational medicine and biomarkers.

As you know, we announced a $3 billion share repurchase in October and said that we had hoped to repurchase $200 million to $300 million per quarter. During the fourth quarter, we were unable to execute any repurchases because settlement negotiations regarding the IP litigation with Merck precluded us from doing so.

Our plan going forward is consistent with our original intent of approximately $200 million to $300 million per quarter. Now, we're happy to address your questions.

John?.

Thanks, Charlie. Christine, I think we're ready to go to the Q&A. Just as a reminder, both Francis and Murdo are here for questions. I also understand that the sound quality – we may have had a hiccup in our sound quality during the call. I apologize for that.

So if you missed anything or weren't sure, please go ahead and follow up with questions on that.

Christine?.

Thank you. Your first question comes from the line of Gregg Gilbert from Deutsche Bank. Your line is open..

can you comment on the potential for large-scale M&A in either direction and diversify the company and just continue to comment on the prioritization of diversification as it relates to Bristol? Thanks..

Let me start, Gregg, good morning, by saying that with respect to business development in general and M&A, our focus is to continue to execute our strategy. As I've said many times, we look at deals that make sense scientifically, strategically, and financially. We are relatively agnostic to size.

We have obviously executed a larger number of small science-driven deals. That's really a function primarily of the volume of those opportunities available in the market. But we always have looked at opportunities for later-stage assets and different types of opportunities, and that focus will continue.

With respect to your question on the lung cancer regulatory update, as we have mentioned, we are really not able to add data because of the rationale I described before, but I will let Francis comment on that..

Good morning, Gregg. We remain committed to investigating the role of the Opdivo/Yervoy combination in lung. Remember, we have the broadest first-line lung program in the industry. We're generating data as well as the I-O/I-O combination; I-O/chemo and an I-O/combo chemo combination.

So while the competitive landscape continues to evolve, we believe our combinations will have a role to play in first-line lung..

Thanks, Gregg.

Can we go to the next question, please?.

Your next question comes from the line of Chris Schott from JPMorgan. Your line is open..

Great, thanks very much for the questions. The first one is can you just elaborate a little bit on the Opdivo growth outlook for 2017? I guess your guidance assumes an approval of the Merck chemo combo.

Just how do you see that potential approval impacting Opdivo? And how do you defend your lung franchise in the event of that approval and before you have data from CheckMate-227? My second question was just a broader picture of how you're thinking about the role of chemo combo versus CTLA-4 combos at this point.

If we look back at the data we've seen over the past year, has that changed your view in terms of the relative attractiveness of those two approaches, and are you seeing a larger role for chemo than you would have in the past? Thanks very much..

Thanks, Chris. It's Murdo here. I'll address the first part of the question and then pass over to Francis for the second part. When we think about our I-O business in general for 2017, we're really thinking about it in three components. We think about our U.S. lung business.

We think about the rest of our business in the U.S., and then of course our international business. And as we think about 2017 for our U.S. lung business, we feel in second-line so far we've been able to defend, as expected. We're exiting 2016 at around a 40% share of overall second-line lung.

And we are seeing the I-O class in general increase in its penetration of second-line lung. Mainly, most of our erosion in second-line has been attributable to the launch of Tecentriq in the fourth quarter.

Outside of lung, we're looking at very strong performance across our other approved tumor types as well as some continuing non-promoted sales, so good performance of the regimen in melanoma, good performance of Opdivo in RCC. Very early launch, but execution looks good in head-and-neck.

And as I said, we're also getting some non-promoted sales in small-cell lung cancer and then miscellaneous other tumors. We are assuming success for KEYNOTE-021 approval in the early May timeframe.

And with that, we're primarily assuming that some of our ongoing first-line non-promoted sales for Opdivo in lung will go away, given that physicians will have another approved option for low and/or non-expressers in first-line. So that's an assumption we've made, and that clearly puts our lung business under some pressure going forward.

But as I said, we remain confident in our Opdivo business in the U.S. because of our performance in the other tumor types and hopefully some other launches as we anticipate approval in bladder.

Outside of the U.S., as reimbursement has come online and as final price negotiations have occurred, we've seen really nice uptake, and I would say uptake curves consistent with what we've seen historically in the U.S. So both in France and in Germany, the Opdivo business is performing well in melanoma and in lung.

In Germany, we see the emergence of our RCC uptake where you can get rapid adoption prior to final price negotiations. And as the rest of the markets outside of the U.S. come online with reimbursement, we expect to drive some pretty good growth there..

Chris, before Francis gives you more detail on the second part of your question, I'll just go back to some of the statements I made in my introductory remarks. First, we are committed to the development of the combination of Yervoy plus Opdivo.

Second, we have a really broad program that is looking at different combination strategies that includes chemotherapy. And third, we clearly believe that our program due to its breadth provides a meaningful opportunity for us to play a meaningful role in first-line lung cancer going forward..

Chris, good morning. As we mentioned in the second half of last year after CheckMate-026, we already had a chemo combo arm in CheckMate-227. We added to that using CheckMate-227 essentially as a master protocol. We were able to ramp that up quickly. That's in all comers.

I think our view is that, as Giovanni said, we have this broad program where we think there's going to be a lot of unmet need still in first-line lung, and we will be generating data in very different areas potentially, so that we will essentially have some combination with a role in first-line lung.

In addition, as we've said before, after CheckMate-026 we are looking at the number of biomarkers that came out of our analysis in CheckMate-026, and we will be looking to publish some interesting data on that later this year..

I will also add to that our commitment to the combo of Opdivo and Yervoy. Obviously, we've had a lot of discussions in lung, but you are aware of the data in melanoma. We are quite excited about the prospects in renal and small-cell lung cancer, so it's a really broad program..

Thanks, Chris.

Christine, can we go to the next question, please?.

Thank you. Your next question comes from the line of Jami Rubin from Goldman Sachs. Your line is open..

Thank you. I have two questions, and just please be patient with me because they're long and detailed. I guess the first question again is on Yervoy and nivo [nivolumab]. I'm just wondering.

Given your cryptic answers to our questions, and the press release on Thursday night left more questions than they did answers, and obviously the stock wiped out a lot of value and the market I think is assuming worst case that you will have no place in lung, but if I'm reading your answers correctly, it sounds like you are less confident in I-O/I-O and maybe more confident in I-O/chemo, and you're basically saying you're committed.

That doesn't help us, but you're committed. And it sounds like you're saying look, we'll get there some way, either I-O/I-O or I-O/chemo. Is that the right way to look at it? And then, Giovanni, I have a follow-up question for you. Thanks..

Jami, why don't you go ahead and ask it right away?.

Okay, all right.

So listen, if I take a step back and look at what has happened to Bristol-Myers in the past year, you've gone from having the best oncology I-O franchise in the industry with a significant lead over your competitors to now handing that lead over to Merck and, in my view, squandering what was otherwise an extraordinary and enviable market position with now question marks over your position in lung.

So again, a question to you, Giovanni, and I asked this of you a couple weeks ago at my conference.

What is your plan to unlock shareholder value in light of the continued underperformance? Are we going to sit around and just wait for CheckMate-227 and hope for the best, or is there a plan to consider a major rethink to unlock value, like a Plan B? And I just want to say that as a longtime supporter of your stock, we think Bristol has a remarkable and robust pipeline, but that has not translated into shareholder value creation.

And just, Giovanni, what do we do about this? Do you just sit there and wait, or are there other plans in place, alternative strategies? Thanks..

Jami, thank you. Let me just answer your second question first. I believe it's a very important question. And let me start by acknowledging your concern. And so there are really four areas that I am focusing on to continue to drive shareholder value (25:12). And those four areas have continued to have our utmost focus and attention.

The first one is commercial execution. And we are very focused in continuing to drive very strong commercial execution. We have demonstrated our ability to do that in 2016.

In 2017, as Murdo said, we see significant opportunities for our marketed immuno-oncology indications across the world, and I want to repeat what those elements of growth opportunity are. Outside of oncology, we are very pleased with what we are doing with Eliquis, which has been established as the leading AF [Atrial Fibrillation] brand globally.

We are very pleased with our ability to drive performance with Orencia and Sprycel, but obviously we will continue to work really hard to make sure that the trends of those brands continue to be very strong. The second area of focus for us is our first-line lung cancer program.

And I do understand that it would be easier to be able to communicate more with respect to that program.

But the reality is we do have four large ongoing Phase III programs, and they have (26:41) since late last year following the negative results of study CheckMate-026, both an option to explore the I-O/I-O combo, which we remain committed to, and alternative strategies, which include I-O/chemotherapy as well as the potential to actually use a short-term cycle of chemotherapy in addition to our I-O/I-O regimen.

So that is one of our priorities. And as I said in my remarks, we do believe we have an opportunity to have a meaningful role to play in the future in lung cancer.

I think it is important to think about what is happening with the rest of our broad late-stage I-O program because we have a significant number of late-stage programs with registrational potential that can read over the next 12 to 24 months. I am focused on potential data in first-line renal cell and HCC.

I am focused on data in small-cell lung cancer in both first and second-line, and all of those readouts are possible in the next 12 months. The fourth priority that we have is to accelerate our pipeline, and a lot is happening there. We did start to see some data at the end of 2016.

There clearly is the potential for a number of important data readouts that can lead to registrational programs.

I'll mention liri [lirilumab], LAG-3, GITR, CFS1R, IDO in oncology; and outside of oncology a number of promising programs like CD28, TYK2, possibly BTK, two programs in fibrosis that we believe have potential to be really important for us. So we are very focused on continuing to drive shareholder value.

And as I said, we're focused on four areas that represent our plan. And as I told you, this is the utmost priority for me and for my management team. I think I've addressed in some way your question about the way we think about lung cancer, but Francis may want to add in this area as well..

Good morning, Jami. Let me emphasize that we do remain fully committed to investigating the role of Yervoy and Opdivo in combination in multiple tumors, including lung cancer.

And just to reiterate, we have more than a dozen registration studies ongoing for the combination, which are going to read out over the next 12 to 36 months, all of them with optionality built in, as we have in all our Phase III studies.

In addition to what Giovanni mentioned around renal cell, there's also small cell, head-and-neck, gastric, MSI-high, and epicellular carcinoma, so a number of potential registration studies, and we're still fully committed to the additional benefit that we believe could attribute to the combination over Opdivo alone..

Christine, can we go to the next question, please?.

Yes, your next question comes from the line of Marc Goodman from UBS. Your line is open..

Good morning. First on CheckMate-227, can you just clarify? In the past, you've talked about there are potential interim looks. I just want to make sure I understand.

Is it a potential interim look, or are there more than one potential interim looks before the end of the calendar year? Second question is can you give us a flavor for – in the fourth quarter for the U.S.

sales of Opdivo, how much of it was lung? And then third, also for the fourth quarter for Opdivo, can you give us a sense of how much was from Japan from the Ono revenues? Thanks..

Let me just start by just reiterating (31:13) that we have optionality built in (31:18 – 31:23). That is true for our entire lung cancer program as well.

Murdo?.

Thank you. Marc, across the (31:30) business in the quarter in the U.S. (31:35 – 31:40) in the quarter..

Christine, can we go to the next question?.

Your next question comes from the line of Jeff Holford from Jefferies. Your line is open..

Hi, thanks for taking my questions. I've just got a few to fire at you.

So given there was no change in the GAAP guidance but a change in the non-GAAP guidance, can we assume that essentially the upfront that came from Merck that was coming in 2017 is a wash on the impact of what you've written off potentially in the back half of the year from first-line lung? Is that the right way to think about it? And then just another question on the first-line lung.

What do you think? Can you give us any indication of what the level of first-line lung sales were in revenue terms in the U.S. in Q4? And then just the other question, I wonder if you can just tell us a little bit about what the expected financial impact would be on Sprycel should things be worst-case scenario there for 2017. Thank you..

(31:35 – 33:02) And the third part of your question regarding Sprycel sales in Europe in the fourth quarter, sales were around $100 million, and for the full year just short of $400 million for Sprycel. And depending, assuming worst case, as I mentioned, we feel very strongly about our IP position.

But it really depends on the entry and timing of entry of what the impact could be..

And on the question regarding first-line lung sales, what I can share is the percentage of (33:33) in first-line lung at the exit of 2016 (33:41 – 34:03) chemo, there could be upside in 2017 related to that assumption..

Christine, can we go to the next question, please?.

Your next question comes from the line of Tim Anderson from Bernstein. Your line is open..

Thank you, a few questions, and I just want to note that the last few answers you guys have given for the last few questions, at least for me, are not really audible. But let me go ahead and ask my questions. The first one is on the IDO space. Merck and Incyte now have five pivotals looking at an IDO combo.

That Phase II data looks interesting based on what we see, comparable to CTLA-4 combo, potentially better safety. So while there's a lot of current attention by investors on CTLA-4 combo versus chemo combo, I'm wondering if IDO combo might be the next emerging threat. I know you have a platform here, but it's earlier.

Second question, you guys have a Phase III trial that looked at Yervoy monotherapy in lung. I think it's called CA184-104. I believe that completed about a year ago. Yet unless I've missed it, those results haven't been published or presented, and I'm wondering if you have a timeframe for when that will happen.

I know the focus is on the combo, but I think it could still be interesting to see these results.

And last question, a quick one, can you confirm you have not yet done an efficacy interim look at CheckMate-227?.

(35:34 – 36:18).

All right, hold on a second. Can we hold the calls right now? I'm getting a lot of texts that things are inaudible. Christine, we're going to seek another conference room.

Can you put all calls on hold right now and see if we can't address this, please?.

Yes. [Audio Break] (36:30 – 37:55) We apologize. We are experiencing technical difficulties. The call will resume momentarily. Thank you. [Audio Break] (38:00 – 38:38) Again, we apologize for the inconvenience. The call will resume momentarily. [Audio Break] (38:41 – 39:53) Your line is now live..

Okay, thank you, Christine, and to everybody, apologies for the technical difficulty. My understanding is that it's on the back end of the conference call company. We are not purposely trying to muffle our discussion. I think what might be most helpful is if we go back and take – maybe, Tim Anderson, we'll take your question.

And to your point, we'll go back to a few, maybe to Marc Goodman, Christine, and then maybe Jeff Holford again, and then go from there.

So, Tim, do you want to start over and try your question again?.

.

This is Tim..

Go ahead, Tim. We hear you..

Okay, I'm hoping you can talk about the IDO space given the fact that Merck and Incyte have five pivotal trials now looking at an IDO combo, and the early data on IDO combo looks interesting.

So as I was mentioning before, there's a lot of attention on CTLA-4 combo versus chemo combo, and I'm wondering if the IDO combo might be the next emerging threat. And I know you guys have a platform here but it's earlier. Second question was on the Phase III Yervoy monotherapy trial in lung cancer that finished about a year ago called CA184-104.

Unless I've missed it, those results still haven't been presented or published, and I'm wondering when we might be able to see those.

And then last question was can you confirm you haven't yet done any interim efficacy looks at CheckMate-227?.

Good morning again, Tim, I apologize again for the fact that you couldn't hear us. Let me say that IDO is indeed an interesting mechanism from our perspective, which is, of course, why we bought Flexus in 2015. We will be presenting data, the PK/PD safety data on the Flexus IDO at the AACR [American Association for Cancer Research] in April.

And depending on the data, the clinical data that we hope to present later in the year, we would hope, if it's good data, to move the mechanism into registration and combination studies with nivo in several tumor types. I will note, in addition, through our collaboration within Incyte, our studies of nivo with Incyte's IDO have been going well.

As far as the Yervoy study in lung, I believe it was presented. I don't think there's any particular reason we have held it back. And we can obviously get back to you and let you know specifically, but I don't have the details at hand.

And then coming back to the request about more data, I just wanted to emphasize, and you may not have been able to hear Giovanni earlier. The update we gave you was essentially a regulatory update, and we have a number of studies ongoing. Again, we're totally committed to our first-line lung studies. It's a broad program.

And in order to protect the integrity of the studies, I just can't provide any additional details at this time..

So, Christine, if I could, I think I'm going to go back and try to summarize what some of the questions were and we're going to go back and answer them here. So first, Giovanni, maybe you could answer – Jami asked a question about shareholder value and what we're focused on, if you could address that..

Jami, I apologize you couldn't hear us. So I acknowledge your concern and what you articulated in your question. I just want to articulate the way we think about continuing to drive shareholder value and what my focus and my team's focus is. And we are really focused on four areas. What I mentioned earlier is the first one is commercial execution.

There, we have had a very strong 2016 across the board, whether you look at the U.S. or international and our various businesses. And we are absolutely focused on continuing to drive execution and commercial performance in areas where we see significant opportunity for growth. That is clearly Eliquis. That is clearly Orencia.

As Murdo mentioned, it's our ex-U.S. immuno-oncology business. It is our U.S. business outside of lung. And then in lung, obviously it is our priority to defend our second-line business. But commercial execution remains obviously a key lever and a very high and important priority for us. The second priority is our first-line lung cancer program.

We did have a setback last year. At this point, we have a broad program with four ongoing registrational studies. They include Opdivo and Yervoy. And as you mentioned, we do remain committed to those. And they do include a number of other modalities. It is a very large program, and we are very focused on executing that program.

As I did mention in my remarks, we believe we do have an opportunity to play a meaningful role in this space in the future. The third one is the rest of what is a very broad late-stage I-O program. And outside of lung, there is a significant number of registrational programs that will read over the next 12 to 24 months.

I did mention as examples of programs I'm focusing on, our first-line renal, our first-line HCC program, the first and second-line programs that we have in small-cell lung cancer, and Francis did add a number of other potential data readouts, and I'll ask him to do that again.

The fourth priority is the acceleration of our pipeline, and there we are working and as a priority advancing a number of really important programs with potential data readouts that can lead if positive to the beginning of registrational programs. In oncology, I did mention liri. I mentioned LAG-3, GITR, CFS1R, IDO.

And outside of oncology, where in immunoscience we are accelerating CD28, TYK2, possibility BTK, and a number of programs in fibrosis that are also very promising. So we are focused on continuing to drive shareholder value. There are significant potential opportunities in the company.

There is a focus on lung cancer, but it goes well beyond lung cancer. And it's clearly our priority..

Thanks, Giovanni. There was also – Jeff Holford asked a question of Charlie about the upfront payment from Merck and the accounting treatment on that.

Charlie?.

Jeff, once again, so between our GAAP and non-GAAP results, it's only specified items, so ongoing operations go through both. The difference and the reason that we changed our non-GAAP results was, as I mentioned in my comments, related to foreign exchange and the potential launch of the Keytruda/chemo combo in May.

The reason we didn't change our GAAP guidance was the composition of the upfront payment related to our settlement with Merck..

Great. And, Murdo, there were several questions about the commercial dynamics for I-O in lung and Opdivo..

Sure. Thanks, John. I'll try and cover the overall expectation and then insert some of the specific answers to questions that were also asked. So when we think about our I-O business for 2017, we're really thinking about it in terms of three components. We think about our U.S. lung business, our U.S. business beyond lung, and then our worldwide business.

In the U.S., clearly we're very focused on defending our second-line position. We exited 2016 at roughly a 40% share of second-line lung, which was in line with our expectations. We gave up about 10 points of market share with the launch of Tecentriq, so that was really the pressure that we were under there.

However, we continue to feel with competitive share of voice, with strong execution, and a strong profile in second-line that we'll be able to defend that business going forward. We've taken a balanced view of the rest of lung in that we have assumed the approval of KEYNOTE-021 at the PDUFA action date of early May.

And if that timing changes or the adoption of that modality of treatment is different from our assumption, there could be upside to our forecast for lung in the U.S. However, we feel we've taken a very balanced view there.

If we go outside of lung in the U.S., we continue to see really strong momentum for Opdivo across all the approved indications, and we're preparing obviously for a potential launch in bladder as well.

The combination regimen of Opdivo and Yervoy is performing well and has maintained its position as the leading treatment of choice in first-line metastatic melanoma with over a 30% share.

We've gained or regained share in second-line renal cell carcinoma, and we continue to see very strong execution in the early phase of our head-and-neck second-line launch as well.

We're also seeing continued off-label usage of Opdivo in areas where NCCN [National Comprehensive Cancer Network] listings have provided a pathway to reimbursement like small-cell lung cancer. So overall in the U.S., we continue to see a robust Opdivo business. We are projecting that to be relatively flat but some upside opportunities exist.

When we go outside of the U.S., where we've secured reimbursement now, and you've seen that recognition of our deferred revenues in the fourth quarter, our Opdivo performance where we have reimbursement has been very good. And the uptake curves look similar to what we've seen historically in the U.S.

So we have seen in France and Germany in our melanoma and our lung uptake very, very robust trends. And in Germany, we have the early emergence now of our RCC trend, given that you can promote and see sales prior to full-price negotiations in Germany.

We're also working to accelerate all the other reimbursement decisions around all the other markets ex-U.S. So overall, the international business will contribute very good growth in 2017 to our overall business. I did get a couple of specific questions. One was what was our percentage of our business in the U.S.

that was lung? For the fourth quarter, that percentage is approximately 60%. And we were also asked specifically what our Japan sales were for Opdivo in the fourth quarter, and the answer to that was $51 million. I think I've covered most of the questions but happy to receive follow-ups..

So thanks and again, apologies, everybody, for the technical difficulties. Christine, we're not going to go backward. I think if there are topics that we missed, they'll likely come up in the next few questions again would be my guess. So if we can, just go to the next person on the list, Christine, for the next question, please..

Yes, thank you. Your next question comes from the line of Seamus Fernandez from Leerink. Your line is open..

Thanks for the questions. So I guess just from a big-picture strategic perspective, Giovanni, if you can, just maybe take a look back for us at the different approaches that have been taken. Obviously, there have been some meaningful upfront decisions that you had to make with regard to commitments to specific mechanisms.

Obviously, having CTLA-4 on board was a specific commitment.

But as I think about some of the strategic decisions and the differences between yourself and the decisions that you've made and the decision that Merck has made, when you study those and look at your own decision processes internally from an R&D perspective, how has the change in position caused your evaluation of the next leg of the I-O pipeline to change? Is it going to be more biomarker driven? What are the aspects that you think really need to occur here? Because the next leg of I-O development looks wildly inefficient, I think, to most of the investor community out there today.

And then the second question really is, as you watch some of those other indications that you pointed out, which would you highlight as the ones that specifically have the most potential commercially and where you believe that you could have a sustainable lead in the market? Thanks..

So, Seamus, thank you. These are very good questions. So I would start from saying that from the beginning, we have invested in a broad immuno-oncology program across multiple tumors and across multiple lines of therapy.

In fact, that includes a distinct focus on the adjuvant setting and in the late-stage setting, both first and second-line and neo- adjuvant. We have also from the beginning articulated a view that combinations will be required in order to make a meaningful difference for patients in oncology.

And we have focused on the combination between Opdivo and Yervoy because we believe there is a strong scientific underpinning to that combination. We believe there is data that has emerged from multiple tumor types that proves the value of adding these two mechanisms of action.

In fact, Francis many times recently has said that the understanding of that scientifically is continuing to advance. And clearly we have continued to build an early pipeline, which enables us to broaden the combination strategies that we follow.

You will remember that in fact as data has emerged, we have updated our strategy in first-line lung cancer. We have included combination studies with chemotherapy, but we are also looking at what short-course chemotherapy can do in potentially addressing the needs of rapidly progressing patients that can then continue on the regimen.

My message there is that as the science evolves, we do not have a dogmatic approach, and we will continue to broaden our program in the ways that we think can add value for patients and advance programs.

We have done a lot of work following the negative outcome of study CheckMate-026 to understand the relevance of different biomarkers, not only PD-L1 expression but also others. We will publish that data. What we have learned is clearly informing the next stage of development decisions we are making.

And obviously given the very rich early immuno-oncology pipeline in the company, we do believe that biomarkers will be important. Translational medicine's capabilities are essential. We have been working with leaders around the world for many years now through our immuno-oncology network.

But we are significantly strengthening those capabilities at the same time because we do agree that they will be very important in enabling rapid progress for what is a really broad and deep immuno-oncology pipeline that we have. I believe that one element that characterizes our strategy is that many of the targets we're working on are in-house.

We believe that will give us flexibility over time versus relying exclusively on external collaborations, but we have never been not open. In fact, we've always been open to external collaborations as well.

And with respect to your question about potential, I am really focused on areas we know best like renal cell, where I think we have a meaningful opportunity globally and an ongoing late-stage Phase III program. I believe there is clear potential in small-cell lung cancer, where we've demonstrated very strong data.

There is clearly significant potential in HCC, and I think that we are looking at areas where we can enter the market and then continue to generate meaningful data. But I do believe that we are well positioned as a company for a next wave of immuno-oncology innovation that is much more driven by translational medicine and biomarkers.

And we have a lot of the right tools to continue to advance those combinations. But we are also very willing and able to partner externally to further broaden our reach..

Great. Thanks, Seamus.

Can we go to the next question, please, Christine?.

Your next question comes from the line of Andrew Baum from Citi. Your line is open..

Thank you, a few questions, please. One for Francis. Francis, can you confirm to us at our conference in December, you published (1:00:03 – 1:00:10) Could you just confirm that statement. Second, do you believe (1:00:14).

Hold on, Andrew. We're now getting a ton of interference on your line. I don't know, Christine, if you can do anything about that..

I do apologize, Andrew, if you want to requeue up for a question on another line..

My comment was on (1:00:35). Okay.

I'm going to have to dial – can you hear me or not?.

Try again. We heard the first part of your question was asking Francis if he can confirm that the data that we've seen that led to the decision last week was related to CheckMate-227. I think that was the first part of your question..

when you and Francis were at a conference in December, Francis confirmed to us that you needed CheckMate-227 to file. Given events since that date, I just want to ask you to confirm that statement.

Second, do you continue to believe that Opdivo/Yervoy is the standard of care for the majority of non-small-cell lung patients, which again came from that conference? And then finally, how quickly is the futility analysis done for CheckMate-227? I'm obviously thinking about the potential for discontinuation of certain arms.

Did you get any of that?.

Christine, we're going to have to let Andrew's line go off, but I think we heard your view of what Francis said at your conference related to CheckMate-227, needing CheckMate-227 data and you need comment on that. Second question was our view on Opdivo/Yervoy standard of care in front-line lung cancer.

And the third related to futility analysis or I guess DMC review of CheckMate-227..

Andrew, good morning. So let me just go back and say two things. First of all, as Giovanni said, we have a broad first-line lung program now.

I think I understand your desire to understand more data about what we've just said, but I'm actually not going to comment at all about additional details about the analysis, although of course CheckMate-227 is part of a registration plan of our broader portfolio.

As far as – all our Phase III studies I would say have DMCs, data monitoring committees. They conduct regular reviews. And to-date, they have not recommended to make any changes to any of our studies..

Andrew, I'll take a stab at the question on whether or not we still believe that Opdivo plus Yervoy can address the majority of non-small-cell lung cancer. The first part of my answer is we'll need to wait to see the data mature.

But as we see it, really only 25% of the market has been satisfied with the first approval of pembrol [pembrolizumab] in greater than 50% expressers, and we haven't seen a durable long-term data set yet with chemo combinations.

So if we can deliver a long-term durable benefit with a regimen in first-line lung cancer, then there's a large addressable population that still has potential..

Christine, can we go to the next question, please?.

Your next question comes from the line of Geoff Meacham from Barclays. Your line is open..

Good morning, guys. Thanks for taking the question.

I know chemo combo is one of the components of CheckMate-227, but does the first-line approval of O21G (1:03:56) change how you guys think about the hurdle for clinical meaningfulness for CheckMate-227? And then I guess along the same lines for I-O/I-O combos, do you think the hurdle has now been raised to now include overall survival as a metric? Do you have to hit that to be competitive? And then a commercial one, OUS will be a bigger component of Opdivo growth, obviously.

But in the EU countries that have reimbursement, maybe you could go over the subtleties in the lung market in terms of patients' awareness. I'm just trying to think of what you can do from a defensive perspective in your European rollout. Thanks..

So I can take the last part of the question. In Europe, where we've been successful so far, we've been very active in building awareness among the oncology community as well as patient communities. I'll use France as a particular example, where we were the first company to participate in the ATU Early Access Programs that the French government allows.

We have in the neighborhood of 70% to 80% of the PD-1 market in France right now, after recognizing our revenues in the fourth quarter. And we continue to see shares of the PD-1 category across Europe in the neighborhood of 60% to 80% of PD-1 category. And in fact, we exited last year in the U.S. at 66% of PD-1.

So the uptake curves in Europe are very similar. There are some nuances. In Germany, there are different prescribing audiences that write for lung, and you have a community base of pulmonologists who are naive to immuno-oncology therapy. Similarly for urologists.

So I would expect some tumor types to have slightly different shape curves on the basis of those unique groups of physicians that prescribe. But in general, the uptake curves have been very good, and I do think that the breadth of our indications continues to provide us some opportunity to defend in second-line lung going forward..

Geoff, I think while acknowledging that the competitive landscape does continue to evolve very quickly, I would just say that as far as our studies are concerned, we have a number of endpoints, including interim analyses, that will allow us, depending on where the regulatory bar gets raised, to play in this situation.

I will just add that the FDA has been – we have a very good relation with the FDA, and certainly they've been very flexible across the board in terms of trying to understand the needs of patients and how to bring these drugs to patients as expeditiously as possible with robust data sets..

Can we go to the next question, Christine?.

Your next question comes from the line of Vamil Divan from Credit Suisse. Your line is open..

you mentioned some of the drivers on the gross margin change that's expected in 2017. Can you maybe just quantify that a little bit more since there are several moving parts there? Maybe you can give us a little bit of a bridge to – it sounds like the improved growth of Eliquis, a little bit of growth with Opdivo, but then the decline in virology.

If you could, just give us a sense of the impact of each of those. Thank you..

Thank you, Vamil. So this is Giovanni. Let me just say we have assumed based on the fact that the data was filed and accepted by the FDA and approval in May, as Murdo and Francis and Charlie mentioned, that is based in our assumptions.

And as we've said before, should that not be the case, obviously we would see more favorable trends for our business in 2017. But I can only confirm that's the assumption we've made..

Vamil, just on the gross margin, I think we've been relatively clear on this on how we think about the product mix, which is the primary driver, particularly in 2017 as we think about gross margin. Clearly, there are other elements like manufacturing variances and FX, but I will really just focus on product mix, which is the primary driver.

Eliquis, because of our partnership agreement with Pfizer, we record that profit share in cost of goods, and that has a margin below 50%. So as the growth of Eliquis goes up, that has a significant drag. So Eliquis, as you know is doing particularly well.

As it relates to the virology business, both hep C and HIV, which is under a lot of competitive pressure, those are what I would characterize as very high-margin products. And so with the declining business there, that has again an impact on how we see our gross margin.

And then Opdivo growth, which has a relatively good margin, helps offset some of that but not all of that..

Great, thanks. Christine, I think we have time for two more questions..

Thank you. Your next question comes from the line of Steve Scala from Cowen. Your line is open..

Thank you so much. I have three short questions. First, ClinicalTrials.gov still states that the primary completion of CheckMate-227 is January of 2018. Is that still the likely date, even post-adjustments to the study? So that's the first question.

The second question is why didn't FX lower GAAP EPS guidance for 2017 as well? And then lastly, I think it was in 2013, but Bristol lowered its tax rate presumably due to moving IP overseas. Should U.S.

tax law changes indeed pass, what are the implications for your tax rate given the OUS IP? My recollection is that the benefit was 4 to 6 percentage points several years ago. So is that what's at risk? Thank you..

Good morning, Steve. So we have said in the past that the CheckMate-227 study expresser part of it would be completed in the beginning of 2018. Obviously, with the addition of additional arms, there will in time be changes to ClinicalTrials.gov to reflect that..

Steve, just on FX, FX had an impact on our GAAP and non-GAAP guidance equally, as did the KEYNOTE-021 assumption that Giovanni just spoke about.

It was really, as I mentioned earlier, the assumptions around the upfront payment related to the Merck settlement on PD-1 that evolved between when we originally gave our GAAP guidance and the GAAP guidance you see today. So I think that should be clear.

In regard to the tax rate and our IP and domiciling some of our international IP overseas, that has helped our tax rate. I will admit to that.

As it relates to how that plays in tax reform, it's way too early for me to comment on how that could play out and how much color I can provide at this point because there are a lot of different elements that will play into that, not just IP, but the legal entity structure, supply chain transfer pricing, and where the actual tax rate ends up.

So until we see more clarity on that, it's a little bit premature for me to comment..

Steve, let me just clarify because, obviously, CheckMate-227 is a large program with multiple studies embedded in it. Your question I believe was specifically related to the expressers. There we don't see meaningful changes with respect to Q1.

There are areas of CheckMate-227 where we've made a number of changes that add a new study, as you know, and those timelines are different. But if your question was related to the expressers and the Q1, we do not see meaningful changes there..

Thanks, and, Christine, can we go to the last question, please?.

Your last question comes from the line of Mark Schoenebaum from Evercore ISI. Your line is open..

Hey, guys. Thanks for taking the question. Thanks to John and Charlie and your teams for all the support of my team while I was out, maybe one for Charlie.

I know maybe a year ago roughly you had said something to the effect that around the end of the decade you thought you could achieve operating margins in the ZIP Code of companies like Biogen, maybe not quite that high.

Could you just reiterate or revise that statement as you see fit? And then for Francis, at least my interactions with you, Francis, and just correct me if I'm wrong on this, is that you've used the word confident in the past quite a bit about the Yervoy/Opdivo combinations in IL-1.

And on this call unless I misheard, I've heard the word committed, and I'm just wondering. Are you still confident? It's a little nitpicky, but it might be interesting to some of us out here. Thanks so much..

Mark, before Charlie and Francis answer, welcome back..

Thank you..

Yes, welcome back, Mark. I did watch your most recent video. What we've said about operating expenses is that based on the transformation, which was not just about cost, it was about efficiency, effectiveness, and focus. But as it relates specifically to cost, it was really to keep our operating expenses in total roughly flat to 2016 levels.

So I think that's where we're at as far as we think about operating expenses. And then the margin component of that, or the operating margin component of that, will be related to how sales then flow out through the rest of this decade..

So, Mark, just let me be and welcome back. Let me just say that we are across the Opdivo/Yervoy program, which I spoke earlier, I hope you heard it. We are confident of the role for Opdivo and Yervoy in a number of different tumors.

So I think rather than parse for you, I think it's just important to reiterate that we've got more than a dozen registration studies, late indications but also early indications. And as Giovanni said, we'll be seeing readouts of that in renal cell probably midyear. So we remain committed and confident to the broad Opdivo/Yervoy program. Thanks..

Thank you, Francis, and thanks, everyone. I do again acknowledge the technical challenges here. I hope that we were able to answer many of your questions. And obviously, John and his team will be, as always, available. So let me just close by saying we are very focused on executing in the three areas we discussed today.

The first one is continuing to drive strong commercial performance for our business. We've discussed many of the dynamics in our business during this call. The second one is to continue to advance a very promising and broad set of late-stage potentially registrational programs.

We gave you our perspective on the breadth and depth of the program in lung cancer but also everything else that we expect to happen in the next 12 to 24 months. And obviously, one important part is advancing an extraordinary and promising early pipeline across four areas. And we will be working through these priorities during the course of 2017.

As I said in my remarks, I remain confident in our significant long-term opportunity in immuno-oncology, and we will be looking forward to continuing to have dialogue with all of you as our programs continue to progress. Thank you..

This concludes today's conference call. You may now disconnect..