John C. Lechleiter - Chairman, Chief Executive Officer and President Peter J. Johnson - Executive Director of Corporate Strategic Planning Derica W. Rice - Chief Financial Officer, Executive Vice President of Global Services, Member of Operations Committee and Member of Policy & Strategy Committee David A.

Ricks - Senior Vice President and President of Lilly Bio-Medicines Enrique A. Conterno - Senior Vice President and President of Lilly Diabetes Susan Mahony - Senior Vice President and President of Lilly Oncology Jan M. Lundberg - Executive Vice President of Science & Technology and President of Lilly Research Laboratories Jeffrey N.

Simmons - Senior Vice President and President of Elanco Animal Health Alfonso G. Zulueta - Senior Vice President and President of Emerging Markets Business.

Charles Anthony Butler - Guggenheim Securities, LLC, Research Division Mark J. Schoenebaum - ISI Group Inc., Research Division Timothy Anderson - Sanford C. Bernstein & Co., LLC., Research Division Christopher T. Schott - JP Morgan Chase & Co, Research Division David Risinger - Morgan Stanley, Research Division Gregory B.

Gilbert - Deutsche Bank AG, Research Division John T. Boris - SunTrust Robinson Humphrey, Inc., Research Division Steve Scala - Cowen and Company, LLC, Research Division Seamus Fernandez - Leerink Swann LLC, Research Division Jami Rubin - Goldman Sachs Group Inc., Research Division Vamil Divan - Crédit Suisse AG, Research Division.

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter Financial Review. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Chairman, President and CEO, John Lechleiter. Please go ahead, sir..

diabetes, oncology and bio-medicines. In diabetes, we announced positive top line results of 2 Phase III clinical trials in patients with type 1 diabetes for basal insulin peglispro or BIL, which is being studied as a once daily treatment for both type 1 and type 2 diabetes.

In both trials, BIL showed a statistically superior reduction in HbA1c compared with Lantus. We've now completed the clinical trials for registration and are on track to submit to U.S. and European regulators by the end of the first quarter of 2015. In oncology, we announced positive top line results for RAISE.

This is a Phase III study of Cyramza as second line treatment in combination with chemotherapy in patients with metastatic colorectal cancer. RAISE showed a statistically significant improvement in overall survival in patients treated with ramucirumab plus chemotherapy compared to chemotherapy alone.

We expect to initiate regulatory submissions based on these data in the first half of 2015. This marks the fourth positive Phase III trial in which Cyramza has improved overall survival, 2 in second line gastric cancer, 1 in second line lung cancer and this 1 in second line metastatic colorectal cancer.

Finally, in our Bio-Medicines business, we announced positive top line results for 3 Phase III studies of Ixekizumab in patients with moderate to severe plaque psoriasis. All primary and key secondary objectives were met in the 3 studies, and Ixekizumab was superior to Enbrel on all measures of skin clearance in both of the active comparator trials.

In our Phase III trials, up to 41% of patients treated with Ixekizumab achieved clear skin at week 12, with just 1 injection per dose. These results give us confidence that if approved, Ixekizumab could make complete resolution of psoriasis possible for significantly more people.

We plan to submit Ixekizumab to regulatory authorities in the first half of next year. We also announced our decision to discontinue development of tabalumab, our anti-BAFF antibody. This decision was due to insufficient efficacy in 2 Phase III trials in lupus as well as in a Phase II trial in multiple myeloma.

I'd also highlight, at the Annual Meeting of the European Society for medical oncology, we presented detailed data from the Phase III REACH trial, studying ramucirumab as a second line treatment in patients with hepatocellular carcinoma after treatment with sorafenib in the first-line setting.

While the study did not meet its primary endpoint of improved overall survival for the full study population, we saw encouraging results in patients with high baseline levels of alpha-fetoprotein. These data could form the basis of continued study of ramucirumab in this setting.

During the third quarter, we completed enrollment in our core registration program for baricitinib in rheumatoid arthritis. Later in the call, Derica will provide you an update of our plans for top line press releases for this program.

We also began Phase III testing for our CDK4/6 inhibitor, abemaciclib as we dosed our first patients in the first of 2 breast cancer trials. Dosing in the second breast cancer trials and in a lung cancer trial is anticipated later this quarter.

In business development news, we announced an agreement with AstraZeneca to codevelop and commercialize AZD3293, an oral beta-secretase cleaving enzyme or base inhibitor, currently in development as a potential treatment for Alzheimer's disease.

We recognize the initial milestone of $50 million pretax or approximately $0.03 per share after-tax as a charge to earnings in the third quarter. We aim to advance this potent base inhibitor quickly into a Phase II/III clinical trial in patients with early Alzheimer's disease.

Lilly will lead clinical development while AstraZeneca will be responsible for manufacturing. The companies will take joint responsibility for commercialization. In line with our previously announced plans, we completed the sale of Lohmann Animal Health feed additives business to a management-led group.

And earlier this week, we announced an expansion of our existing research agreement with Zymeworks to include development of immunomodulatory by specific antibodies for cancer. In other news, we announced plans to close and sell 1 of our 3 manufacturing plants in Puerto Rico.

As a result of this action, we expect to record a charge of approximately $170 million pretax or approximately $0.16 per share after-tax in the fourth quarter. The IRS issued final regulations related to administration of the branded prescription drug fee under the Affordable Care Act.

The final regulations modify the timing of when a company must recognize expense for their share of the fee. As a result, we recognized a $119 million non-tax-deductible charge in the third quarter for the fee we expect to pay in 2015. This accounting change has no impact on the timing of cash payments.

Also, the third quarter charge is excluded from our non-GAAP results. Finally, during the third quarter, we repurchased shares worth $300 million under our $5 billion share repurchase program. Since authorizing the program in October of last year, we've now repurchased $1 billion worth of our shares.

Combined with our dividend in the last year, we've distributed $3 billion to shareholders. And now I'll turn the call over to Phil for a discussion of our financial performance for the quarter.

Phil?.

Thanks, John. First, I'll review our GAAP results and then discuss a few non-GAAP measures to provide some additional insights into the underlying trends in our business. Moving to Slide 8, you can see that our Q3 revenue was $4.9 billion which is 16% lower than Q3 2013. This decrease in revenue reflects a decline of $1 billion in U.S.

Cymbalta sales on a loss of exclusivity in December last year. In addition, U.S. sales of Evista declined over $150 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 7%, mainly from volume.

Gross margin as a percent of revenue decreased 5.2 percentage points, also driven by the loss of U.S. exclusivity for Cymbalta and Evista. In Q3 both this year and last year, the effect of foreign exchange rates on international inventory sold had a minimal impact on cost of sales.

Excluding this FX effect from both 2013 and 2014, gross margin as a percent of revenue declined 4.8 percentage points from 79% in Q3 2013 to 74.2% in Q3 2014. As in past quarters, we've 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 9.

Total operating expense, defined as the sum of R&D and SG&A, decreased 8% or nearly $235 million versus Q3 of 2013. Marketing, selling and administrative expenses were down 6% while R&D was down 10%.

The reduction in marketing, selling and administrative expenses was due to the reduction in sales and marketing activities for Cymbalta 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, partially offset by a $63 million charge associated with the termination of tabalumab development. Excluding this charge, R&D expenses declined 14% and total operating expenses declined 10%.

Other income expense was net income of $93 million in Q3 2014 compared to a net expense of $31 million in the third quarter of 2013, with the change driven primarily by gains on the sale of certain equity holdings and income from miscellaneous milestones earned.

Our non-GAAP tax rate of 22%, an increase of 1.5 percentage points compared to Q3 last year. The main reason for this increase in the tax rate is the lapse of the R&D tax credit at the end of last year. At the bottom line, net income and earnings per share declined 41%.

As in the first half of the year, this decline is significant but very much in line with our expectations and places us on track to achieve our full year non-GAAP EPS guidance. On Slide 10, we provide the same reconciliation of non-GAAP adjusted information for our year-to-date results.

Moving to Slide 11, you'll find a reconciliation between reported and non-GAAP EPS and additional details about our reported earnings are available in today's earnings press release. As you're aware, nearly all of 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. Many of you on both the buy side and sell side have noted that our inclusion of amortization expense in our non-GAAP results distorts comparisons of our financial ratios with those of our peers.

After careful consideration, we've decided that we will exclude amortization expense from our non-GAAP results beginning in 2015. In particular, we hope that this change will assist portfolio managers in making better buy-sell decisions. Now let's look at how price, rate and volume affected our revenue growth.

On Slide 12, you can see the total revenue decline of 16% in Q3 2014, shown on the yellow box in the middle of the page, and that this decline was almost entirely driven by volume. Price added about 1% to revenue growth, while the impact of FX was 0. Excluding U.S.

Cymbalta and Evista, the rest of our worldwide revenue grew 7% with about 5.5 percentage points of growth coming from volume and the rest from price. Touching on some of the geographic highlights. In the U.S., pharma revenue declined 37%, driven by a volume decline of 38%. Excluding Cymbalta and Evista, the rest of our U.S.

pharma revenue increased 6%, about half from volume and about half from price. Pharma revenue in Japan grew 4% with exchange rate masking stronger underlying growth. As you can see, volume was up 10% in Japan and revenue growth in constant currency terms was 9%. In Emerging Markets, we saw strong growth of 18%, almost all from volume.

Sales in our largest emerging market country, China, grew 21%. I'd also highlight the consistent strong growth we've seen from our Emerging Markets business this year, with 14% revenue growth in constant currency terms through the first 9 months of the year. Finally, Elanco Animal Health posted revenue growth of 10%.

The Lohmann acquisition drove 6 percentage points of growth with our base business driving the remaining 4 percentage points. This lower base business growth is due primarily to competitive pressures and to a lesser extent, to slower market growth in the U.S. Now let me turn the call over to Derica..

Cyramza, Jardiance and Trulicity. 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. In addition, it positions us well for a return to growth and expand margins in 2015 and beyond.

And now I'll turn the call over to Phil for the Q&A session.

Thanks, Derica.

Marla, if you could go ahead and provide instructions to the callers for the Q&A session, please?.

[Operator Instructions] And our first question will come from the line of Tony Butler with Guggenheim Partners..

Two questions if I may. One perhaps to Derica or maybe even to Dave Ricks, and the second to you, John. The first is really around the sales footprint. You've done a very nice job at keeping cost down but the question is with new launches, obviously, there is the need for additional marketing expense and maybe additional salesperson.

So I'd love for you to -- if you could provide some idea or thoughts around both U.S. and non-U.S. footprint with respect to sales individuals.

And then the second, John, you've made a good comment about keeping the dividend at the same rate, especially as you entered this particular year, but as you move forward with these new launches, have you given some thought to when it's prudent for the overall business to actually raise that rate?.

Tony, for the sales footprint, Dave, if you don't mind maybe talking about some of the things that have been going on in maybe U.S. and Europe and in terms of some of the restructuring since you've been very involved in that.

And then maybe Enrique and Sue, if you could talk about some of the preparations for launches since that's hitting you first in terms of the progression of the pipeline. And then Derica, if you want to take the question on the plans we have for the dividend, thoughts around the dividend..

Great. Tony, as it relates to the loss of exclusivity products, as we've been discussing here over the last 2 years, we've been taking down our sales footprint market by market. Typically, those are anticipating. They have been in advance of the LOE event. So in the U.S.

you're seeing the full year effect of sales reductions in 2014 which mostly occurred in 2013 related to Evista and Cymbalta. As it relates to Europe, our patents are expiring this last quarter, reporting on now, some of those actions have been taken, some have not.

But we do anticipate over the next year, rationalizing the footprint to the products we have in biomed, not including Cymbalta, of course, being the major contributor. Going forward, we're quite confident we have the personnel and coverage to launch our new product portfolio effectively in those major markets.

Of course, we're shifting much more to a specialty type business, so the absolute numbers are lower than what we had in the past in biomedicines.

Enrique?.

Sure. So when it comes to diabetes, Tony, we've had a very significant footprint on a worldwide basis. I think what we have said before is that we basically expect to leverage this footprint. We do see some increases but they are limited when it comes to our overall sales force. We've seen some increases in the U.S.

but more marginal when it comes to Europe..

Tony, with regards to oncology, we're going to be using the footprint that we have in oncology. We've got an experienced oncology sales team globally, very experienced in thoracic oncology and as well historically in GI and we'll be using the expertise and the people that we've got globally on that commercial perspective to launch our products..

Tony, this is Derica. From a dividend perspective just historically, before we entered this YZ period, our dividend payout ratio was in the 40% range or the mid-40s and that's kind of been on par with where our peers were as well.

We knew as we went through this period that we would see a spike in our payout ratio as we went through this income decline, so the law of the ratio itself. As it pertains to when would we consider to increasing the dividend going forward, I don't believe we'll wait until we have to get back to that 40%, 45% range.

It's going to be more predicated on our confidence as we see how some of the pipeline and regulatory and launch news play out over these next couple of years..

We'll go to Mark Schoenebaum with ISI Group..

If I may, just 2 quick ones. Number 1, just a clarification. Can you guys clarify what, if any, interim analyses might be available to you for solanezumab as well as evacetrapib in 2015? Again, if any. And number 2, I was wondering if you could speak about the Tradjenta outcomes trial.

I'm just wondering if there is prospectively evaluated endpoint of hospitalizations for heart failure. This has obviously become an endpoint of interest to the physician and the Wall Street community..

Mark, if you can still hear me, are you referring to the Tradjenta outcome study or studies or are you referring to the empagliflozin outcomes that we talked about having data for in the second half of next year?.

Actually, both would be nice..

I knew when I asked the question, that'd probably be the answer. All right, we'll see if we can accommodate that. So Dave, if you could start us off please with the interims for solanezumab. Enrique, if you want to handle the question on the measures for the outcome study, that would be great..

Thanks, Mark. On, evacetrapib we have said we will be conducting an interim analysis. We expect that to be happening sometime in the first half of 2015. This is of course, a safety review but also includes some efficacy features.

I think as we've said before, it's a reasonably low bar given that in lipid management studies, quite a bit of the benefit is often seen in the back half of the trial. So we'll of course, await that event and communicate quickly afterward if there's any change to the program. Otherwise, we continue to expect a final readout on that data in 2016.

As it relates to solanezumab, we did build into the protocol, a possibility of an interim review. We have not decided to conduct that or not. One of the key reasons for that is this review needs to be conducted late enough where we have enough patient exposures.

You may remember in EXPEDITION 1 and 2, a lot of the benefits started to accumulate after 40 weeks of exposure. And there's a relationship between the rate at which we've recruited the study and whether there'd be value in conducting such an assessment or just waiting a short time further for the final result.

The study continues to enroll and so we'll be making that determination sometime in the next 12 months..

Enrique?.

Very good. So just to clarify, we are expecting for our EMPA CV trial to report out next year, and when it comes to Tradjenta in 2018. So a big difference in terms of when we expect the results. Both of these trials have similar measures. So we look of course, the CV desk, we look at MI and we look at stroke.

In addition to that, the Tradjenta trial has hospitalization for unstable angina. So those are the prospective measures that we look at. We do have the ability to look at hospitalization due to heart failure. This is of course, an important measure.

We would know more about the DPP-4 class I think, when the tech study basically reports out from Merck's up and down [ph] , we should get some clarity in terms of this particular measure..

And next we'll go to Tim Anderson with Sanford Bernstein..

As you near the launch of your Lantus look-alike, the insulin glargine product, I'm hoping you can give us your latest commercial assessment of the opportunity both here in the U.S. and then in Europe where you'll launch first.

At one point in the past, you talked about what you thought could be the market share potential of your product which was quite a bit higher than how Sanofi has described it and they continue to minimize the threat to their product from your program.

When are we going to learn more from Lilly on some of the EU specifics like pricing and exact launch timing? And then my second question is on as we near the end of 2014 and move into 2015, I'm hoping you can qualitatively describe the pushes and pulls in R&D spending.

It seems that you've crossed a lot of milestones in your pipeline and maybe there could be some easing up on R&D spending and that's already a trend it seems like that we've started to see in 2014.

So directionally, as you think about R&D in 2015, what should we be considering?.

Thanks, Tim. So Enrique, if you'll handle the first question and then maybe Jan and I will tag team the second question for you.

Enrique?.

Well, on glargine, I don't think that we've discussed before what we believe is going to be our share update. I think what we have shared is that we expect that glargine will continue to be a very important product going forward. Clearly, there is a very significant opportunity.

How biosimilars in Europe or in the U.S., these glargine follow ons basically compete and what those dynamics will be, will be critical to see what is going to be the share of the overall biosimilar market. We clearly are not the only 1 that are coming. We are maybe the first that will be entering the marketplace.

But clearly for us, we like our chances because we do have the commercial footprint, the expertise in diabetes and the very extensive manufacturing capacity and devices to make sure that we can provide an excellent customer experience and go toe-to-toe with Sanofi. So we do have expectations for this product.

We have to recognize that this is a very significant opportunity overall and even any type of level of market share can be basically meaningful from a revenue perspective..

Tim, this is Phil. On your second question, just as a preamble. We will issue official financial guidance including R&D spend on January 7 of 2015 for 2015.

In that same meeting as we have in the past, we'll talk about some of the specific late stage developments that we would expect over the course of the year including Phase III starts, so I'll limit my remarks today to some of the things that are sort of already out there and known in the public.

For pushes and pulls on R&D spend, clearly we've had a lot of trials read out this year that will not be continuing into 2015 that does provide some relief in terms of year-on-year compares.

We do have trials that are ramping up for things like abemaciclib as we'll have all 3 of those trials enrolling quickly, we expect, over the course of 2014 and what remains in 2015.

We also, pending the full removal of the partial clinical hold by FDA, could be restarting Phase III trials and a significant number of them potentially for tanezumab that would also add spend in 2015 that we did not have in 2014.

And then also the collaboration with AstraZeneca for the base inhibitor which we're excited about, we do expect more spend in '15 compared to '14.

In the past, Derica on many occasions has said that going forward roughly, we're looking at the sort of $5 billion number plus or minus a few hundred million dollars likely, as the place that we will be, obviously dependent upon pipeline outcomes and good investment opportunities in the pipeline.

Jan, do you want to comment maybe on some of the things that are in earlier stage development that you're following in or are very interested in?.

Right. I think we should remember that positive Phase III readouts also would trigger additional opportunities. And we have a number of line extension opportunities and also the new combinations and so on that -- that we could pursue which we are currently discussing, and this is oncology, diabetes and the autoimmune space for instance.

We also are very keen then of how sustainability of the pipeline and looking at additional Phase II investments. And here, oncology have a number of readouts next year including the gargalunisertive [ph] the TGF-beta compound, the MetMAb and several others. Diabetes, we have the glucagon receptor antagonist or oral first in class agents.

And in the Alzheimer areas, as Phil said, we have our new base program in addition and we also have our plaque specific antibody N3pG which will generate new data.

And just to remind you, we have also some very intriguing preclinical data with combinations of base and N3pG which actually cause more or less a total clearance of plaque in Alzheimer models. In the pain area, Phil mentioned tanezumab, our NGF antibody which we are very excited about based on the previous data and various pain situations.

And we need to clear then, the situation with the regulators, with some additional preclinical safety data. We have our CGRP antibody which we are not only testing in migraine prevention but also recently in osteoarthritis, since we believe that this could be a pain mechanist that can be applied more generally.

We also are looking upon data from our PCSK9 antibody and evaluating then the efficacy and so on, to see if this could be the potential best-in-class molecule in that area. And blosozumab, as you know, we delayed Phase III start but they are working very much on a new formulation so we could come back.

And finally, we are getting data from myostatin on muscle building and we have recently reported that this not only builds muscle mass, but also strength. So we have a lot of opportunities coming both on existing then enemies [ph] , but also in some of the new ones..

We'll go to the line of Chris Schott with JPMorgan..

Just had 2 here. First, can you maybe just elaborate a little bit more on the animal health commentary from your press release and the prepared remarks on increased competitive dynamics? Just trying to understand that a little bit better. And the second question was on the near term diabetes launches.

Can you just help set some expectations in how you're kind of seeing the shape of those launch curves? It seems like we've seen some kind of non first-in-class primary care launches that have seen fairly slow initial uptick in first year ramps.

And then these products go on to be very successful but I'm just trying to think with these opportunities, is that a reasonable way to think about how these products will launch? Or is there anything you think about with these profiles or that you can do from a pair perspective that might result in a different kind of uptake curve for these products?.

Thanks, Chris. We'll have Jeff Simmons take your first question and Enrique take the second.

Jeff?.

I'll start kind of at a high level, Chris. As you know, Lilly has been very intentional and strategic about its animal health business. We've outpaced the industry in growth the last 6 years. We intend this year to be at or above industry growth rates.

As you saw, our growth driven by both Lohmann as well as organic growth that we've seen in our existing business.

But as Derica mentioned, there's 2 competitive pressures that were anticipated and they are both first in the companion animal space, seen a couple of new competitive entrants as well as we've seen the market actually not grow as anticipated. That was driven by one, cooler weather and then second is a little bit more movement into the OTC channels.

On the food animal side, we've seen market growth not be quite as aggressive as it was last year. Some of that is, as you know, the swine virus has dropped pig population around the world, anywhere from 7% to 10%, and then just some of the natural dynamics in the market.

I would say the other thing that materially impacted us was Zilmax last year went off the market and we saw 1.5% or so growth in our food animal business by filling this gap in the marketplace. And so year-to-year, that impacted our growth rate as well. But overall, we feel very good.

Acquisition growth, international growth and innovation growth will allow us to see in the medium and long-term, at or above industry growth rates..

Great. Thanks, Jeff.

Enrique?.

Maybe some comments on the structure of the market which I think in a certain way, impacts how we basically view the upticks of new products. And this is regardless of whether the product is first-in-class or second or third in the class.

First, I think when we look at access, about 50% of the market in the commercial space -- 50% of the market basically is available for access when it comes to new products. First-in-class, second-in-class, third-in-class, you're likely going to be on a lower tier when it comes to the co-pay but it is not off formulary.

About 25% of the market in the commercial space is going to have some sort of restrictions -- so step edits or some sort of restriction that goes beyond just the co-pay. And about 1/4 of the market, the rest of the market basically is of formulary. So we need to take that into account as we look at the uptick of new products in today's world.

In Part D, the situation is different because it basically takes a lot longer to be able to get into the Part D formulary. And it's not as simple to be able to get into a Part D formulary in the middle of the year. Now as we look at upticks for our products, we look at our performance, we've seen the plants where we have access.

Of course, we also look at our overall performance. But as I look at empagliflozin, as I look at the issue of the 2 class, I have to say that I'm very encouraged by the uptick of this class.

Not just the overall volume of prescriptions that we basically see but we basically have seen an acceleration of the upticks with the additional players coming into the market. So that to me is very encouraging. But not only is the quantity of prescriptions interesting but I think the dynamics of those prescriptions.

Because they are coming at the expense of sulfonylureas. So primarily, the substitution that is happening is for when it comes to new patients, our patients instead of going to an SGU, they are going to an SGLT2. That to me I think, is extremely interesting because there is the -- just today, after metformin continue to be very widely used.

So I'm very encouraged by the uptick of the class. It is early for me to make many comments about Jardiance but I would say based on 6, 7 weeks that we're on the market, that we're off to a strong start..

We'll go to David Risinger with Morgan Stanley..

I have 3 questions. First, with respect to the SG&A outlook, should investors expect SG&A to decline or stay [indiscernible].

Dave, you're cutting out. We can barely hear you..

Sorry about that.

Is this better?.

Yes, it is..

Okay, great. So the first question is with respect to the SG&A outlook.

Should investors expect SG&A to decline in 2015 or stay flat? Second, with respect to the earnings impact from the Novartis Animal Health acquisition in 2015, could you just review what you've stated previously and also comment on the amount of amortization that Lilly will exclude? And then third, could you just provide some perspective on the variables that will impact your decision over the next year regarding whether or not to take an interim look at the solanezumab data?.

We'll have Derica handle the first 2 and then Dave, do you want to do the third please? Derica?.

David, in regards to the SG&A outlook, I'm not in a position to provide you '15 guidance at this point. As Phil said, we will have a more extensive dialogue around that on January 7. So if you'll just kind of live with this till then.

And then likewise also in terms of the earnings impact anticipated from the Novartis Animal Health, until we actually close the deal which we anticipate being some time in 2015, we're really not in a position to talk about that at this stage.

What we did say at the time we announced the deal is that by 2017, we would expect to have achieved at least $200 million of benefit or synergistic benefit that would result in cost savings as well as we should be able to get back to our historical levels of profitability in that 2017 and 2018 time frame which for our animal health business has been at that 25% roughly level of profitability.

As it relates to amortization, what we can talk about at this stages is the amortization that we're seeing in our base business today. Obviously, it will be eventually impacted once we close the Novartis Animal Health deal. But in this quarter alone, we had $134 million of amortization expense in Lilly's results.

And on an annual basis, it's about $500 million, $540 million. And then obviously, if we're able to close the Novartis Animal Health deal, that number will grow or get bigger as a result of that acquisition..

Dave?.

I think there's an earlier question on this as it relates to the sola interim review. We do have a feature to potentially conduct such a thing. But the primary -- there's many reasons why we would pull that trigger or not but the primary one relates to patient exposure versus the amount of time left in the study.

So you may recall an EXPEDITION 1 and 2, most of the drug impact appeared to occur after week 40. And so what you want is enough patients with at least that exposure, to conduct the appropriate statistical analysis. On the other hand, if the study enrolled very quickly, it wouldn't be so wise to use alpha to take that look.

I think our current situation for -- as investors know, is that the study's enrolling quite well. And so we're not in a position to make a statement about whether we would conduct an interim review or not but those are the considerations we would weigh. And some time next year, we'll have something to say about that..

Great. Thanks, Dave. Before we go to the next caller, I'm sure that our Chief Accounting Officer, Donald Zakrowski, is listening, so I do want to go ahead and just set expectations.

When we provide guidance on January 7, we will still have to make high-level assumptions about how we'll allocate purchase price and what the financial impact will be to both reported and non-GAAP results for 2015. It'll be later in the year that we'll actually be able to finalize those numbers, so you should expect that there could be some variance.

Hopefully, it's not very large but some variance on specific line items or the amount of purchase price allocated to intangibles that are being amortized.

So again, we'll do a great job I'm sure, with our accounting group, to get as close as we possibly can for our guidance but you may see some variability as we go through the year and finalize the accounting for the transaction..

We'll go to the line of Greg Gilbert with Deutsche Bank..

I have a few. First, emerging markets growth was quite strong.

Is that based on early benefits from your new commercial model or are there other factors we should be aware of that might be shorter term in nature on the pipeline? How is the base inhibitor from AstraZeneca different from your prior experience and perhaps, from Merck's approach? And lastly, on your PCSK9, Jan, you indicated you would assess to see whether it could be best-in-class.

Are you setting the bar that high because of the expense or could you shed some more light on what you think about your PCSK9 inhibitor base and what you've seen to date, and what's sort of the go, no go decision it will be based upon?.

Chito, we'll have you take the first one on the emerging markets growth. And then Jan, if you'll the base and PCSK9. And Dave, if you have any comments to add to the PCSK9, feel free to do that as well.

Chito?.

Good to have the first question for the emerging markets for the year. So delighted to have the question. We're obviously thrilled to see the strong growth for the quarter and year-to-date.

Let me make sure everybody understands so that a part of that strong growth is driven by a tender that we won for Humulin in Brazil, and a few one-time items with regards to China and our anti-infectives business. The underlying business is growing at around 8% to 9%, solid growth.

The key drivers again would be China, really our diabetes business; strong growth in Latin America and pockets within the Middle East. Our fastest growing product, if you exclude Humulin because of the tender, is actually Forteo which is growing at 24%, 25% year-to-date. We think there's a lot more opportunity there but so is Humalog.

So with the diabetes opportunity in China and emerging markets, Humalog is growing over 20%. I think it's early to say that the actual new commercial model is having an impact.

Clearly, I'm seeing across all our affiliates, that the move to nontraditional, non-salesforce alternative channels is taking shape where we're seeing a significant growth in our interactions with customers using the digital channels which I think are, from our perspective, more effective and in fact, more efficient..

Thank you.

Jan?.

Okay. The base inhibitor from AstraZeneca is also an oral compound and it's a nonselective base 1, base 2 agent which is similar then to our previous agents and also the Merck inhibitor now in Phase III.

This agent has Phase I data, showing a dramatic a beta [ph] lowering in cerebrospinal fluid which is a good indication there are no target engagement in the CNF.

But what we need now is longer exposure data in patients in Phase II before starting Phase III, to exclude that we see similar effects as we had on the liver or potentially other side effects, remembering that this class needs a strong safety component. We are very encouraged by the data we have seen so far.

But again, we need longer safety exposures before we can start Phase III. In relation to PCSK9, I think we are all very enthusiastic about this class based on initial Phase III data from several competitors, including some preliminary data on positive mace [ph] outcomes.

Therefore, for us, I think being behind, we will have a very high hurdle on this agent looking at what is the LDL lowering efficacy, how long is the duration of effect and what about injection convenience, the volume and the regiment and so on. And we have not yet made those evaluations..

We'll go to the line of John Boris with SunTrust..

First question just has to do with your gross margin going forward. On your insulin lines in particular, there's some ongoing manufacturing changes that you're making to improve the efficiency of your production of your insulins.

When you benchmark ourselves against your competitors, how much of an improvement do you think we might be able to see on the gross margin line from that and the timing of that as it filters through? Second question.

In autoimmune, it would appear that you have a couple of assets there that could be ideally positioned to compete in somewhat highly competitive markets. How should we be thinking about an autoimmune buildout and the implications of that for 2015? And then just the last question on Alimta. Any update in Europe on either the German or the U.K.

appeals?.

So we'll cycle among the 3 business unit Presidents. Enrique, if you take the first question, the gross margin for insulin; Dave, for the commercial support for Autoimmune platform going forward; and then Sue, if you'd like to handle the European situation for the Alimta challenges.

Enrique?.

So improving our gross margin for an insulin portfolio I think, is critical to us. We are in the process of executing our insulin technical agenda to be able to do that. What we have shared in terms of the benefits and improvement is that we should start seeing some benefit, but it's limited in '15 and more fully in 2016.

Over time, because of learning curves and so forth, we do expect this to be very significant, and we have shared that our gross margin for insulin should improve by several percentage points over time.

So a very important initiative for us and also is one that gives us flexibility when we look at our facility as being able to produce different types of insulins. So important initiative and we are very much on track to deliver what we've been expecting..

Dave?.

We're obviously very excited about our possibilities in autoimmune. I would point out that each of the products have their own marketplace. And so although they may fit into a therapeutic area that's quite broad, we'll be competing against different products in each case.

We've announced in the quarter last quarter, Ixekizumab's data and we're very pleased with the fact that it met all of the 10 points in a very strong way.

We are working extremely hard right now to get that submission to the FDA in the first half of 2015, and we're encouraged by the possibilities for the IL-17 class, but also about the possibility for us to have a differentiated product within that class, and really successfully be able to move patients to the possibility of complete clearance of plaque psoriasis which is -- or a significant portion of them, which is what we understand patients want.

The buildout for that business is, as I mentioned on a previous question, not as significant in terms of people and organization but is significant in terms of the capabilities. So the company is hiring from the outside, we're building medical infrastructure, patient support infrastructure as well as selling resource.

To do that, we plan to be completely prepared to compete with the strongest players in the psoriasis sector at the time of launch. Baricitinib, we anticipate data soon. And I think as Derica mentioned, we will likely have a top line release on the first study over the next few months. And this also will be in a very competitive space in RA.

We see baricitinib as a potentially disruptive technology in that space and one in which we could really change expectations for the treatment of RA for many patients. We'll wait for the data of course which will further inform our strategy.

But we will also compete effectively in areas of medical sales and patient support across that product and plan to play to win in RA, assuming the data supports a submission for baricitinib..

Thanks Dave.

Sue?.

With regards to the Alimta patent situation in Europe, as a reminder, the European patent office ruled in our favor in terms of validity, and that is being appealed. We still do not have a date for hearing with regards to that. On the infringement, the German case that was ruled for us is being appealed and a date has been set for March of next year.

And in the U.K. where the English high court ruled against us, and that covers France, Italy and Spain, that is also being appealed with a date set for March of next year..

We'll go to Steve Scala with Cowen..

Two questions. Lilly's 2014 guidance range implies Q4 EPS from down 8 to up 3. Why are you still guiding to such a large range with only 9 weeks left in the year and why didn't you choose to tighten the range today? And the second question is on the base inhibitor. There would seem to be 3 possible reasons why you did this deal with Astra.

The first is that you fear that Merck is too far ahead of your own preclinical candidate, the second is that you see some weakness in the Merck agent, or the third is that you need a base to combine with your other agents internally.

Any thoughts on which of those is most likely?.

We'll have Derica take your first question and then Dave, if you want to take lead maybe on the base inhibitor question. Jan, feel free to chime in as well.

Derica?.

Steve, we left the guidance range unchanged, essentially to say that our business in totality and aggregate we see as being unchanged at this stage. We did modify some of the line items.

As you saw, we raised the bottom end of our R&D, we lowered the top end of SG&A but in total, we believe that our total OpEx will stay about in line with what we expected for the year. And then likewise, we're dealing with some of the top line headwinds as it relates to rate when you think about our outlook for the remainder of the year.

So overall, we felt comfortable with the guidance range that we had. There was nothing behind -- anything beyond that to read into it -- no change to our EPS guidance range..

Thanks Derica.

Dave?.

Steve, to answer the question on the base deal, we're very excited about the collaboration with Astra, not only because we like the asset, we like the space but also we get a very complementary type of alliance with Astra Zeneca on this. You mentioned 3 reasons why we might be interested, I think those are all good reasons, there may be a few others.

This product is clearly ahead of our own internal efforts, given the setback we had in 2013 on our own clinical stage program. It is different in terms of the approach to base inhibition from a chemistry perspective, so that's a good thing. With Merck's program we, of course, watch that carefully.

We do think there's opportunity for differentiation and a best-in-class approach even if it's not first-in-class. And as Jan mentioned previously, we are excited by -- I would say we anticipate that combination therapy, particularly anti-body, small molecule combinations in the treatment of Alzheimer's will become the norm.

And so having all these -- as many of these mechanisms is possible is probably a good thing for combination studies and offering more value to our customers. So amongst these 3, it's really all of the above, Steve. They're all good reasons to do this deal and we're excited by it.

We have an aggressive plan for development and we'll give you further updates into next year on that..

And just a final comment on tanezumab [ph] which, as you probably know, have genetic validation where people in Iceland and who have some mutation in this base cleavage cycle of APP actually are protected against dementia and live very long. So I think that seems to be very attractive options they may make..

We'll go to Seamus Fernandez with Leerink..

So first, Derica, can you be a little bit more specific on the percent of the gross margin benefit from FX versus the plant shutdown delay? I presume that the plant shutdown delay would then kind of recur or be delayed into the -- 2015.

Just trying to get a sense of what the magnitude of that difference would be and if that would be a repeat delay or if it's something that you would expect then to kind of -- it's shifted to 2015 and then it's shifted again to 2016, so really, there's just a benefit this year but we need to kind of anticipate a differential but not a double hit in 2015.

Second question. In terms of your expectations for U.S. coverage and access relative to Trulicity. I was just hoping that you could give us a little bit of color on your hopes for overall access, unrestricted access and Medicare coverage.

For Dave, the key differentiating features of Xeljanz just versus Xeljanz with baricitinib that are hoped for in the product profile. And then lastly, for Susan, maybe ramu approval. It's possible that we could see second line lung approval in the fourth quarter this year.

How should we think about the pace of uptake, the percentage of second line lung patients likely eligible for therapy and the duration of a real-world therapy in that context?.

I think I've got that down, Seamus. So we've got the percent gross margin benefit coming from FX versus the shutdown. We'll have Derek obviously handle that one. So then the U.S.

access outlook for Trulicity, Enrique; Zelgan versus baricitinib profiles, Dave; and then Sue, the ramucirumab approvals, some of your thoughts on the pace of uptake and the percent it'd be eligible in the second line.

Derica?.

Seamus, in regards to our gross margin revised guidance for the remainder of the year, what's -- the primary driver is the benefit or the FX benefit. So we get a top line headwind but we get a tailwind in terms of the cost of sales impact when you include the FX impact on the inventories expected to be sold during that period.

As it relates to the shutdown, it is a benefit in this year. We do expect to be more on a normal cycle next year so this is we would view as a kind of a one-time movement. So we wouldn't expect to see 2015 shutdowns being -- scheduled shutdowns being pushed out..

Thanks, Derica.

Enrique?.

Seamus, I wouldn't be able to give you what our access goals are for Trulicity but I will share once again, that as we look at the diabetes space, regardless of class as we -- and regardless of order, what we basically see is that about in about 50% of the commercial space, we are able to get access maybe with the higher co-pay but it is access.

And we believe that we can very much compete in that space and most companies can. In about 25% of that space, you have step edits. In some cases, in the GLP-1 class, this is going to be a step edit over GLP-1. So you have to be in a GLP-1 before you could maybe go on the new GLP-1 that is launching, in this particular case, Trulicity.

And in about 25% of the commercial markets, there's really no coverage until basically the P&T makes a formal decision to be able to do that. On Medicare, on Part D, I think the situation is different because of the schedules.

And while we are working to try to get coverage some time in 2015, I think the discussions are typically around 2016 coverage for Part D and whether we can maybe accelerate that into 2015.

I have to say that we have been having discussions with payers around Trulicity and I do believe that we have a very strong value proposition, and that's basically what our payors are sharing with us..

Thank you, Enrique.

Dave?.

Thanks for the question. Obviously, the big caveat on all this is we need to see the Phase III data from our program and we're looking forward to that first study toplining here in the next several months.

Which as a reminder, the TNF-IR study, so these will be refractory patients to TNF therapy, there's a complete program which also spans pre-biologic patients as well as a head-to-head against humira [ph] which is our structure study and it's fully powered for noninferiority.

So one feature that could be different from tofacitinib is the clinical program. We built this program, looking at our own Phase II data but also what they had conducted. And we are optimistic that it will yield the kind of label, should these studies demonstrate the effect that we saw in Phase II, it will be very competitive in the RA market for us.

Of course also, we have a difference. Although they're both JAK inhibitors we have different receptor activity. We are selective that JAK1/JAK2 pathway where tofacitinib is not, it's a pan JAK inhibitor, this may manifest in different side effects or effects. And again, the clinical program will have to bear that out.

Recall as well that we are very happy with our dose, our ability to select the dose that yielded a very significant efficacy result that was published in our Phase II studies.

Really with the side effect profile that we think is quite appropriate for the RA patients and competitive with biologics, yielding the possibility of an oral medicine with biologic-like efficacy.

And so head-to-head comparisons haven't been conducted but for instance, if we look at our competition which is unable to gain EMA approval really based on lack of effect at the 5 milligram dose, we think that could also be different.

Ultimately in this class for early uptake as well, the overall safety profile emerging from the Phase III program will be essential to look at. We don't have that data in front of us but have been conducting regular data monitoring committee meetings and have been pleased that there haven't been any changes made to the program.

So we'll wait for our data to come out. The way we designed this was to have a differentiated profile and really be able to present to the market, something that could change expectations for patients who suffer from RA..

Thanks, Dave.

Sue?.

Seamus, with regards to Cyramza, clearly we're very happy to not only have a positive Phase III study with Cyramza in second line lung cancer, but also get priority review. So we are hoping that we'll get an action by the end of this year and be ready to launch next year.

Regarding uptake, clearly, I can't give you full details of that but I will say a few things. Firstly, this is the first agent to show a benefit in a broad patient subset, both in the squamous and the non-squamous in second line setting.

And we have a good experience with thoracic oncology with Alimta in first line and this would now be in broad-based second line. So we're excited by the opportunity that we've got with this agent in the second line setting and clearly, our plan is to ensure that we have a successful launch..

We'll go to Jami Rubin with Goldman Sachs..

John, you've been quiet on this call, I have a question for you. On the last earnings call, a lot of us asked you whether or not you're interested in a tax inversion deal and in hindsight, very smartly, you said you weren't. And congratulations, it's been a mess out there.

But I'm just curious what your Washington folks are telling you about prospects for corporate tax reform. With the midterm election in a couple of weeks, looks like prospects for Republicans to gain control of the Senate look pretty promising; who knows, it's pretty close.

But just what -- how should we think about potential changes to tax reform which will even the playing field for U.S.

companies relative to foreign enterprises?.

Jami, up to this point, I've been delegating effectively here, but you got me. I think on tax reform, obviously a lot depends on what happens in November and some of the subsequent dynamics and of course, what else is happening in this crazy world we live in.

I think I can say and then our guys in Washington would say, we're cautiously optimistic that the next 2 years will bring about some sort of meaningful tax reform. I've never seen an issue where I go around and talk to people in both parties and everybody's in agreement that we've got a lousy system now that makes American companies less competitive.

People seem to agree on the fact that we need a lower rate and that a territorial system of some kind would make sense. There's not unanimity on that but I think there's -- you get a fair degree of alignment. And then we get into the details and that's where the devil is. I mean, some companies are capital-intensive, some are R&D-intensive.

Some have the bulk of their operations here, some like Lilly are sort of equally divided between the U.S. and o U.S. So I don't think there's a necessarily easy answer, even if we all agree that the status quo really doesn't represent sound policy and doesn't really put the U.S. on the best possible footing to be competitive.

So we're going to keep pushing for it, we're going to keep talking about it and as I say, I think there -- I believe there is a window over the next 2 years and I think you're going to see a lot of companies, not just Lilly, really beating on this drum as well, Jami..

We'll go to the line of Vamil Divan..

So just a couple more on the base inhibitor which we've discussed quite a bit already. But one is just a very simple question.

I don't understand why you guys listed on Phase I on your slideshow and your pipeline, I think, was Slide, 14, when there's already a Phase II/III study that's ongoing that you guys talked about, at least the Phase II part has already started. So just a simple question there. And then my other question just related to that study.

I couldn't tell from reading the description if you guys are actually using your amyloid imaging agent to screen patients, at least those who might have mild AD for entry in this study. And if you could just clarify if you are or not? And if not, why not? And then one other quick one, if I could, on the diabetes side with the basal insulin peglispro.

It's obviously the top line release you guys put out earlier, but if you can just give us a sense at this point, now that you've seen some of the Phase III data internally, what group of patients do you think would be the best candidate for that drug? Especially given some of the side effects we're seeing there on the triglycerides and some of the changes in HDL and LDL..

I'll go ahead and take your first one the phase of development for the base inhibitor. Dave, if you'd like to take the second question on the trial itself; and then Enrique, for basal insulin peglispro.

So I believe both AstraZeneca and Lilly follow a similar process for calling something a Phase II asset, and that's when the first efficacy dose, the first dose of the drug is actually administered to a patient. We do expect that will happen in the near term. Just recently, that trial has started to screen patients.

Should they pass those screens and after a certain period, they will receive their first dose. So it should not be too long into the future, you will see that formally change, I think, for both Astra and Lilly, to show us a Phase II asset.

Dave?.

There are many design features in the Phase II/III program. We've incorporated learnings from our past failures and observations and disease modification in Alzheimer's. Among those include screening patients for the presence of amyloid plaque.

There are many other things and this is I think why the collaboration makes sense for AstraZeneca and us, to harvest those learnings and build that into a base program, and ultimately, try to maximize the probability of success. So, yes, we're conducting screenings on these patients..

Well, when it comes to our basal insulin peglispro, we have conducted our studies across type 1 and type 2, nice patients switching from glargine and also in combination with mealtime insulin and so forth. And so we have a wide spectrum of studies. I think consistently, what we have seen is superiority when it comes to hemoglobin A1c.

And as you mentioned triglycerides, we are encouraged. I think when we look at some of the CV data in terms of -- and what we have shared so far is that we have already excluded -- when we look at our trials, we have already excluded the 1.3 hazard ratio and that our observed hazard ratio when it comes to the CV event is basically below 1.

So we are pretty excited in terms of what this product would offer patients now. Specifically to your question, how does the benefit would vary across different patient types, I think is a discussion that we can have when we basically disclose the detailed data at ADA..

As we're reaching the bottom of the hour, if there are callers still in the queue, the IR team will get back to you shortly. For those of you who have additional questions, do feel free to call us during the day. We're happy to help with your questions.

John, would you close the call, please?.

Sure. Thanks, Phil. To all those on the call, we thank you for your continued interest in our company and for your support. As we near the end of our journey through years YZ, I'm extremely proud that we have executed on our strategy and delivered on the commitments we shared with you nearly 5 years ago.

We remain convinced that our strategy is the right one for Lilly in order to create value for patients, physicians, payors and our shareholders. And our ability to execute so far gives us increasing confidence in our future prospects. As always, we will keep you apprised of our progress. Thanks again, everyone..

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