John Lechleiter - Chairman of the Board, President, Chief Executive Officer Phil Johnson - Vice President, Investor Relations Derica Rice - Chief Financial Officer, Executive Vice President - Global Services Enrique Conterno - Senior Vice President and President - Lilly Diabetes Dave Ricks - Senior Vice President and President, Lilly Bio-Medicines Jan Lundberg - Executive Vice President - Science and Technology, President - Lilly Research Laboratories Sue Mahony - Senior Vice President and President - Lilly Oncology Ilissa Rassner, Director, Investor Relations.

Tim Anderson - Sanford Bernstein Mark Schoenebaum - ISI Group Jamie Rubin - Goldman Sachs John Boris - SunTrust Chris Schott - JPMorgan Seamus Fernandez - Leerink Steve Scala - Cowen Vamil Divan - Credit Suisse Colin Bristow - Bank of America Merrill Lynch Jeff Holford - Jefferies Alex Arfaei - BMO Capital Markets Marc Goodman - UBS Damien Conover - MorningStar Gregg Gilbert - Deutsche Bank Mark Purcell - Barclays.

Ladies and gentlemen, thank you for standing by. Welcome to the Q 2014 earnings call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Chairman, President and CEO, Dr. John Lechleiter. Please go ahead..

Thank you. Good morning, everyone. Thanks for joining us today to discuss Eli Lilly and Company's second quarter 2014 earnings. As the operators said, I am John Lechleiter, Lilly's Chairman, President and CEO.

Similar to our last call, this morning we are bringing more of our senior leaders into the room here to participate and to answer your questions and we hope that this enhances the quality of the information we provide you during these sessions. Joining me on today's call are Derica Rice, our Chief Financial Officer, Dr.

Jan Lundberg, our President of Lilly Research Laboratories, Sue Mahony, President of Lilly Oncology, Enrique Conterno, President of Lilly diabetes, Dave Ricks, President of Lilly Bio-Medicines, Chito Zulueta, President of Emerging Markets, Jeff Simmons, President of Elanco Animal Health and Ilissa Rassner, Brad Robling and Phil Johnson of Lilly's Investor Relations team.

During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide three and those outlined in our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission.

The information we provide about our products and our pipeline is for the benefit of the investment community. It's not intended to be promotional and is not sufficient for prescribing decisions. Before we get into our Q2 results in detail, I would like to offer this context.

Even as we feel the full brunt of our patent expiries, we continue to execute our strategy. Our performance is in line with our expectations and we are on track to meet the goals we have shared with you for the year. And the steady advance of our pipeline only strengthens our confidence in our innovation-based strategy.

Cyramza launched to a good reception in the U.S. Empagliflozin has been granted approval in the EU. Our insulin glargine product has been recommended for approval in Europe. And we presented positive data on a number of late stage molecules at the recent ASCO and ADA meetings.

We anticipate a number of additional regulatory actions this year as well as additional regulatory submissions and important Phase 3 data readouts. And we continue to manage our expenses rigorously even as we invest to ensure successful launches and continue to advance our pipeline. With that, let's turn to the key events since last quarter's call.

Since our last call, we launched Cyramza in the U.S. as a single agent treatment for patients with advanced or metastatic gastric cancer or gastroesophageal junction adenocarcinoma with disease progression on or after prior chemotherapy.

We are pleased with the uptake we are seeing with the reports we are receiving from the sales organization and with feedback from customers on their experience to-date. We have also a number of positive developments on the regulatory front spanning diabetes and oncology.

The European Commission approved empagliflozin or Jardiance indicated in the treatment of Type II diabetes to improve glycemic control in adults. As I mentioned on last quarter's call, Lilly and Boehringer Ingelheim anticipate launch of the product in European countries to begin this quarter.

In the U.S., Boehringer Ingelheim resubmitted the empagliflozin NDA to the FDA. This was deemed a Class I resubmission, which carries a two month review period. Consequently, we expect FDA action this quarter. In Europe, Boehringer Ingelheim submitted the fixed dose combination of empagliflozin and metformin.

Also in Europe, the CHMP issued a positive opinion recommending approval of our new insulin glargine product for the treatment of Type I and Type II diabetes. This product, which is part of the Lilly-Boehringer Ingelheim Diabetes alliance is the first biosimilar insulin recommended for approval in the European Union. Moving now to oncology.

In the U.S., based on data from the RAINBOW study, we submitted a supplemental BLA for Cyramza as combination therapy in patients with second line gastric cancer. This will be a standard review and therefore we expect FDA action in the first half of 2015.

In Europe, where our initial submission was based on the REGARD monotherapy study, we have now incorporated the RAINBOW data in our submission dossier which is currently under review. And finally, we announced that the FDA granted fast track status for our BLA for necitumumab as first-line treatment of metastatic squamous non-small cell lung cancer.

We continue to expect FDA submission before the end of this year. In clinical news, we had a number of detailed data presentations at the annual meetings of the American Society of Clinical Oncology and the American Diabetes Association.

At the ASCO meeting, we presented detailed data from the Phase 3 REVEL trial studying ramucirumab in second line non-small cell lung cancer. In this study, Cyramza demonstrated statistically significant improvements across multiple efficacy endpoints including overall survival, progression free survival and overall response rate.

The improvement of overall survival and progression free survival on the Cyramza plus docetaxel arm was consistent across the majority of subgroups including nonsquamous and squamous histologies. We remain on track to meet our commitment for regulatory submission in the second half of 2014.

We also presented detailed data from the Phase 3 SQUIRE trial studying necitumumab in first-line squamous non-small cell lung cancer. In the Phase 3 SQUIRE trial, patients with stage IV metastatic squamous non-small cell lung cancer showed a statistically significant improvement in overall survival, progression free survival and disease control rate.

As I mentioned earlier, we intend to submit this BLA by year-end. Finally, following our initial disclosure at AACR in April, we presented additional data from the Phase 1 trial of our CDK 4/6 inhibitor, Abemaciclib. These data were from two different cohort expansions.

One as a single agent in patients with advanced non-small cell lung cancer, and the other in combination with fulvestrant in patients with advanced breast cancer. Based on these data as well as the data presented at AACR, we will begin Phase 3 trials later this year in both advanced breast cancer and advanced lung cancer.

We are pleased with the single agent activity we have seen with Abemaciclib as well as with the product safety profile and believe we could have a best-in-class molecule. At the ADA meeting, we presented detailed data from three of the Phase 3 AWARD trials of dulaglutide.

There was significant investor interest in the AWARD-6 trial comparing once-weekly dulaglutide 1.5 mg to once-daily liraglutide 1.8 mg. Results from this study show that dulaglutide 1.5 mg was noninferior to the highest approved dose of Victoza in the reduction of HbA1c from baseline.

This is the first head-to-head Phase 3 trial of a GLP-1 to show noninferiority to liraglutide 1.8 mg on this important clinical measure. Detailed data was also presented for AWARD-2 and AWARD-4 head-to-head trials comparing dulaglutide to insulin glargine with and without mealtime insulin.

Both trials showed that once-weekly dulaglutide 1.5 mg provided significantly greater reductions in blood glucose for patients with Type II diabetes. Additionally, in both studies hypoglycemia rates were lower for dulaglutide 1.5 mg treated patients compared to insulin glargine.

We are very pleased with the results of these three Phase 3 studies for dulaglutide, as well as with those of the Phase 3 studies presented at last year's ADA. If approved, dulaglutide will be the only GLP-1 receptor agonist that is both once-weekly and ready-to-use.

We believe it could provide patients and physicians an important new treatment option for Type II diabetes. In the quarter, we also issued two topline press releases for Phase 3 trials, one for our basal insulin peglispro and the other for Cyramza in second line hepatocellular cancer.

We announced positive topline results for three completed Phase 3 clinical trials in patients with Type II diabetes for basal insulin peglispro, which is being studied as a once-daily treatment for both Type I and Type II diabetes.

The primary efficacy endpoint of noninferior reduction in HbA1c compared to insulin glargine was met in all three trials. Having met the primary endpoints, superiority for HbA1c lowering was examined and in all three trials basal insulin peglispro showed a statistically superior reduction in HbA1c compared with insulin glargine.

In addition, in all three clinical trials patients taking basal insulin peglispro experienced statistically significant lower rates of nocturnal hypoglycemia and had comparable to statistically significant less weight gain than those taking insulin glargine.

We remain on track to issue a topline press release this quarter on our Phase 3 trial in patients with Type I diabetes and to make regulatory filings by the first quarter of next year. For Cyramza, we announced that the Phase 3 REACH trial in patients with hepatocellular carcinoma or liver cancer did not meet its primary endpoint.

Overall survival favored the Cyramza arm but was not statistically significant. Although the REACH study did not meet its primary endpoint, we are encouraged by the efficacy seen in specific subpopulations. We plan to discuss these results with regulatory authorities to inform future trials.

In business development news, we announced last week an immunotherapy collaboration with U.K. based Immunocore Limited to research and potentially develop novel T cell-based cancer therapies.

This collaboration will result in a third quarter charge of $45 million or $0.03 per share of EPS after-tax that we have incorporated into our revised guidance for 2014. Also, we close the acquisition of Lohmann Animal Health, a privately held German company that is a global leader in poultry vaccines.

This acquisition establishes Elanco as a global poultry leader and solidifies Elanco's vaccine presence and manufacturing capabilities. We also entered into an agreement contingent upon certain closing conditions to sell the feed additives portion of Lohmann's business to a management led group.

Finally along with Sanofi, we announced an agreement to pursue regulatory approval of nonprescription Cialis. Under the terms of the agreement, Sanofi acquired the exclusive rights to market Cialis OTC following Sanofi's receipt of all necessary regulatory approvals.

In other news, the English High Court determined that the vitamin dosage regimen patents for Alimta in the U.K., France, Italy and Spain would not be infringed by a generic competitor that has stated an intent to market certain alternative salt forms of pemetrexed in those countries upon expiry of the Alimta compound patents in late 2015.

We strongly disagree with this ruling and have appealed the ruling to the Court of Appeal. In the U.S., based on the U.S. Supreme Court ruling in the Akamai versus Limelight Networks, Teva and APP filed an unopposed motion asking the Court of Appeals to remand the Alimta case back to the District Court to consider the issue of infringement.

No date has been set for a hearing with the District Court. Note that this does not affect the District Court's decision that our patent is valid. We remain confident that this patent is both valid and enforceable against generic manufacturers.

A Brazilian labor court ruled against our local subsidiary in a case alleging some employees were exposed to hazardous materials in a manufacturing facility operated by the company between 1977 and 2003. We believe the decision is entirely without merit and we filed an appeal.

Finally, during the second quarter, we executed share repurchases totaling $145 million under our $5 billion share repurchase program. And now, I will turn the call over to Phil for a discussion of our financial performance for the quarter..

Thanks, John. First I will review our GAAP results and then discuss a few non-GAAP measures to provide some additional insight into the underlying trends in our business. Moving to slide seven, you can see that our Q2 revenue was $4.9 billion, which is 17% lower than Q2 2013. This decrease in revenue reflects a decline of $1.1 billion in U.S.

Cymbalta sales following loss of exclusivity in December last year. In addition, U.S. sales of Evista declined nearly $145 million following that product's loss of exclusivity in March of this year. Excluding Cymbalta and Evista in the U.S., the rest of our worldwide revenue grew 6%, mainly from volume.

Recall that last quarter, we stated that our Japan revenue benefited by about $70 million from higher customer purchases in advance of an increase in a local consumption tax. As expected, this quarter customer purchases in Japan were reduced by a similar amount.

This negative impact on our overall corporate revenue growth was largely offset by a benefit in the U.S. related to an adjustment in the reserves for managed Medicaid rebates and discounts. Gross margin as a percent of revenue decreased 4.4 percentage points, also driven by the loss of U.S. exclusivity for Cymbalta and Evista.

This quarter the effect of foreign exchange rates on international inventory sold resulted in the modest addition to cost of sales, while in last year's quarter, it resulted in a modest reduction to cost of sales.

Excluding this FX effect from both 2013 and 2014, gross margin as a percent of revenue declined 3.4 percentage points from 79.9% in Q2 2013 to 76.5% in Q2 this year. As in prior calls, we have included a supplementary slide providing our gross margin percent for the last 10 quarters with and without this FX effect.

Non-GAAP measures are shown on slide eight. Total operating expense defined as the sum of R&D and SG&A decreased 11% or nearly $340 million versus Q2 of 2013. Marketing, selling and administrative expenses were down 11%, while R&D was down 10%. The reduction in marketing, selling and administrative expenses was due to the reduction in U.S.

sales and marketing activities for Cymbalta and Evista as well as our ongoing cost containment efforts. The decline in R&D expenses was driven primarily by a reduction in late stage development costs.

Other income and expense was net income of $54 million in Q2 2014 compared to a income of $12 million in the second quarter of 2013, with this modest change driven by a variety of miscellaneous items. Our non-GAAP tax rate was 22%, an increase of 1.5 percentage points compared to Q2 last year.

The main reason for this increase in the tax rate is the lapse of R&D tax credit at the end of last year. At the bottom line, net income declined 42% and earnings per share declined 41%. As in Q1, this decline is significant but very much in line with our expectations and places us on track to achieve our full year guidance.

In slide nine, we provide the same reconciliation of non-GAAP adjusted information for our year-to-date results. Moving to slide 10, you will find a reconciliation between reported and non-GAAP EPS. Additional details about our reported earnings are available in today's earnings press release.

As I mentioned last quarter, nearly all our peers exclude amortization of intangibles from their non-GAAP results, while we include this expense. For your modeling purposes, please note that we recognized amortization expense of $134 million representing 2.7% of revenue this quarter.

Now let's look at how price, rate and volume affected our revenue growth. Given the significant decline in U.S. Cymbalta and Evista sales, I will provide you with some color on how that affected revenue growth this quarter.

On slide 11 you can see the total revenue decline of 17% in Q2 2014, which is shown in the yellow box on the middle of the page, and that this decline was entirely driven by volume. Price added about 1% to revenue growth, while the impact of FX was nil. Excluding U.S.

Cymbalta and Evista, the rest of our worldwide revenue grew 6%, with just over half of that growth coming from volume and the rest from price. Touching on some of the geographic highlights. For the quarter, U.S. Pharma revenue declined 33%, driven by a volume decline of 36%. Excluding Cymbalta and Evista, the rest of our U.S.

Pharma revenue increased 13% comprised of 5% from volume and 8% from price. The benefit I mentioned earlier from the adjustment for managed Medicaid utilization had a positive effect a two percentage points of this growth in the form of price.

In Japan, as I mentioned earlier, our Q1 revenue benefited by roughly $70 million as customers increased purchases in advance of an increase in the consumption tax that went into effect on April 1. As expected, customer purchase in Q2 were reduced by a similar amount leading to a decline in our Q2 Japan Pharma revenue.

Specifically, Japan Pharma revenue declined 15% this quarter, driven by a volume decline of 10%, adjusting for the timing of customer purchases, our Q2 Pharma Japan volume would have increased 5%. You will also see that the weaker Yen is still reducing our growth rate but at a much lower rate than in prior quarters.

In emerging markets, we saw good performance growth of 8%, partially offset by a 4% negative impact from foreign exchange. Volume growth of 7% was driven by Humulin, Forteo, Humalog, Vancocin, and Tradjenta. Sales in our largest emerging markets country China grew 15%. Finally, Elanco Animal Health posted revenue growth of 11%. Strong growth in our U.S.

food animal business and in both food and companion animal products oUS was partially offset by lower U.S. companion animal sales. Also at the end of April, we closed the acquisition of Lohmann Animal Health. This added nearly $25 million in revenue, primarily oUS contributing four percentage points to worldwide animal health growth.

Now let me turn the call over to Derica..

Thanks, Phil. On slide 12, you will see the effect of changes in foreign exchange rates on the growth rates for select items of our income statement. FX had almost no impact on our revenue or operating expenses this quarter.

As Phil mentioned, FX did cause a modest increase in the growth of cost of sales with the corresponding negative effect on operating income and EPS. As a result, FX caused our operating income and EPS to decline an additional two to three percentage points. Slide 13 shows our pipeline as of July 17.

Changes since our last earnings call are highlighted with green arrows showing progression and red arrows showing attrition. As John discussed earlier, Lilly and Boehringer Ingelheim received European approval for empagliflozin.

In addition, we began Phase 2 testing of a biologic for diabetes and we began Phase 1 testing of two Biologics, one for anemia in patients with chronic kidney disease and the other for ulcerative colitis, and we terminated development of five assets, three in Phase 2 and two in Phase 1.

Next, let me remind you of our key events for 2014 and review our updated 2014 financial guidance. In the first 6.5 months of the year, we are pleased with the progress we have made on key events we laid out for you at the beginning of the year.

As you can see from the green checkmarks on slide 14, we had a productive first half of the year, advancing our pipeline and sharing Phase 3 data. While I will not go through each item on the slide, I will give you a reminder of the potential key events for the remainder of this year and provide updates along the way.

As John mentioned, later this year we will begin Phase 3 trial for abemaciclib our CDK 4/6 inhibitor in both advanced breast cancer and advanced lung cancer. We no longer expect to move blosozumab, our antisclerostin antibody for osteoporosis into Phase 3 in 2014.

The formulation we plan to take into Phase 3 produced injection site reactions at a higher rate than desired. We will conduct additional work with the formulation used in Phase 2 before moving forward. With respect to Phase 3 data, we expect to report topline results this year, with detailed data presentations next year.

For our basal insulin peglispro studies in patients with Type I diabetes, ramucirumab for metastatic colorectal cancer, and three immunology assets, ixekizumab, tabalumab and baricitinib.

In addition to the submissions we have already completed this year, we continue to expect regulatory submissions this year for the fixed dose combination of empagliflozin and metformin for Type II diabetes in the U.S., necitumumab for first line squamous non-small cell lung cancer and ramucirumab for second line non-small cell lung cancer as well as for gastric cancer in Japan.

As we previously disclosed, we expect to submit our basal insulin peglispro for Type I and Type II diabetes by the end of the first quarter of 2015, if not earlier. Also this year, we could have regulatory action on empagliflozin in the U.S., dulaglutide in the U.S. and Europe and our new insulin glargine product in the U.S.

as well as final EC approval following the recent positive CHMP opinion and ramucirumab in advanced gastric cancer in Europe. Now keep in mind that in addition to regulatory approval timing the launch timing for our new insulin glargine product will be impacted by a number of factors, including patent expirations and ongoing litigation.

In other key events for the remainder of 2014, data package exclusivity for Cymbalta will expire in Europe in the second half of this year, although we do not expect generic duloxetine to enter the European market until 2015.

Now clearly we have a lot going on in 2014 and we are looking forward to maintaining the momentum from the first half of this year into the second half. Now let's turn to our 2014 financial guidance. Our performance through June places us on track to achieve our full year financial guidance.

Since our last earnings call, there have been some minor pushes and pulls but major changes to our full year outlook. As a result, our guidance for nearly all line items as shown on slide 15 remains unchanged.

We have revised our GAAP EPS guidance to reflect a charge of $45 million pretax or $0.03 per share after-tax related to the immune oncology licensing deal with Immunocore announced last week, and we slightly revised our outlook for capital expenditures, which has been reduced to $1.2 billion.

On slide 16, we have provided a reconciliation between reported and non-GAAP EPS for 2013 and the associated growth rates from these numbers to our 2014 guidance. Now I will turn the call back over to John..

Thanks, Derica. Before the Q&A session, let me briefly sum up. While our revenues and earnings continue their decline as we expected, at the same time the launch of Cyramza and a number of approvals and impending launches give us great confidence that we are poised for growth in the years ahead.

Our performance is consistent with our expectations and we are on track to meet our 2014 financial goals. We recorded growth in the sales of a number of products and key markets as well as in our Elanco Animal Health business.

The 11% decline in our operating expenses shows our ongoing determination to manage expenses rigorously so we can get the most from our well-stocked late stage pipeline. The steady advance of the pipeline strengthens our confidence in our innovation-based strategy and our commitment to accelerate discoveries to the people who need them.

And now I will turn the call over to Phil for our Q&A session..

Great. Thank you, John. Toni, we are ready for the first caller, please..

(Operator Instructions). Our first question comes from the line of Tim Anderson with Sanford Bernstein. Please go ahead..

Thank you. Two questions. The first is, we are seeing price competition in diabetes in various ways starting last year and then recently Glaxo launched their GLP-1 at a pretty big list price discount to existing therapies, which you rarely see drug companies do.

This could have an obvious impact on dulaglutide's pricing at launch and I am sure you will say it's too early to discuss pricing, but I am hoping you can still address in general terms, because it is a worrisome trend, not just for dula and Lilly but for other products and other categories for a variety of companies.

Then the second question is on Lilly's plans in terms of M&A activity and also tax inversion. You guys, in the past, have been pretty steadfast about only really considering bolt-on acquisitions. Is this still the current stance, because if so that size probably would not be big enough to qualify you for inversion.

So how is Lilly thinking about M&A and the potential for inversion?.

Tim, thank you for the questions. We will have Enrique Conterno, President, Lilly Diabetes take the first question on the pricing in the GLP-1 space and then Derica Rice, CFO, take your question on M&A.

Enrique?.

Very good. Well, as we all know, pricing in the U.S. has become extremely competitive when it comes to the diabetes space, which is driven both by payors and competition. I think in this particular case, pricing also in a certain way reflects the profile of the very specific products.

We are extremely confident in the profile that we bring with dulaglutide and the number of trials that we have conducted. So we do think we have a very strong value proposition. And of course, as we think about diabetes, our stance continues to be the same. We are a proponent of choice. We believe choice is important for patients.

And we are seeking basically a dual axis in the diabetes space whenever this is possible..

Thanks, Enrique.

Derica?.

Tim, as it relates to M&A activity, our stance and strategy has not changed in this space. We continue to be very interested in looking for those opportunities that can augment our current organic footprint, both commercially as well as scientifically.

And that really lies in the space that you have seen us play in historically, looking for in licensing deal and sometimes it's easier to do small M&A transactions to get access to those technologies. We continue also to be not interested in doing the large-scale M&A. We just have not seen that the long-term benefits from those types of transactions.

As it relates to inversion, if that ever did come about, it would be a secondary benefit, not the primary driver of us taking any type of M&A action..

Great. Thanks, Derica. Toni, next caller please..

Thank you. The next question comes from the line of Mark Schoenebaum with ISI Group. Please go ahead..

Hello?.

Yes. We can hear you..

Thanks. Can you hear me? Sorry about that. I am sorry. Thanks for taking my question. Just if I could ask the pipeline question. So all across the pipeline, you have had some nice success this year, but perhaps nothing truly transformative.

But when I look ahead, I see two things that potentially are really transformative, solanezumab and the CETP inhibitor. And I was just wondering, I think in the past, you have characterized, not the recent past necessarily, but you characterized solanezumab as a high risk pipeline program.

I would love to know if you still perceive it as such, now that the new Phase 3 programs are ongoing? And I guess, so we can't do a deep dive in earnings call, the same big picture question on CETP, do you view that as a high risk, moderate risk or low risk asset? And maybe if you could just remind us on the timeline? Thanks..

Great. Mark, thanks for the questions. We will have Dave Ricks, President, Lilly Bio-Meds answer your questions. Jan, if you would like to chime in anything after Dave, please feel free to. Dave..

Thanks, Mark, for the question. We remain excited about both of these programs, the CETP inhibitor, evacetrapib and solanezumab. Importantly, we are confident on the timelines we have previously communicated as to those data readouts which are clearly not in this year but that coming up over the next couple years.

As it relates to CETP inhibitors and ours specifically, we are confident for several reasons. One, the LDL in addition of this asset, we think is enough by itself to achieve the outcomes we have designed in the study to demonstrate. On top of that, of course, there are other effects.

HDL lowering or increasing being the most pronounced as well as other cardiovascular potential impacts. So testing the CETP hypothesis with a complete inhibitor of CETP like evacetrapib, we think is something that's new and we are doing an ACCELERATE trial.

So we remain excited about that asset and should it play out that it has an impact on cardiovascular risk reduction, we think there is ample market opportunity for such a drug. For solanezumab, I think as we have communicated since the EXPEDITION-1 and EXPEDITION -2 studies, we believe in the mild signal we saw in those studies.

We have designed a study now, which we think will be the definitive test of solanezumab in mild patients with Alzheimer's and we have improved, we believe, the probability of success in that versus EXPEDITION-1 and EXPEDITION-2 by importantly screening out patients who did not have amyloid plaque and by powering the study appropriately for this population.

So bottom line, we are bullish on both of these. Of course, there is technical risk because both programs did not complete a normal Phase 2 proof of concept in the sense that you are demonstrating the outcome before starting a Phase 3. So I will stop there and ask Jan if he has any additional --.

Yes, I think we can also gain some additional confidence from data from competition.

The recent report by crenezumab at the Alzheimer's meeting in Copenhagen, I think supports the data that we have with solanezumab because it was reported there that this antibody which has some similarities to sola in its mechanism of action also reduced the cognition decline in the mild population of Alzheimer's, which I think is the second nonpharmacological agent that actually shows that if you interfere with the amyloid pathway, you can reduce cognition decline in Alzheimer patients..

Great. Thank you, Jan. Toni, Next caller, please..

Thank you. Our question comes from the line of Jamie Rubin with Goldman Sachs. Please go ahead..

Thank you. Just a more mundane question.

Derica, your gross margin guidance for the full year at 73%, which assumes a significant deterioration in the second half of the year, are you just being conservative with your numbers? Or is there something that we are not aware that we should take into consideration for that? And can you confirm that that would assume a worsening in the second half? And Dave Ricks, for you, just on PCSK9.

I know that is a Phase 2 asset, and it would seem that the PCSK9 would directly compete with the CETP inhibitor. What are your plans for this drug? And I think you are probably fourth in line in bringing a PCSK9 to the marketplace. So if you can elaborate a little bit on where you see that project going? Thanks..

Thanks for the questions. Jamie.

Derica, you want to kick this off?.

Sure. Hi, Jamie. Good morning. As it relates to our gross margin guidance, let me just walk you through a series of things. One typically Q2 is one of our higher gross quarters, primarily because one, we do not have the slowdown that usually takes place in our production facilities outside the U.S., primarily in Europe due to the summer holiday.

And also in the fourth quarter, we typically experience the usual maintenance shutdowns.

What we expect and what you saw in the first half of the year is that we had very high production volumes running through our manufacturing facilities and we anticipate that those production volumes will be lower in the second half for the reasons I cited earlier.

So the gross margin performance that you are seeing thus far for us is pretty in line with the expectations that we have for the year.

The second thing that I would also highlighted is that also what you will see in the last six months of year is a full absorption and dilutive effect of the Lohmann Animal Health acquisition which we talked about, the $0.05 hit, when we announced the deal for the year and we also talked about the fact that it would be dilutive to our gross margin as well..

Great.

Thanks, Derica, Dave?.

Great. Thanks, Jamie, for the question on PCSK9. I think you are correct that we are behind in this class but we think the class has a place in the management of cardiovascular risk. Obviously there's assets in front of us that are reading out positive data. So the probabilities here look good for the class.

I think for us the really question is one of differentiation, maybe not so different to the question on the GLPs. We are conducting right now a Phase 2 experiment to really elucidate a differentiated profile. And I think that data is going to be really key for our decision making about what to do next.

Whether that would be to proceed full speed ahead, perhaps share risk with another partner or perhaps to have someone else take the asset forward and Lilly move on to other opportunities. So we need to see that proof of concept and based on that information, we will make some decisions in the quarters ahead..

Great. Thanks, Dave. Toni, next caller, please..

Thank you. Our next question comes from the line of John Boris with SunTrust. Please go ahead..

Thanks for taking the questions. First one for Derica. Just one item in your guidance that seemed to change was the CapEx, which seemed to move down on your guidance. Can you maybe just characterize what's going on in the CapEx line and where that savings is going to be going? Second question for Jan.

It looks as though there were some pruning of the pipeline to your oncology assets. Can you maybe help us understand what the next assets or beyond ramu and neci within your strategy that you will be focusing on within oncology. If there is any in Phase 2 you can point out.

And then on the Immunocore deal for novel T-cell based therapies, are there any particular mechanisms that you are targeting along with T-cell area or looking to optimize with that codiscovery and codevelopment strategy? Thanks..

John, thanks for the questions. Obviously Derica will take your first question on capital expenditures and maybe John and Sue, you would like to comment on the oncology questions that John had.

Derica?.

Sure. Hi, John. From a CapEx standpoint, it's really fairly straightforward. Our manufacturing team and our facilities group have done an excellent job of just driving productivity and being able to bring in projects still on time, but at lower cost.

So that $100 million change in our outlook for CapEx s really spread across a multitude of capital projects where you are eeking out increased efficiencies..

Great. Thanks, Derica. Jan..

John, with respect to what you term pruning of the pipeline, I think the fact that we had three potential cancer drugs that fell out of Phase 2 is somewhat a factor of just the abundance of cancer opportunities that we have in Phase 2.

It reflects the ongoing nature of the business decision making related to data that we have gathered and other priorities that we have set.

I think going forward, you are going to see Lilly much more focused on the clinical progression of the molecules where we believe we have a competitive lead and that we believe offer the greatest opportunity for Lilly. We have got a great position today of really having an abundance of riches and yet we have finite resource.

With an ever more competitive environment, I think it's important that we put clear focus and resources behind those that we believe provide for us the greatest potential and the greatest opportunity for patients at the end of the day.

With respect to the T-cell therapies, I am going to ask Sue to comment, both on your second question about the oncology portfolio and then specifically on immuno-oncology. But we believe immuno-oncology is an important area. We have said this.

We believe we have assets already in our pipeline that really factory in to this disease, to this mechanism a writ large and the Immunocore deal was, we think a great opportunity for us to influence the immune cycle, hopefully for the benefit of cancer treatment in a very specific way. And again, I will ask Sue to comment in greater detail..

Sure. Yes, thanks. Clearly with regards to the oncology pipeline, we are looking at the key cancer pathways, including cell cycle inhibition, the tumor microenvironment and immunotherapy. You are aware of bemaciclib. Obviously, we are very excited about that molecule. We have initiated our Phase 2 study, single agent study.

We are on track to initiate the fulvestrant Phase 3 study in breast cancer in the next few weeks. And the additional Phase 3 study, both with a breast caner with aromatase inhibitor and in lung cancer will be starting and KRAS lung cancer, we will be starting towards the end of this year.

So that is one molecule we are very excited about and we are moving forward rapidly with that. In other molecules that we have in our pipeline that we are continuing to progress, our c-Met antibody which is a bivalent antibody that we believe could have different properties than other agents out there.

And then, our TGF-β small molecule inhibitor or galunisertib, which is in Phase 2 development, and this is actually a molecule that is getting a lot more interest because it targets the pathway that modulates and functions T Regulator Cell.

So that is one agent that we believe that could have or does have a new modulating activity and we are going to be seeing further combinations with that agent, both with other targeted agents and with other immunotherapy agents.

We have two other agents that we have got in clinical development as well that impact the immune system includes the CXCR4 peptide antibody which is in Phase 2 development, and that's involved in the trafficking of immune cells in tumors and rCSF-1 antibody that's in Phase 1 and that targets monocytes and macrophages involved in creating an immunospecific environment in the tumor.

So we have three assets in clinical development that impact the immune system. We are also continuing to increase our discovery efforts and capabilities both internally and through recruitments externally if necessary and we have got a number of targets that we are interested in.

In addition to collaborations and partnerships and potential acquisitions that we are looking at, and Immunocore is the recent one that we have announced and we are very excited about looking at novelties. So base cancer therapies, that deal specifically looks at three targets. We have identified three targets.

We can't tell you what those targets are now but they are ones that we believe that have potential and clearly if we decide to take those into the clinic, we will be looking at combinations with other oncology assets and other assets in our pipeline for those agents.

So we are very excited about the opportunities that we have got in oncology and as John said, it's really a case of making sure we are prioritizing and putting our focus in the right areas to making sure we are progressing the molecules that have got the most potential for patients..

Great. Thank you, Sue. Toni, if we can have the next caller, please..

Thank you. Our next question comes from the line of Chris Schott with JPMorgan. Please go ahead..

Great. Thanks very much. Just had a few here.

So my first one was, as we look at Lilly returning to growth and as cash flow starts to recover, can you just share some of your views on your products and potential divestitures of non-core assets? We have seen a number of players in the space that would consider looking at the divesting some of those businesses? Just thoughts from Lilly in terms of, if that's something that could be on the table? Second question on the CDK program in breast cancer.

I think Pfizer announced, it's moving forward with a palbociclib filing based on Phase 2 data.

If that drug is approved early next year, just can you comment what that means competitively Lilly, as you think about your program and the timing of that program relative to Pfizer's launch? And then finally, I am not going to sound so generically, but your on sclerostin inhibitor, just talk about next steps from here and your confidence that this is something you can dress? Just trying to understand what we should be watching for on the updates there.

Thanks very much..

Chris, thank you for the questions. We will have Derica take the questions on strategies around late stage assets, post patent assets. Sue Mahony on what the palbociclib potential approval could mean from a competitive perspective, and then Dave, want to take lead maybe on talking about the sclerostin question, that would be great.

Derica?.

Hi, Chris. As it relates to, I guess this is a little bit of still, a further extension of our capital allocation strategy. We have got a number of deals over the last few years to take advantage and make sure we are maximizing the potential what's sitting inside not only Lilly's labs but also Lilly's even currently marketed products.

So even if you look at Evista, we did some deals there outside of the U.S. to make sure that we were able to put proper resourcing behind that at a time when we were diverting some of other resources more towards the pipeline to advance the late stage assets that we saw with future potential.

I think going forward, we will continue, as you heard even from Dave and from John as well, that we have a pretty robust and pretty full clinical stage pipeline today. And we believe there are potentially more opportunities than we will have the capacity to progress on our own.

So it is possible that going forward you will see us as we cycle through those deciding which assets we will go alone and as Dave said, which assets we may partner and which assets we may find other ways to monetize the value from.

The good news is that we are at the beginning of this cycle as we are getting great discovery output from our research labs and that's what affording us these opportunities that lie ahead of us.

And we have no intentions of doing anything that will damage that flow of new molecules moving into the clinic and it gives us the optionality down the road..

Thanks, Derica.

Sue?.

Yes, with regard to the palbo potential approval, that really doesn't have any significant impact on our plans for Abemaciclib. Clearly our focus is on ensuring that we get our three Phase 3 studies up and running as quickly as possible this year, which we are on track to do.

I am very confident that the team has got a good plan in place to ensure that we get rapid enrollment in these studies. We are confident in our molecule. We believe that we could have a best-in-class molecule here with single agent activity and continuous dosing.

So as I said, our focus really is ensuring that we get these trials up and running as quickly as possible, and I think we are on track to do that..

Great. Thanks, Sue.

Dave?.

Great. Thanks, Chris. Maybe just quickly as well on asset mix and looking to change that, I would say, on the late lifecycle, in market assets, I think we are open to that as well, but we need to have a transaction that produces value. So I think when we see those things we move on them.

I think the Cialis announcement with Sanofi this quarter is an example of that where we are harvesting late lifecycle value from Lilly assets. On sclerostin antibody, pronounced blosozumab, for those on the phone, we had completed a proof of concept study in severe osteoporosis. We are excited by that data. We remain excited by the data.

In conducting a transition from a Phase 2 formulation to a final commercial image, we did have some results that surprised us a bit in making that transition. We needed a bit more work on the formulation so that we have really a competitive or even differentiated commercial product image.

We had scheduled or had communicated a potential for a start to the Phase 3 program toward the 2014 and today we are just saying, that's not going to happen in 2014 because of this delay. As we have more information, we will come back to the investment community to share firmer timelines..

Great. Thanks, Dave. Toni, next caller, please..

Thank you. Our next question comes from the line of Seamus Fernandez with Leerink. Please go ahead..

Thanks for the questions. So just a few quick questions. First off, maybe for Jan.

Can you give us your general thoughts on the data that was presented on Roche's crenezumab? I think we have seen some data that looked somewhat similar, but can you just maybe compare and contrast what we saw with Lilly's solanezumab versus crenezumab, and how these molecules are fundamentally different? Second question is for Enrique, on the launch preparation for dulaglutide.

Can you just give us a sense of where we are, as we lead into a potential action date from the FDA? Have we the facilities? Have they been inspected? How is inventory building? And how would you recommend that we assess the dulaglutide launch, given recent product launches and perhaps access, although I would think that Lilly might have a bit of a better opportunity given its ability to leverage the portfolio? And then just a quick update on the glargine challenge in the U.S.

and if you would consider and risk launch following the expiration of the 30 month stay? And my last question is, if you can remind us, post the Lohmann acquisition and perhaps Novartis, Derica, would you be able to tell us what the overall deal related noncash charges that get baked into the P&L on an ongoing basis and your adjusted earnings? Can you remind us what that number is currently? And it what may move to? And then perhaps what prevents Lilly from moving to the industry standard cash EPS? Thanks a lot..

Okay. Keep us on track here. If we miss one of your questions, don't hesitate to let us know, but I think we will go ahead and have Jan talk about the data for Roche's crenezumab. Obviously, Enrique, the two middle questions on launch for dulaglutide and the status of the glargine legal situation here in the U.S.

and then Derica, the last one on the noncash charges.

So Jan, you want to start please?.

Yes, first I would like to make a comment, and since it's not a head-to-head trial, I think it's more compelling than different trials and done under different conditions, but as I said before, the data are generally supportive between solanezumab and crenezumab.

We should remember though that the crenezumab is a Phase 2 trial, which is clearly much smaller than EXPEDITION-1 and EXPEDITION-2. And I think for our EXPEDITION-3 is going to be the most important trial, which is even 60% larger than the previous EXPEDITION trials and the focus, I think here is clear.

It is the mild Alzheimer's patients that could have the best impact from solanezumab and we are selecting the amyloid positive ones which is also a key criterion..

Great. Thank you, Jan.

Enrique?.

First on dulaglutide. We are, by the way, expecting that the trade name which is going to be TRULICITY. We are very much on track. The action date for both the U.S. and Europe is this year. So our launch preparations are very much ongoing. There is not much more really that I can discuss at this stage whether it's pricing or inspections and so forth.

Just to say that at this stage things are going on truck from our perspective. When it comes to our new insulin glargine product, we are also expecting tentative approvals this year and clearly we do have in the U.S. the 30 month stay.

I can't make many comments about the ongoing litigation, but clearly we do not believe that we are infringing any of the asserted patents. So we are hopeful that we can resolve this as soon as we ca. Hopefully even before the 30 month stay.

But if that is not the case, we have the conviction in terms of what our position is and we are not infringing any of those asserted patents. So we will be planning to launch at this stage..

Enrique, thank you.

Derica?.

Hi, Seamus. For amortization of intangibles that's embedded in our operating results, as you heard from Phil earlier, for the second quarter about $135 million is what's reflected in our Q2 results. When we think about Lohmann, if you look at it on a full-year basis, a full twelve month basis, somewhere between $15 million to $20 million.

As it relates to Novartis Animal Health. I am not able to share that with you until we actually close the deal and we have the final purchase accounting. So that number is still moving at the moment..

And in terms of any thoughts about moving towards where most of the peers said of the non-GAAP treatment of amortization, Derica?.

Thanks, Phil. We have obviously gotten some input both from people such as yourself, Seamus on the sell side as well as we have gotten some inquiries on it from some of our buy side investors as well. It's something we are taking under consideration. Actually, we plan to come back and inform you as to what are our actions going forward will be..

Great. Thanks Derica.

Toni, if we can have another caller, please?.

Thank you. Our next question comes from the line of Steve Scala with Cowen. Please go ahead..

Thank you. I have three questions. First, on dulaglutide. There's no question that you have a best-in-class asset.

But what portion of the GLP market would be receptive to a modestly effective but less expensive product from GSK? And is that portion 10% or 30%? Secondly, Lilly has given out some time ago now, a very specific guidance on SG&A and R&D as a percent of sales without specifying a year in which that will be achieved.

Consensus, I believe, has Lilly achieving these targets in 2019.

Can you tell us whether Lilly's internal forecast has you achieving these targets before 2019? And if you aren't willing to say, would you say whether Lilly plans to achieve these targets this decade? And then the final question is that, it seems that 2015 is setting up to be a phenomenal year with sales and earnings up very strongly.

Yet consensus covers a wide range. What early observations would you like to make about 2015? For instance, please take the opportunity to rein in the high end of those estimates, unless compared to your expectations, the high end is just fine. Thank you..

All right. Steve, thank you, for the three questions. Well I will have Enrique take the dulaglutide question, and Derica you will have to comment on timing or some of the goals for the SG&A and R&D as a percent of revenue, and then any initial thoughts on 2015.

Enrique?.

Steve, thank you for your comments. I am going to quote you on dulaglutide as a best-in-class asset. VERY much appreciate it. We certainly believe so. Look, on your specific question about -- there are different types of profiles in the GLP-1 class and some look less efficacious.

I will be honest, I think the value proposition for those products is very complicated. We do know that improved glycemic control leads to reduction in complications. That is a very strong value proposition. It does what we seek that.

So it is difficult for me to say what type of share would those products get, but I do not believe it is going to be very much..

Okay. Thank you.

Derica?.

Hi, Steve. As it relates to our margin guidance that we put out there, Steve, we actually have provided a timeline, at least up till now. What we said is that, no later than 2019 or by 2019 we will achieve a total operating expense as a percent of sales somewhere in the 48% to 50% range.

Getting back to the historical levels of profitability that you have seen from Lilly pre-patent expiration. We still expect to at least meet that timeline. There clearly will be opportunities to update that outlook as we move forward. As it relates to 2015, Steve, it is still early. I am not in a position to share details on our outlook for 2015.

But we have said though is that we do, coming out of 2014, expect to return to growth and to begin our journey towards expanding our margins.

And so that is the kind of performance you should expect to see and obviously in the near future we will have an opportunity of giving you more specifics around 2015 as we think about our usual timeline for issuing guidance..

Yes, and then typically, Steve, that guidance is given in that first full week of January. So probably somewhere around January 7 you should expect to be seeing a day reserved for the 2015 guidance call. Toni, if we can have next caller, please..

Thank you. Our next question comes from the line of Vamil Divan with Credit Suisse. Please go ahead..

Yes, thanks so much for taking the questions, so two that I have. One on the CGRP antibody. I think that's a pipeline asset people don't talk about too much yet. Can you just talk a little more on your expectations there? We have obviously seen some setbacks previously in that space.

What do you think are the differentiating points for that product? And what would you say are some of the key decision points that you have coming up here? And then just looking at your slide 14 with the key events, it doesn't look like any other major external data readouts the rest of this year.

Any chance any of the autoimmune studies that you have ongoing that we might see some of those at AACR later in the year? Or if not, should we assume ULAR next year might be a big meeting for you guys with all three of these assets there?.

Vamil, thank you for the questions. We will have Jan lead off on the CGRP.

Dave, feel free to chime in and then I will ask my colleague Ilissa if she wants to comment on some of the data readouts for the back half of the year, Jan?.

Yes. Calcitonin gene related peptide or CGRP has been implied as an important mediator in migraine since quite some time and it has been shown by small molecules that you can reduce then the acute migraine symptoms by giving up oral agents.

The problem with both agents were that yes, they prove the hypothesis that CGRP is an important mediator, but they were not safe for chronic use, because they had liver toxicity. That's why I think the antibody, in a way, comes in with an open door where the mechanism has been proven and antibodies, as we have seen with ours, are generally safer.

So they are more appropriate also then for potential to chronic use. And as you know, we described the positive data from a proof of concept study recently where the effect in chronic migraine was shown reducing the migraine headache days and also migraine attacks than in so-called episodic migraine.

So what we are doing now with this molecule is to do some more dose ranging and studying and preparations then for Phase 3. And we also recently announced that we will start to study on osteoarthritis also for this agent..

Great, Jan. Thank you.

Dave, any comments?.

No..

Okay, Ilissa?.

Sure. Thanks, Vamil, for the question.

So a while you are correct, that we don't have any detailed data readouts listed for our immunology portfolio, we are expecting internal data readout in the second half of this year, starting with ixekizumab, followed by tabalumab and towards the very end of the year, the first trial we will readout for baricitinib.

Those trials should have detailed data readouts starting in 2015. I will also remind you that we are expecting topline results as well for our basal insulin peglispro in diabetes for the Type I trials and that will be in the third quarter of this year..

And as has been our past practice, Vamil, I think you should expect that the various trials that Ilissa just mentioned would lead to topline press releases providing an update at a high level on whether or not the trials have met their endpoint. So what kind of safety profile we have seen and some of our thoughts on next steps for those molecules.

One I might mention that's broader across the portfolio, the REACH trial of ramucirumab in hepatocellular cancer, I think it is quite possible and likely that we have detailed data presented at a medical meeting before the end of the year that should get some additional insights into the commentary we provided around subgroup data that we found to be quite interesting..

And then also for ramucirumab, there is the colorectal data that would lead out towards the end of this year, possibly early next year and could have a topline readout as well..

Great. Okay. Thank you..

Thanks for the questions. Toni, next caller, please..

Thank you. Your next question comes from the line of Colin Bristow with Bank of America Merrill Lynch. Please go ahead..

Thanks for taking the questions. On GLP-1s, we should see Phase 2 data for Novo' oral GLP-1 in Q2 2015.

I was just wondering if you would give us your thoughts on this approach and how you view it as a potential competitive threat to the GLP-1 market, as well as the DPP4s and SGLT2s? On SGLT2 fixed combos, one of your competitors has stated that they view the approval of these as a significant inflection point for the acceleration of cost growth.

I am just wondering how you are thinking about this opportunity and do you share this view? And then finally, just on the basal insulin peglispro, I think I heard you say that the U.S. filing was going to be 1Q 2015 or earlier. What are the factors that could lead to an earlier filing? And how soon could this be? Thanks a lot..

Great. Colin, thank you very much for the questions, and those are all directed to Enrique Conterno.

Enrique?.

Thanks. On oral GLP-1s, we have said that this is an area that is attractive and is an area where we very much looking at as well. I won't comment. I think your question is probably more appropriate for one of our competitors.

When it comes to the fixed dose combination, if you are referring to the fixed dose communication between a GLP-1 and insulin, we clearly see the combination of a GLP-1 and insulin as important therapy. We do believe with dulaglutide and our insulin portfolio, we can provide very significant value when it comes to providers and payors.

We do believe that the restriction that is imposed by having a fixed dose combination in this particular case, in a certain way, takes away from the flexibility that endocrinologists want and need, given how insulin is titrated. They are giving some indications here but I should also comment about the SGLT2s and DPP4 fixed-dose combination.

We do believe this is an important product for us. Of course, we are developing this with Boehringer Ingelheim. We have submitted this in the U.S. and we believe we are significantly ahead of our competition. Today about 25% of the SGLT2 use is on top of a DPP$0.

So that gives you a sense of the possibilities for overall class growth and branded growth and the impact that this fixed dose combination could have. Finally, you asked about whether we could file earlier than Q1, basal insulin peglispro? That is a possibility, but at this stage, I think what we said is we would file by Q1.

Clearly we are working on getting the readout for our Type I studies and we expect that we are going to be seeing this later this quarter, and we expect the press release together with that..

Great. Thank you, Enrique..

Thank you..

You are welcome. Next caller please..

Thank you. Your next question comes to from the line of Jeff Holford with Jefferies. Please go ahead..

Hi. Thanks for taking my questions. I have got two questions around insulin glargine products.

Just firstly, can you just give us a bit more color on why you have added the three mil cartridge to your filing? And does this potentially relate to being able to come to the market with a product such as the OptiClik device which Ypsomed had previously there to try and get around some of the Solostar patents? And then secondly, can you just update us a bit more on your thoughts around timing of European launch and what kind of presentation the product would have, in terms of device or not? Thank you..

Great. Jeff, thank you for the questions. We will stay with Enrique..

Sure. On insulin glargine, we have submitted two NDAs. You are right. One for prefilled pens and one for an insulin for cartridges. Clearly, those are two independent NDAs and we have been sued on each one of them.

So that's all I will say, basically, at this stage, but we will be intending to, basically, oppose the patent expirations and resolving the ongoing litigation to be able to bring both of those to the market. Your second question was related to Europe. Clearly the patent expiration for Lantus is in 2015. We are expecting tentative approval this year.

So we are very much in our preparation, but that's as much as I can comment. Of course, we take very seriously the patents, but are in place and we will launch after those patents have expired..

Thanks very much..

You are very welcome. Toni, next caller, please..

Thank you. Your next question comes from the line of Alex Arfaei with BMO Capital Markets. Please go ahead..

Good morning. Thank you for taking the questions. A question on ramucirumab for second line metastatic colorectal cancer. My understanding is that the Phase 3 trial, those patients could have been treated with Avastin first line.

So how should we think about the process of this trial, given the similar mechanism of action and given the clinical profile we have seen with ramu so far? Thank you..

Thank you very much, Alex.

Sue Mahony, please?.

Yes, Alex, you are right. This is a second line trial after Avastin in first line. Clearly, we will wait and see what the data shows. We will have that data towards the end of this year and we will be announcing topline and then we will be planning to present it at a scientific meeting next year. So I think it's too early to speculate at this point.

We will have to wait and see what the data shows us..

Okay, great. Thank you very much. Toni, next caller, please..

Okay. Your next question comes from the line of Marc Goodman with UBS. Please go ahead..

My first question is how are you thinking about the biologic psoriasis market? There's several players there. So are you thinking about your product being differentiated? Second, there was a comment earlier on the call about an adjustment in the U.S. for managed Medicaid.

How big was that adjustment? Can you just explain what happened there? And then third, just on the insulin products. Any major changes in the quarter? Humalog, Humalin seemed to be bouncing around first quarter, second quarter quite a bit relative to what I would have thought the scripts were doing.

So if you could just give us a sense of what's going on there? Thanks..

Absolutely happy to, Marc. Thanks for the questions. Dave Ricks, we will have you go and start with the biologic market with psoriasis. Derica, if you could comment please on the managed Medicaid situation. Enrique, for the U.S. insulin sales trends we have been seeing.

Dave?.

Yes. Thanks, Marc. As it relates to psoriasis treatment, we have seen our rapid growth of TNF use over the last decade in treating moderate to severe psoriasis and then more recently, of course, alternate mechanisms with Stelara which has been met with great success in the market.

We believe IL-17s are another step forward in therapy for patients with moderate to severe psoriasis and you can see some of the Phase 2 and Phase 3 readouts from the three competitors, which are all neck and neck in the very last stages of testing here.

The promise of the class is really to move the standard of what good is from a PASI 75 clearance to really something north of that, PASI 90 or total clearance which can now be possible for these patients who suffer from this difficult condition and we see IL-17s delivering PASI 100 or complete clearance substantially above both anti-TNFs and Stelara.

So that's the value proposition for the class. Within the class, we of course have our own differentiation strategy, which includes of course efficacy. We will have to see the safety as it bears out and then dosing regimens which are all different between the various players.

We have not disclosed or read-out our Phase 3 program and that will be coming soon in a topline fashion. So we will wait to say any more until when we see those data in a complete form, but we are bullish on the class..

Excellent, Dave. Thanks, Dave.

Derica?.

Hi, Marc. As it relates to the U.S. and the managed Medicaid, this is really us, as we got additional receipts in from customers. We were able to true up the accruals and provisions on our book. Dollar wise, it's about $60 million, which in effect was about two percentage points of growth in the U.S. So just as a reminder, our U.S.

overall sales was down about 30%. If you were to exclude the impact of the Cymbalta and Evista patent expirations, our growth was a positive 13%, which was about eight percentage points of price, five percentage points of volume. So of that eight percentage points of price, two percentage points of that was the managed Medicaid adjustment..

Excellent. Thank you, Derica.

Enrique?.

Sure. Marc, you are correct. When we look at the underlying script growth for our insulin business in the U.S., Q1 and Q2 are very comparable but we do see you in terms of our reported sales, we were at minus 1% for Humalog in Q1 and we were 17% growth for Q2. So a big difference there.

Let's remember that in Q1, we had a significant wholesaler destocking that impact in the growth rate. In the case of Humalog, that impact was 8 to 9 percentage points in Q1. So that that explains the part of the difference.

In Q2, we just discussed managed Medicaid, in the case of Humalog, that impact was 4%.So those were we had, I guess, some very unique impacts to each one of those quarters..

Great. Thank you, Enrique. Toni, next caller, please..

Thank you. Your next question comes from the line of Damien Conover with MorningStar. Please go ahead..

Great. Thanks for taking the questions. Just a follow-up on the insulin franchise. Just had a question for the pricing power with Humulin. It looks like a very strong growth in the U.S. with price.

I just kind of want to understand that in the context of the Express Scripts negotiations on getting on the formulary there, but still being able to drive some price.

Wondering if that price is coming from customers outside that formulary? Or if that formulary still allows for some pricing power? And then secondly, when you think about the renegotiations with the PBMs, and we are likely to see the formularies in August, I wanted to see if anything strategically has changed with the negotiations there after you have had a couple quarters here of a more aggressive negotiation that happened last year? Thank you..

Damien, thank you for the questions. Enrique Conterno..

Sure. On Humulin, a big part of our human insulin franchise in the case of Humulin is that we have a very unique product in Humulin R U-500 which basically has significant growth on where the pricing pressures are not as high as with the rest of the insulin franchise, and you basically see some of that reflected in terms of both price and volume.

Your second question related to our ongoing discussions or negotiation with the PBMs and payors, I won't be able to share much on that front..

Okay, great. Damien, thanks for the questions.

Toni, next caller, please?.

Thank you. Your next question comes form the line of Gregg Gilbert with Deutsche Bank. Please go ahead..

Thanks, and good morning. I wanted to go back briefly to the inversion subject. And for John and Derica, companies that have done inversions almost always claim that tax efficiency is a secondary sort of effect.

So I would like to hear how you are and the Board is thinking, John, on this subject has evolved over the past year or so? And sort of a nitpicky follow-up. Derica, you indicated that Lilly isn't considering or doesn't generally agree with large scale M&A for Lilly.

But would a $20 billion to $30 billion deal, definitionally, be considered large scale M&A? Thanks..

Okay, great. Thank you very much for the questions. Welcome back to the fold. Wasn't expecting to hearing you on the call, but its great to hear your voice. Derica, for the inversion and the definition of large scale, please..

Well, to me, $20 billion to $30 billion is a pretty large number. At least from my basic math class in Alabama..

So maybe the rest of the question is moved then?.

Again, even if we were preparing to through our series of patent expirations and there is a lot of speculation of other thoughts we needed to do to manage our way through this tough period in the history of Lilly and still clearly large-scale M&A was one of the options that was on the table.

Again, as we looked at all the data, both looking at other transactions by other firms that historically there is that near-term benefit you can gain but longer-term, the core to this industry and we believe the core to our business as Lilly is, your ability to innovative and get new molecules out of your labs that create clinical differentiation.

And so that's where we chose to focus and expend our energy. So when we think about business development transactions, ways that we can augment that innovative platform or footprint for us, we are absolutely interested in.

Things that would begin to create a distraction and could begin to hamper or dampen our ability to produce new innovative research and development, are things that we are really quite not interested at the moment. And for us, it's been a combination of those smaller deal bolting on to our organic strategy and I see that being the path going forward..

Gregg, it's John Lechleiter. It's nice to hear from you. I think the only other comment I would make is, look, I think that the activity around inversions right now just points to a failure of our U.S.

tax code and it really keeps American companies, not just Pharma industry, but across industries from being competitive with their overseas counterparts. We have been talking about tax reform. I think the first TV interview I gave when I became CEO in 2008, a big discussion was tax reform. We need a lower rate. We need a territorial system.

We don't need Band-Aid approaches in between. It's time for the Congress to step up to the bar and get this thing done..

Thanks, gentlemen..

Thanks, Gregg. Thanks, John. Toni, next caller, please..

Thank you. Your next question comes from Mark Purcell with Barclays. Please go ahead..

Yes. Thanks for taking my questions. Staying with diabetes, lots of questions. But I wondered, for clarification, for the glargine product in Europe, should I expect from some of the comments you made so far, to see this product launched in Europe in Q2 next year? And then in terms of the SGLT/DPP4 combo, actually you are about a year ahead.

So again, heading in towards a Class 1 review, how confident you are of launching that product after the PDUFA early 2015? Straying away from diabetes and thinking about your margin targets and where you are heading with a very broad pipeline. Some of these areas you are heading into are fairly crowded.

There could be some serious battles in primary care and cholesterol. Obviously, there's some entrenched competition, increasing competition in the immunology space.

So how do you consider going alone on some of these assets outside your core are for the moment versus partnering with players already in the space? And then lastly, clearly some very rigorous management recession on R&D costs, as you mentioned several times on the call.

Should we be more comfortable now towards the lower end of your guidance range for SG&A and R&D cost lines for the full year? Or are there phasing effect such as initiation of new R&D trials which we need to be alerted to at this point? Thanks a lot..

Great, Mark. Thank you for the questions.

We will have Enrique take the questions on the insulin glargine in the European Union and then thoughts on the lunchtime for the SGLT2/DPP4 combo and then for the going alone versus partnering, some of how we think about that given some of the investments required to compete in these marketplaces, Derica, if I would ask you to maybe make a comment based on these volunteer business in particular if you want to comments as well, please feel free to, and then Derica if you could comment on the lower end the guidance range we have got for SG&A and R&D and how we should be thinking about where we are tracking.

Enrique?.

So when it comes to glargine in Europe, as I mentioned, we are expecting to launch after the patent expiration in Europe. I do not believe that I provided an expect date on that, but clearly we are undertaking all of the preparations so that we can do that.

When it comes to the SGLT2/DPP4 combination, the EMPA/LINA fixed dose combination, we had shared that we have submitted that. We shared that early this year, which basically puts with an action date of early 2015..

Great. Thank you, Enrique.

Derica?.

Mark, I will start with that the guidance in terms of operating expenses. I am not able to guide the investment community to one end or the other of the range. What I can say is we feel very good about meeting those goals that we established for the year and we feel very confident that we will be within the range that we provided.

As it relate to, I guess your earlier question also around, as we look at our portfolio, the good news is that we believe we produce an abundance of clinical opportunities in our pipeline and some of those are core areas and some of those are maybe outside or tangential.

Clearly, we will be able to evaluate each of those molecules and decide which path we choose to pursue as we consider each one of those. But the good news is that we have optimality and Dave, I don't know if there is anything you would like to add to that..

Well, nothing more than, we always look, I think, almost every asset at options to partner, either to share risk if it's a critical stage asset or as the asset matures a trade value, sometimes by accessing reach, sometimes by capability or this other unique sort of portfolio fits or portfolio trade options that manifest themselves.

So we are open-minded about all that but it has to make sense in terms of value creation and we are not going to talk about those in advance in this setting. But I think that's our mindset as it relates to partnering..

Excellent. Thanks, Dave. Toni, next caller please..

Thank you. And our last question comes -- disregard. They have disconnected. Thank you..

Okay, all right. Having exhausted the queue, I will turn it over to John to close our call today.

John?.

Okay, thanks, Phil. And I will be brief. To all those on the call, we appreciate your continued interest in Lilly. Our performance once again is in line with our expectations this quarter. We are on track to meet our 2014 financial goals and continued progress advancing the pipeline places us on track to return to growth and margin expansion post 2014.

We believe our strategy is the right one for Lilly to create value for patients, for physicians, payors and of course our shareholders. And our ability to execute so far gives us increasing confidence that Lilly is indeed poised for growth. As always, you can expect we will keep you apprised of our progress. Thanks again..

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