John C. Lechleiter - Chairman, President & Chief Executive Officer Philip Johnson - Vice President, Investor Relations Derica W. Rice - Executive Vice President, Global Services & Chief Financial Officer Jan M. Lundberg - Executive Vice President, Science and Technology, and President, Lilly Research Laboratories David A.

Ricks - Senior Vice President and President, Lilly Bio-Medicines Enrique A. Conterno - Senior Vice President and President, Lilly Diabetes Susan Mahony - Senior Vice President and President, Lilly Oncology Jeffrey N. Simmons - Senior Vice President and President, Elanco Animal Health Alex M. Azar II - President, Lilly USA LLC, Eli Lilly & Co..

Michael DiFiore - Evercore Group LLC Seamus Fernandez - Leerink Partners LLC Gregg Gilbert - Deutsche Bank Securities, Inc. Timothy Minton Anderson - Sanford C. Bernstein & Co. LLC John T. Boris - SunTrust Robinson Humphrey, Inc. Chris Schott - JPMorgan Securities LLC David R. Risinger - Morgan Stanley & Co. LLC Vamil K.

Divan - Credit Suisse Securities (USA) LLC (Broker) Steve Scala - Cowen & Co. LLC Andrew S. Baum - Citigroup Global Markets Ltd. Jami Rubin - Goldman Sachs & Co. Tony Butler - Guggenheim Securities LLC Alex Arfaei - BMO Capital Markets (United States) Colin N. Bristow - Bank of America Merrill Lynch Marc Goodman - UBS Securities LLC.

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2016 earnings call. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Dr. John Lechleiter. Please go ahead..

diabetes, oncology, neurodegeneration, immunology and pain. And the revenue growth from these new product launches will be reinforced by new indications and line extensions, which on average could number two per year.

So how do we see this translating into revenue growth for the balance of this decade? Having already launched six products in the past two years, with more launches possible in the next few years, we expect to generate robust revenue growth from 2015 to 2020, despite facing a number of significant patent expirations.

To provide a floor for our expectations, we've analyzed a range of scenarios for clinical, regulatory and commercial success. Based on this analysis, we expect annual revenue growth over this period to average at least 5% on a constant currency basis driven by higher volume, not price.

And we certainly see scenarios for clinical, regulatory and commercial success that would drive revenue growth significantly higher than this minimum expectation.

I would point out that our revenue growth expectations do assume increased price pressure in the US, but do not include any significant government action on Medicare Part D, for example, and also assume that we maintain Alimta patent exclusivity in the US throughout the period.

With regard to our margins, we remain on track to achieve our goal of reducing operating expenses, sum of R&D and SG&A, to 50% of revenue or less in 2018. And when excluding foreign exchange, we expect to increase gross margin as a percent of revenue over the remainder of this decade.

Finally, on deploying capital to create value, we will follow the priorities we've outlined for you since early 2015. First and foremost, we'll fund the considerable opportunities provided by our existing products and our pipeline. Second, we will actively pursue opportunities to bolster our future growth prospects through business development.

You should expect these efforts to be concentrated on our existing human pharma therapeutic areas and our animal health business. Finally with the strength of our current business and pipeline, we plan to return to annual dividend increases to our shareholders beginning in December of this year, and to return excess cash via share repurchases.

I hope this provides you with greater clarity on the progress we expect to make on our four strategic objectives through the end of this decade. Now let's move to this quarter's results. As I did last quarter, I'm going to use that same strategic objectives framework to summarize our progress.

On our first strategic objective, grow revenue, we grew revenue 8% in the second quarter on a constant currency or performance basis. All of this performance growth was driven by volume. And in total, our new products, Trulicity, Cyramza, Jardiance, Basaglar, Portrazza and Taltz drove 6 percentage points of this volume growth.

On our next strategic objective, expand margins, our non-GAAP OpEx as a percent of revenue declined 90 basis points compared to the second quarter of last year. Excluding the $100 million milestone payment to AstraZeneca, our non-GAAP OpEx percent decreased nearly 3 percentage points.

We remain on track to achieve our full year guidance, which at the midpoint of our ranges, implies an improvement of 200 to 250 basis points in OpEx as a percent of revenues. Under the heading of sustaining the flow of innovation, Taltz was approved in Japan for both psoriasis and psoriatic arthritis.

For the PSA indication, this marks the first time I can recall that a new indication was first approved in Japan. Kudos to our Japanese regulatory colleagues on this outstanding accomplishment.

Olaratumab, a monoclonal antibody from our ImClone acquisition, received priority review status here in the US, and an FDA advisory committee voted 12 to 11 that substantial evidence exists to establish that Jardiance reduces cardiovascular death in adults with type 2 diabetes and established cardiovascular disease.

During the call, we'll provide a more complete list of the pipeline progress we've achieved over the last three months. Lastly, on our strategic objective deploy capital to create value, we completed a number of smaller deals to bolster both our human pharma and animal health businesses.

We will continue to actively pursue additional external opportunities to enhance our future growth prospects. And finally during the quarter, we returned over $500 million to shareholders through our quarterly dividend.

In summary, I'm confident that the progress we're making in 2016 places us on track to achieve each of our strategic objectives through 2020. And I assure you that their achievement is a top priority for our entire management team. Now let's move on to a review of the key events that occurred since our last earnings call.

On the commercial front, earlier this month we began initial launches of Taltz in Europe for the treatment of moderate to severe plaque psoriasis and Elanco Animal Health launched Inteprity, a first-in-class animal use only in-feed antibiotic approved for the prevention of necrotic enteritis, a significant and costly intestinal disease in poultry.

Once again, it was a busy three months on the regulatory front. In Japan, we received approval of Cyramza for two new indications, one in metastatic colorectal cancer and the other in non-small cell lung cancer. Also in Japan as I just mentioned, we received approval for Taltz for both psoriasis and for psoriatic arthritis.

Along with Boehringer Ingelheim, we received two FDA approvals for a once daily form of Jentadueto for the treatment of adults with type 2 diabetes and for a larger 80-unit Basaglar KwikPen, we remain on track for a mid-December launch of Basaglar. The FDA determined that we met the requirements for pediatric exclusivity for Effient.

Based on this decision by the FDA, Lilly has gained an additional six months of US market exclusivity with compound patent exclusivity now expiring in October 2017. In oncology, the FDA granted priority review for olaratumab for soft tissue sarcoma.

As a result, we expect FDA action before the end of the year, and as I mentioned earlier, an FDA advisory committee voted 12 to 11 that substantial evidence exists to establish that Jardiance reduces cardiovascular death in adults with type 2 diabetes and established cardiovascular disease.

Jardiance as you know is marketed by Boehringer Ingelheim and Lilly. On the clinical front, at ASCO we presented results from the Phase II MONARCH 1 study of abemaciclib, our CDK4 and CDK6 inhibitor in patients with hormone-positive HER2-negative metastatic breast cancer.

The data showed single-agent activity as measured by objective response, clinical benefit rate and progression-free survival in metastatic breast cancer patients for whom endocrine therapy was no longer a suitable treatment option.

As Sue mentioned on our recent investor call to discuss these data, the interim Phase III readout for MONARCH 2 will occur in the near future. Given the close proximity of this readout to the final MONARCH 1 data, we expect to submit MONARCH 1 data to the FDA as early as later this quarter after the interim MONARCH 2 readout.

Also at ASCO, along with Merck, we presented promising early-stage clinical data on the combination of Keytruda with Alimta in frontline non-squamous non-small cell lung cancer and of Keytruda with Cyramza in later lines of non-small cell lung cancer.

At ACR, along with Incyte, we presented data for baricitinib in rheumatoid arthritis from the Phase III long-term extension study, RA-BEYOND. Among other things, these data show that baricitinib was superior to placebo at inhibiting joint damage.

We continue to be pleased with the data generated on baricitinib in RA, and we look forward to regulatory action next year in the US, Europe and Japan.

At the American Diabetes Association along with BI, we presented results from the Phase III MARLINA trial demonstrating that Trajenta, a DPP-4 inhibitor, reduced blood sugar in adults with type 2 diabetes who were at risk for kidney impairment with a renal safety profile similar to that seen in other trials.

And from the EMPA-REG OUTCOME study, showing that Jardiance reduced the risk for new onset or worsening kidney disease by 39% versus placebo when added to standard of care in adults with type 2 diabetes with established cardiovascular disease.

Also at ADA, we presented results from the AWARD-9 study, showing that Trulicity significantly reduced blood sugar and body weight as an add-on to insulin glargine compared to placebo plus insulin glargine.

In other news, Lilly and BI announced a collaboration to evaluate the safety and tolerability of abemaciclib in combination with BI 836845, Boehringer Ingelheim's insulin-like growth factor, ligand neutralizing antibody in patients diagnosed with hormone-receptor positive HER2-negative metastatic breast cancer.

And Elanco Animal Health announced a collaboration with EnBiotix to use EnBiotix' technology to develop alternatives to traditional antibiotic therapies for animals. We were pleased that the German Federal Supreme Court granted our appeal in the Alimta patent case versus Actavis, vacating the prior decision denying infringement.

This ruling supports our continuing belief that Alimta's vitamin regimen patent would be infringed by the entry of generic pemetrexed products, including alternative salt forms in Europe prior to June 2021. And the US Patent and Trademark Office granted petition seeking inter partes review, or IPR, of our Alimta vitamin regimen patent.

We expect final IPR written decision in mid 2017. Finally, we did not repurchase any stock in the second quarter, leaving $2.65 billion remaining on our $5 billion plan. During the quarter however, we did distribute over $500 million to shareholders via our dividend.

We remain committed to providing a robust dividend and returning excess cash to shareholders. Now I'll turn the call over to Phil for a discussion of our financial performance for the quarter.

Phil?.

Great. Thanks, John. Slide eight summarizes our presentation of GAAP results and non-GAAP measures. Now let's look at our results for the second quarter. Slide nine provides a summary of our GAAP results. I'll focus my comments today on our non-GAAP adjusted measures to provide insights into the underlying trends in our business.

So please refer to today's earnings press release for a detailed description of the year on year changes in our second quarter GAAP results. Moving to non-GAAP measures on slide 10, you can see the Q2 2016 revenue increased 9% compared to Q2 2015, reaching $5.4 billion. Gross margin as a percent of revenue decreased 3.2 percentage points to 76%.

This decrease was driven by the effect of foreign exchange rates on international inventories sold. This effect resulted in a benefit both this quarter and last year's quarter, but the benefit this quarter was substantially smaller than the benefit realized last year.

Excluding this FX effect, our gross margin percent decreased by 50 basis points, going from 76.2% in last year's quarter to 75.7% this quarter, driven primarily by product mix. Total operating expense, defined as the sum of R&D and SG&A, increased by 7% compared to Q2 2015.

Breaking this into its component parts, marketing, selling and administrative expenses increased 1% while R&D increased 14%. The slight increase in marketing, selling and administrative expenses was due to higher spending on new products, largely offset by lower spending on late lifecycle products and lower litigation expenses.

The increase in R&D expense was driven primarily by higher late-stage clinical development costs, including the $100 million milestone payment to AstraZeneca triggered by the transition to Phase III testing for the oral-based inhibitor for Alzheimer's disease, AZD3293.

This milestone payment added 8.5 percentage points to R&D expense growth and over 3.5 percentage points to total operating expense growth. Excluding this milestone payment, total OpEx increased just over 3%, which was substantially less than revenue growth.

Other income and expense was income of $21 million this quarter, slightly less than the $29 million reported in last year's quarter. Our tax rate was 22.4%, an increase of 160 basis points compared with the same quarter last year.

This increase was primarily due to a net discrete tax benefit in last year's quarter of approximately $24 million, which lowered that quarter's tax rate by about 2 percentage points.

In addition, this year's tax rate benefited from certain US tax provisions including the R&D tax credit that are in force in 2016, but had lapsed during last year's quarter. This was largely offset by the tax impact of an increased percentage of earnings in higher tax jurisdictions this year compared to last year.

At the bottom line, net income increased, I'm sorry, decreased 5%, and earnings per share decreased 4%. While Derica will cover the effect of FX on our income statement in a subsequent slide, I would highlight that when excluding the effect of FX, non-GAAP EPS actually increased 4% this quarter.

Slide 11 contains non-GAAP adjusted information for the first half of the year, while slide 12 provides a reconciliation between reported and non-GAAP EPS. And you'll find additional details on these adjustments on slides 25 and 26. Now let's take a look at the effect of price, rate and volume on revenue growth.

On slide 13 in the yellow highlighted row at the bottom of the table, you'll see the 9% revenue growth I mentioned earlier. For the first quarter in quite a while, FX was not a headwind as a stronger yen offset weaker emerging markets currencies.

As it did in Q1, on a performance basis, our worldwide revenue grew 8% this quarter, driven entirely by volume. By geography, you'll notice that US pharma revenue increased 15%, driven primarily by volume.

Trulicity and Humalog were the main drivers of US volume growth, with meaningful contributions also coming from Cialis, Taltz, Jardiance, Humulin and Trajenta. Having completed the take-back of North American rights for Erbitux on October 1 of last year, we also benefited from booking end sales of Erbitux.

The decline in EuCan revenue of 1% was driven by the negative effect of price, which was nearly offset by the positive effect of volume and to a much lesser extent FX. On a constant currency or performance basis, EuCan revenue decreased 2%.

This decrease was driven primarily by lower price and volume for Cymbalta following patent expiration, partially offset by the uptake of new products including Trulicity, Cyramza, Basaglar and Jardiance, and higher sales of Humalog, Trajenta and Cialis. Excluding Cymbalta, EuCan sales increased 7% in constant currency terms.

In Japan, pharma revenue increased 21% in total, driven by mid teens volume growth and an 11% benefit from a stronger yen, partially offset by a 7% negative price effect from the latest biannual price cuts. On a constant currency basis, Japan pharma revenue increased 10%.

This performance growth was attributable to a number of products, led by Cyramza, but also including Cymbalta, Strattera, Basaglar, Trulicity and Trajenta. Turning to emerging markets, we saw revenue decline 3% driven by the negative effect of FX which was partially offset by higher volume.

On a performance basis, emerging markets revenue increased 5% due to volume growth from a number of products, most notably Humalog and Trulicity, partially offset by continued sales erosion of off-patent brands including Alimta, Cialis, Zyprexa and Cymbalta.

Also this quarter, our pharma revenue in China increased 15% or 23% on a constant currency basis. This quarter's growth rate did benefit from customer buying patterns in both last year's quarter and this quarter. We estimate that underlying demand for our products in China increased 5% in the second quarter.

Turning to animal health, we completed the Novartis Animal Health acquisition on January 1 last year. So year on year revenue growth comparisons are now on an apples to apples basis. This quarter, Elanco Animal Health revenue increased 2%. Excluding the negative effect of FX, Elanco revenue increased 4%.

This performance increase was primarily driven by the uptake of new products as well as by wholesaler buying patterns of US companion animal products. On slide 14, you'll find the same price, rate and volume analysis but on a year to date basis.

As I mentioned a moment ago, excluding FX from our worldwide revenue, our growth would have been 8% this quarter, with nearly all of that growth coming from higher volume. Our new products, Trulicity, Cyramza, Jardiance, Taltz, Basaglar and Portrazza were the engine of our worldwide volume growth.

Slide 15 shows that these products drove over 6 percentage points of volume growth this quarter. Humalog contributed nearly 2 percentage points of volume growth, while the take-back of Erbitux contributed nearly 1 percentage point of volume growth.

You'll also see that the loss of exclusivity for Zyprexa, Cymbalta and Evista, while largely in the rear-view mirror, still provided a drag of roughly 1.7 percentage points on our volume growth. Finally, Alimta reduced our worldwide volume growth by nearly 1 percentage point this quarter.

The major driver of the decline in worldwide Alimta volume was the US, where we've seen increasing competitive pressure from immuno-oncology agents, and to a lesser extent from targeted agents. Notably, Alimta volume across EuCan was relatively flat this quarter with the exception of the UK, where we have begun to see generic competition.

Now let me turn the call over to Derica..

Thanks, Phil. As I did last quarter, I'd like to start by sharing some color on our new product launches. During the Q&A session, both Sue, Enrique and Dave can provide more details. As you can see on the graph on slide 16, our new products generated $428 million in revenue this quarter, led by Trulicity and Cyramza.

This now represents about 8% of our total worldwide revenue. And as Phil mentioned earlier, these products drove 6 percentage points of our worldwide volume growth this quarter. Cyramza continues to grow globally, driven largely by strong gastric cancer uptake in Japan and Europe.

And we look forward to continued growth in these markets, not only in gastric cancer, but also supported by the ongoing launches of the colorectal and lung cancer indications. Sales in the US declined slightly this quarter due to competition in non-small cell lung cancer, primarily from immuno-oncology agents.

Sales outside of the US now account for over half of Cyramza's global sales, with Japan making up nearly a third. Trulicity continues to gain momentum globally. Here in the US, we're now capturing over 25% of new patient starts in a GLP-1 class while in many O-US markets, we're seeing uptake comparable to that seen with Victoza when it launched.

Of note, in Germany, Trulicity is now the most prescribed GLP-1 brand for patients new to the class. In addition to our strong performance, we're benefiting from strong growth of the GLP-1 class, with the US market growing 30%. Another class that is showing rapid growth is the SGLT2 class, where we see US class growth in the 25% range.

This is however below the class growth we'd expected to see. In the US, our new-to-therapy share with endocrinologists continues to increase, exceeding 35% in the most recent IMS data, as shown in our supplementary slide 41. Outside the US, we've seen very strong uptake in Italy, with encouraging trends across all countries.

In addition to the guideline update in Canada I mentioned last quarter, we've seen initial regulatory approvals of a CV indication for Jardiance in markets like Ecuador and Mexico, and we look forward to the FDA action later this year. We've now launched a Basaglar in a number of O-US countries.

As I mentioned last quarter, in countries where local pricing authorizations have produced a copay advantage, share of market performance has been higher than our expectation. This includes markets like Japan, Poland and Slovakia.

In countries like Germany and Spain, where there isn't a copay advantage, we're running on an annualized share of the total Basal insulin market of 3% to 5%. In aggregate, we are pleased with our performance.

Here in the US, as John mentioned earlier, we recently gained FDA approval of an 80-unit KwikPen and look forward to launching Basaglar in mid December. It's still early days for Portrazza, with the US launch having occurred in December and the initial European launches in April.

In the US, we are encouraged that the vast majority of US payers are now covering Portrazza, although we continue to see strong uptake of IO agents in first-line squamous non-small cell lung cancer, which is affecting Portrazza's uptake. Finally, our newest product, Taltz, launched in the US in April and in Europe earlier this month.

Early prescription data in the US is encouraging. Given the recent approval in both psoriasis and psoriatic arthritis, we also look forward to launching Taltz in Japan this fall. Moving to slide 17, you'll see the effect of changes in foreign exchange rates on our 2016 results. This quarter, FX had a small positive impact on revenue growth.

Excluding FX, worldwide revenue grew 8%. In performance terms, growth in non-GAAP cost of sales at 12% outpaced revenue growth, due primarily to the negative effect of product mix. Moving down the income statement, excluding FX, non-GAAP operating expenses grew slightly slower than revenue at 7%.

Excluding the $100 million AZD3293 milestone payment, non-GAAP operating expenses grew much more slowly than revenue at just 3.5%. Finally, excluding FX, non-GAAP operating income increased 7%, while a higher tax rate and slightly lower other income led to a 4% increase in non-GAAP EPS.

Moving on to our pipeline update, slide 18 shows our pipeline as of July 19. Changes since our last earnings calls are highlighted, with green arrows showing progression and red arrows showing movement out of the portfolio.

In our NME pipeline, we started Phase I testing for four molecules, including a CHK1 inhibitor and a PD-L1 monoclonal antibody for cancer, a double incretin mimetic for diabetes and a tau antibody for Alzheimer's disease.

I would note that increasingly, even in areas outside of oncology, we are testing our molecules in patients in Phase I, in addition to healthy volunteers. You will also see that we terminated development of two Phase II molecules in non-core areas.

In our NILEX pipeline, as shown on slide 19, along with Boehringer Ingelheim, we received FDA approval of the once daily version of Jentadueto as well as our first global approval for ixekizumab in psoriatic arthritis which occurred in Japan, and we began Phase III testing for ixekizumab in AxSpA.

You will also see that we're showing baricitinib for diabetic nephropathy and for psoriasis as attrition as we decided not to pursue these indications at this time. We will invest in additional indications for baricitinib and have trials ongoing in atopic dermatitis and lupus and you shouldn't be surprised to see more in the future.

Turning to slide 20, let's recap the progress we've made on the key events we projected for 2016.

Since our last call, we've added green check marks for the initiation of Phase III for ixekizumab in AxSpA; the internal data readout and subsequent presentation at ASCO of detailed results from the Phase II MONARCH 1 trial of abemaciclib as a single agent treatment for advanced breast cancer; the presentation at ACR of data from the RA-BEYOND study of baricitinib in RA; the presentation at ADA of the MARLINA study of linagliptin; the approval of Taltz in Japan for both psoriasis and psoriatic arthritis; in collaboration with Boehringer Ingelheim, the US approval of once daily Jentadueto XR; and the favorable German Federal Supreme Court Alimta ruling.

I'd also note that we now have a date, September 7, for the CAFC appeal hearing in our US Alimta patent litigation. Given this timing, we could have a CAFC ruling before the end of the year.

You will also see that we moved the ixekizumab head to head psoriasis trial versus Stelara to the potential Phase III data external disclosures section, as we now hope to present data from this trial at a scientific meeting this year.

Also, two events we thought might occur in 2016 are now projected in 2017, the cluster headache readout for galcanezumab, and the Phase III start for our ultra-rapid insulin. Turning to our 2016 financial guidance on slide 21, is as straightforward a picture as you could possibly have.

All GAAP and non-GAAP guide line items, including EPS, remain unchanged from what we communicated on our Q1 earnings call in April. So in summary, 2016 is shaping up to be another strong year.

Excluding FX, we drove revenue growth of 8% this quarter entirely driven by volume, with growing contributions from recently launched products, which this quarter drove 6 of the 8 percentage points of our volume growth.

We reduced OpEx as a percent of revenue compared to Q2 last year, and we remain on track for our full year reduction of 200 to 250 basis points. The strong momentum behind our innovation-based strategy continued, with Taltz being approved in Japan, olaratumab being granted priority review here in the US and the FDA AdCom vote for Jardiance.

We also completed early stage deals in oncology to build out possible abemaciclib combinations, and in animal health to bolster our R&D efforts at finding alternatives to traditional antibiotics.

As John mentioned when he kicked off the call, our management team is committed to making steady progress against each of our strategic objectives in the coming years.

Our success to date gives us increasing confidence in our ability to make contributions to medical progress, to meet or exceed our minimum midterm financial expectations and to create value for shareholders. This concludes our prepared remarks. Now I'll turn the call over to Phil to moderate the Q&A session.

Phil?.

Great. Thanks, Derica. And for the callers that are in the queue, as we have done on some of the past calls, it would be greatly appreciated if you could limit your questions to two or to a single two-part question so we can get to as many of the callers in the queue as possible.

Christy, if you could now go ahead and give the instructions for the Q&A session and then go to the first caller please..

Thank you. And we will go directly to the line of Mark Schoenebaum with Evercore. Please go ahead..

Hi, guys. This is Mike DiFiore in for Mark Schoenebaum. Congrats on the quarter and thanks so much for taking my call. Just two questions. Sola still remains, like solanezumab still remains top mind amongst investors. So I have a question regarding its MOA and plaque removal.

Clearly sola was targeting of monomeric forms of A-beta along with its peripheral sink mechanism clearly differentiates it from BIIB's aducanumab, the theory being that sola can almost potentially act like a BACE inhibitor by preventing the accumulation of plaque versus simply clearing it from the brain.

So my question is, if in the event that sola does not hit its functional end point in EXPEDITION-3, but does get FDA approval, can you comment on how it could compete with aducanumab and BACE inhibitors in the marketplace? And just a totally unrelated question after that, just if you could kindly comment on the disparity between cardiologists and endocrinologists voting ways in the Jardiance AdCom and what that could potentially mean for the label change and treatment guidelines? Thank you..

Great, Mike. Thanks for the question. So for the first one on solanezumab and if we're in this scenario where we're not hitting on functional but having cognition, how we might compete with other agents that might come through, if, Jan, you want to start off and give some of your comments, and Dave, feel free to complement.

And then Enrique, if you can comment on the AdCom vote that was apparently split between cardiologists and endos and what that might mean for labeling in our view..

Yeah. And I guess your question targets also then the different mechanists we have across the industry today to influence then the amyloid component of Alzheimer's disease.

And as you said, solanezumab then binds monomeric free amyloid-beta, which has the intention then to prevent further buildups of plaque but potentially also then have a peripheral sink effect.

And in the EXPEDITION trials, there is now tau, or sorry, amyloid imaging in all patients, which means then we will also be able to follow actually if there is a change in the plaque deposits of amyloid in these patients after long-term solanezumab treatment.

The other antibodies then, aducanumab, are directed more towards the plaque in Alzheimer's patients. And the difference here could be both related potentially then to the clinical effect but also in particular safety, since aducanumab has shown changes then in MRI, suggesting brain edema as one of the components.

And I think the early data on cognition, et cetera, for aducanumab clearly was a relatively small trial and needs be confirmed in the longer and larger trial.

The BACE inhibitors prevent formation of amyloid then from the precursor protein APP, having better brain penetration but also potentially then a different safety profile which needs be established in larger and longer trials. So I think it's hard to speculate actually what's going to happen using these three agents.

But I think what is clear is that it is very important to include only amyloid-positive patients. It's also very important to start very early in the disease. It's also a key, in my view, to have global studies which involve some highly trained sites that can do these trials.

Another aspect of the sola trial is also that we have Tau imaging in a proportion of patients. And as you know, tau is more related to the decline than on particularly the ADAS-Cog, and here we have another way potentially of showing then if there is disease modification.

I think I'll leave to Dave to talk about the cognition and functional endpoints and the potential outcomes there..

Thanks, Jan. Yeah, I think it's early days in terms of understanding mechanisms in Alzheimer's. For sola, as we described in the past, we've moved our primary endpoint to be cognition and then key secondary endpoints, which will have control for Type I error, will be primarily the functional endpoints.

I won't rehash why we did that, but I would just reinforce that our base planning scenario is that we achieve both significance on cognition and function, reminding everyone that the pooled mild data, which we're trying to replicate and we've made improvements in the study in seeking to replicate, has statistical significance on both function and cognition in that pooled mild subset.

So should we miss on that, look, I think we'll have to talk about that when we get there. Clinicians in my experience are interested in outcomes and they're interested in safety. And so Jan has covered the safety topic. We know solanezumab is extremely well tolerated by patients.

In fact, I can share that now that we have a majority of patients in EXPEDITION 3 rolling off into the open label study, we're seeing a very similar effect from EXPEDITION 1 and 2 in that 95% of patients are electing to continue on therapy or in a blinded way switch to therapy from their placebo.

I think that's a very high number for what is a fragile and elderly population, reinforcing the tolerability of the medication. We'll have to wait until December to see the results and fully answer your question..

Great.

Enrique?.

Sure. So on the Jardiance AdCom, we had a positive 12 to 11 vote that we had substantial evidence to reduce the incidents of cardiovascular death in patients with type 2 diabetes and established cardiovascular disease. If I recall the vote, the five practicing cardiologists voted in favor.

And they were, excluding pediatric endocrinology, there were five endocrinologists in the panel and they voted three against and two in favor. I think it's difficult to try to assign a particular view of whether it's cardiologists or endocrinologist based on the vote of 10 people. What I would say is we were very pleased with the overall discussion.

We thought it was robust and we believe that the right discussion happened. And for that reason we feel optimistic that we have a really good chance of getting an indication come late Q3, early Q4..

Great. Thank you, Enrique. Christy, if we can go to the next caller please..

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

Thanks for the questions. So just a couple of quick ones here. So can you guys update us on what's assumed for sola and the Jardiance indication in the minimum top line guidance? The second question, and this is a little bit a couple of sort of sub parts here so I apologize.

But can you just remind us again the assumed timing for the interim look for abemaciclib in the MONARCH 2 study? Can you tell us whether this will be at 50%, 60% or 70% to 75% of events? And then lastly, on the same abemaciclib topic, just when we compare across the MONARCH 2 study and the PALOMA-3 study for Pfizer's palbociclib, can you just help us understand what might be the differences between those studies that would have the control arm performed differently? Thanks..

Great. Seamus, thank you for the questions. Derica, if you'll take the first question that was posed on what's included in the revenue guidance with relation to solanezumab and Jardiance. And then, Sue, if you can comment on Seamus' questions for abemaciclib specific on MONARCH 2..

Good morning, Seamus. In regards to the minimum financial or revenue guidance that we put out there, let me state this again. We expect that we can achieve at least 5% revenue growth on average between now and the end of the decade.

And of course, as we looked at that, we considered a number of different scenarios including the downside of if we were unsuccessful with solanezumab. And clearly if we are successful and we also see scenarios where we could be higher than the 5%. So we feel very good about our ability to at least achieve the 5% through the end of the decade.

What it does not include, as we noted in our upfront remarks, is that any significant pricing action in the US in terms of legislative impact such as rebates and Medicare Part D. It also includes that we will maintain our IP for Alimta in the US..

Great. Thanks, Derica.

Sue?.

Yeah. Okay. So with regards to abemaciclib, we should be getting the interim data on MONARCH 2 soon. And as we have said previously, our intent is to submit MONARCH 1 as early at the end of this quarter once we've seen the MONARCH 2 data. We do plan to issue a press release once the interim has happened. As a reminder on that, we have a high bar.

The data we're looking at will be PFS, and the data monitoring committee, the independent data monitoring committee will look at that data and then advise us accordingly. And we have not given data with regards to the cutoff, and so we will not do that.

And then with regards to the differences, there are some differences in populations with regards to having prior chemotherapy and also first line and second line patients. So I think it's fair to say that we'll have to wait and see what the control arm looks like in the MONARCH 2 data..

Great. Thank you, Sue. Christy, if we can go to the next caller please..

Thank you. We'll now go to Gregg Gilbert with Deutsche Bank. Please go ahead..

Yes, hi. John, how would you handicap the likelihood of Part D rebates between now and 2020? Then my follow-up is for Jeff. Perhaps you could talk about what a normalized run rate quarter would have been without the wholesaler buying patterns? And what did you have to impair that you acquired? Thanks..

Okay, Gregg, I think the likelihood of Part D, you said Part D rebates. But I guess the extreme would be the repeal of the noninterference clause. And then there's a lot of scenarios in between, for example, moving the LSI patients or the duals to more of a Medicaid type system. I think the likelihood is low, quite honestly.

I think that Part D is a rare example of a government program that comes in exceeding expectations at a cost of hundreds of billions of dollars less than had been forecast at the beginning.

The Congressional Budget Office has several times stated that if price controls are placed into Part D, the only way the government would save money in that event is to restrict access to drugs on the formulary. Today most seniors have access through the private plans to the whole formulary, and that's why senior satisfaction rates are so high.

That doesn't sound like something a politician would want to mess with..

Great. Thanks, John.

Jeff?.

Yeah, Gregg, on the animal health side, we had a major SAP cut-over in the US business. So that did move about $20 million of impact into Q2. So we see when we normalize it, Q2 revenues grew at 2% year over year. And if you look at year to date, we would normalize our 4% sales growth to 3%, 3% when you take out that.

And then we've seen very strong as highlighted in the results, again we've seen very strong EBIT growth of 19% year to date as well. So again we're seeing the value and the integration of Novartis come through as we had talked about in the December Investor Day..

And Gregg, this is Phil. I'll follow up after the call. I'm not aware of anything that we impaired in the quarter that we had acquired. We did have some charges in the quarter that were related to integration and severance costs for the Novartis Animal Health acquisition, but nothing else to my knowledge.

So I'll follow up and see what, if there was something else I missed that you were referring to. Christy, if we can go to the next caller, please..

Thank you. Our next question is from Tim Anderson with Bernstein. Please go ahead..

Thank you. A few questions. Just to clarity on the guidance on sola. Are you saying that if sola was a zero and completely failed, that your revenue guidance would remain intact? Just a clarification question on that. And then two other questions. On Portrazza, I think I heard you say that uptake has slowed because of PD-1 usage in first-line lung.

I'd be surprised if that was happening because there's no published results. There's no compendia listing and that sort of thing. So did I hear that incorrectly? And then Jardiance, naturally your product will be the only one with cardiovascular outcome data in the label in 2016 and 2017.

Do you think that will lead to significant formulary coverage shifts in favor of your product in 2017? Or could that be viewed as a class effect by payers and P&T committees, and you could find incumbent products, like Invokana actually keeping a good portion of their formulary positioning?.

Hey, Tim. Thanks for the question. So, Derica, if you will handle the first question related to the revenue guidance; Sue, on what we're seeing in first-line squamous non-small cell lung cancer for IO uptake, and then, Enrique, to you for the Jardiance question..

Tim, good morning. The short answer to your question is, yes. Even in a scenario where sola is a zero, we still believe we can keep a minimum of 5% average revenue growth between now and the end of the decade. Now recall, we've always been saying that when we looked at our future growth prospects for Lilly, we were never reliant on a single asset.

The real thesis behind Lilly is that we've been building this broad portfolio. And the fact that we had the opportunity to launch multiple new molecules, we believe 20 in 10 years, is what gives us confidence that we've got the substrate to support that revenue guidance that we put out there..

Thanks.

Sue?.

Yeah, Tim, you did hear correctly. There is no data yet in first-line squamous non-small cell lung cancer. And yet, we are seeing quite significant use with over 20% share of market in the first-line setting of PD-1 inhibitors, mainly Opdivo. That's impacting most products in that marketplace, including the uptake on Portrazza..

Great.

Enrique?.

Sure. There is no question that a new label with an indication for a reduction on the CV, or the incidence of cardiovascular death will be very significant from a payer perspective. Now in this particular case, we already have excellent coverage and access. We are at 85% plus when it comes to commercial and above 70% in Part D.

So our access is very good, and it can only get stronger once we get the label..

Thanks, Enrique.

Christy, next caller please?.

Next we have John Boris with SunTrust. Please go ahead. Your line's open..

Thanks for taking the questions and congratulations on the results. On your slide 20, you indicated that you still have solanezumab, the prodromal Alzheimer's trial on track for rollout.

Can you help us understand how you're thinking through the endpoints for that trial, how the FDA draft guidance potentially shapes that? And are you going to ask the FDA or have them review it under an SPA? And then second question on Jardiance. Obviously, you have one positive trial in EMPA-REG coming out favorable.

Can you give some commentary on the design of your heart failure trials and how you think those trials might be able to capture data that could help with additional build-out of your label on Jardiance? And then lastly, just on galcanezumab, what actually contributed to the delay in migraine?.

All right, John. Thank you for the questions. So Dave, if you want to comment on the solanezumab prodromal question, and I guess is galcanezumab also potentially faulty as far as what led to the delay. Do you want to comment on that? And then John, you can fill in.

And then, Enrique, if you'll comment on the heart failure trial and how that might help to expand the labeled indications for Jardiance..

Okay. Yeah. So for the sola prodromal study, we're anticipating enrolling patients very soon. As we said in our December 8 investor conference on Alzheimer's, we fully expect to get that study up and running this year and sort of rolling into the EXPEDITION 3 rollout, have that underway.

In terms of primary outcome, we've disclosed that, which is going to be cognition is the primary endpoint, with key secondary endpoints of function. Just like EXPEDITION 3. I think the general logic here is that the earlier you go in disease, the less meaningful functional changes are and frankly, the more difficult they are to detect.

So moving from a mild-only study like EXPEDITION 3 to the prodromal, that's entirely logical. By the way, we've also made those changes in the BACE inhibitor programs in partnership with AZ. Your second question, just to be clear, John, we've not announced a delay in the galcanezumab migraine program but rather the cluster headache program.

This was a kind of quasi-orphan speed play we announced in parallel with the migraine start. One of those studies, although enrolling well, requires episodic cluster episodes to begin before we place patients on medication. We had to predict the rate at which patients would have episodic cluster headaches.

I think we estimated too high, so we're waiting for people to have those episodes before we can begin treatment, and that's slowing down that particular study, although the chronic cluster study is on track time-wise.

So we'll have to make some decisions as we get closer to the end of the chronic cluster study about submission and labeling, et cetera. But the migraine study's on track time-wise, just to be clear..

Perfect. Thank you, Dave.

Enrique?.

John, we are not in a position right now to disclose the specific design for our heart failure trials. Just to remind everyone, we will be conducting two trials, one for reduced ejection fraction and one for preserved ejection fraction.

We expect the first of those trials to start still this year and also to note that we are studying that in people with and people without diabetes. So clearly, we will be seeking an indication when it comes to heart failure with those trials..

Christy, next caller please?.

Thank you. We'll now move to Chris Schott with JPMorgan. Please go ahead..

Great. Thanks for the questions. First one for maybe John or Derica.

Can you just elaborate on some of your comments about increased pricing pressures in the US through 2020 that's reflected in the 5% minimum target? I guess how are you thinking about pricing dynamics for the next few years? Do you see the industry with less pricing power? Do you see more volume driving growth? Just any color there would be great.

Second question is on 2017, just pricing and kind of coverage outlooks. Any major shifts in coverage we should be thinking about as we think out towards next year? And maybe specifically on diabetes, anything we should be keeping in mind there in terms of either coverage or pricing as you've been talking to payers about the 2017 season? Thanks..

Great. Thanks, Chris. So Derica, if you want to take the first one. And then for the second one, Chris, I'd just say as a preamble, typically we comment on access much later in the year, closer to the new plan year and oftentimes need to wait to say anything until the payers themselves have announced these.

But I will leave it open to any of the three, our therapeutic business unit presidents, if you want to give any general comments on what you might be seeing or expecting in trends.

Derica?.

Sure. Hi, Chris. When we talk about increased pricing pressure, if you look at the trends that we're seeing, one, we're seeing a decline or a decay in the net price benefit that we're receiving on kind of annual basis.

And when we look to the environment going forward, we are also seeing an environment where we're seeing increased rebating or discounting going on. We've experienced that in our diabetes business, and we know that we're looking to going into some highly competitive spaces in terms of some of our new product launches.

So our focus has been on driving volume-driven revenue growth, and that really gets to the clinical differentiated profile of our new products that we are in the midst of launching and that's where we've centered our attention. So that's really the thesis behind our comment as it relates to increased pricing pressures..

Great thanks.

Enrique? Dave? Sue? Any comments on access, or does that cover it?.

You said it well, Phil. I think it's premature right now to discuss that..

Okay. Great. Thanks.

Christy, next caller please?.

Next we have David Risinger with Morgan Stanley. Please go ahead..

Thanks very much. I have two questions.

First, could you just explain why the MONARCH 1 filing is pending interim MONARCH 2 data? And then second, regarding the increased US price pressure that you expect later this decade than you're currently experiencing, Derica, could you just remind us how you report US pricing trends year over year with respect to factoring in drugs going generic? As I understand it, when a drug goes generic, even though Lilly doesn't reduce the list price of the drug, there's a negative impact on the calculation of net pricing that you report.

And maybe you could tie in how the pending patent expirations of Cialis and Forteo will thus play into that greater price pressure this decade than you're currently experiencing. Thank you..

Great, Dave. Thank you for the questions. Sue, if you'd take the MONARCH 1 filing question, and then Derica, the pricing question..

Yeah, Dave, with regards to the MONARCH 1 data, as a reminder, this is a single arm study looking at single agent abemaciclib.

Given the close proximity of the MONARCH 2 interim, we announced after ASCO and on our last call that our plan would be that we would submit the MONARCH 2 data, sorry, submit the 1 data once we'd seen the interim of MONARCH 2. And we're anticipating seeing that soon, and therefore we'd be submitting MONARCH 1 as early as this quarter..

Great.

Derica?.

Hi, Dave. In regards to just more color on the pricing pressure and our thinking going forward, just recall if we look at our LOE products or our brands that are going off patent, we have a distinction between our original brand versus the branded generics that we have historically potentially launched into the market such as we did with Zyprexa.

When you looked at our PRV slide that's captured in our call materials, that is the true realized pricing effect that we're seeing rolling across our business. So you should expect on a go-forward basis that it will still be on that same apples to apples.

When you then think about the future patent expirations of Cialis and Strattera and brands like that, you will see it also parceled in the same manner.

So when we again look at our business, and I think that's pretty much reflected in the results you saw here in the second quarter, even in the midst of launching, we're focused on driving a volume-driven growth profile.

And the fact that we could achieve 8% volume growth this quarter and really relatively no price benefit really speaks to our commentary around increased pricing pressures going forward..

One thing real quick, Dave.

As you think about this, it is true that a number of years ago when we would have had, for example, an authorized generic, and we would have shipped out a very large amount of product in a given quarter, we would have only recognized the relatively modest sales price for that product that was shipped, not the potential share that we would have gotten in the revenues once the product was sold.

That led to significant negative price impact at the time we would ship that product and we'd actually recognize the revenue later. With no units against it, it would lead to a very large price increase. It really had nothing do with price increases.

What Derica's mentioned is, for a while now we've been treating our brand and an authorized generic as totally separate products, so you no longer have those aberrations in your net price calculation. And it will be a true underlying price change as Derica just mentioned.

Hopefully that helps give you some context for what you might have seen in the past and what you have seen recently and will see going forward..

Great. Thank you..

You're welcome. Christy, next caller please..

Next we'll go to Vamil Divan with Credit Suisse. Please go ahead..

Great. Thanks so much for taking the questions and for the commentary on the long-term guidance. So just a couple questions if I could. One just to follow up. I'm sorry if I missed this on the last question that Dave asked. But just, I still don't fully get why the interim for MONARCH 2 impacts the mission. You may have mentioned it before.

But I'm sorry if I missed it just when you were commenting to Dave's question. But can you explain why it's exactly tied to that? Why wouldn't you just submit when you're ready to submit? And then if the FDA ever wanted to see that data during the review process, they could obviously ask for it and see it then.

But my questions were actually, one was just on Jardiance. You mentioned that the year over year growth for that class is a little less than what you had expected.

Can you just comment on that in terms of why you think that is? Is it some of these safety concerns we're seeing kind of across the class, or anything else that's maybe keeping that growth a little bit below where you were expecting? And then my second one was just on Taltz.

I know it's still relatively early days, but if you could just give a little more color on the feedback you're getting from physicians on that product specifically relative to Cosentyx, and then on the data we should expect later this year versus secukinumab? I assume the goal of that study is to show superiority.

Can you just confirm that that is the case? Thanks..

Great, Vamil. Thanks for the questions. I'm going to flip it up on our group here. I'm going to go in reverse order. So Dave, if you'd like to go ahead and handle, and with your team if you want to involve who we've got in the room here, feedback we're hearing on the launch versus Cosentyx and the head to head for Stelara later this year.

Enrique, if you'll comment on the year on year growth for the overall (63:59) class and whether it'll be differing than our expectations. And then Sue, for the timing of submission relative to the MONARCH 2 interims..

Yeah, thanks, Vamil. I'll take the first part of this on Taltz and Alex Azar, my colleague who runs the US will answer the second part on what he's seeing in the early uptake. The head to head against Stelara which will read out by the end of the year is fully powered for superiority on all the standard psoriasis metrics.

And this is an important study in particular for O-US access.

Alex, you want to comment on what you're hearing from physicians?.

Yeah. You bet. Thanks, Dave. As you mentioned, it's still very early, especially with a specialty biologic like this in terms of the data flows and information that we would get. But thus far, we're very pleased with the initial performance of Taltz.

If you look, for instance, at the IMF's New to Brand NPA, just dermatology specialty focused data, we're bouncing around right at the Enbrel, New to Brand level. We're closing in very closely on the Cosentyx New to Brand among derms there. Revenue in the second quarter totaled $19 million. A portion of that was wholesale stocking in there.

But as I mentioned, with a specialty product going through specialty pharmacy channels, it'll take a while before we get really complete data there.

So I just want to caution that we can look at IMS a bit, but really it's going to be when we see the actual script-level data coming through the specialty pharmacy data flows that we'll have much more clarity. The feedback from physicians has been very positive.

We're just hearing wonderful things anecdotally about their experiences with it with their patients, in terms of their interactions with us. We think Taltz has a very attractive value proposition to our patients, to our physicians, to our payers.

Including our Taltz savings card, which I think is a really important thing for folks to know about is, with this Taltz savings card that we've got out there, the patients will pay as little as $5 a month if they're commercially insured and covered by their insurance.

If they're commercially insured and are not covered by their insurance and have filed a script, have that denied and filed an appeal and had it denied, they will pay no more than $25 a month. This really removes a prescribing burden and hurdle for the physician, for the patient and the doctor's office in getting people initiated on the medicine.

So right now everything seems to be positive from the experience but in a wait and see mode. Thank you..

Thanks a lot. Dave, any comment on the head-to-head versus (66:26)..

I did. I covered that already..

I'm sorry.

Enrique?.

Very good. So we've had over the last year or so a number of strength in warnings or new warnings when it comes to products in the issued P2 class starting with the DKA which was a warning that was added across the class. And then we've more recently have had two strengthened warnings that have not covered Jardiance.

These covered other products, not Jardiance. One, when it comes to bone fractures specific to canagliflozin and then a strengthened warning on acute kidney injury that covers both dapa and canagliflozin. All of these warnings or strengthened warnings come.

We saw that counterbalance where today we cannot, we're unable to promote our CV data until we basically get our label updated. So we continue to feel the benefit risk profile of the class is very strong, but that of Jardiance in particular given that our data basically speaks for itself when it comes to some of these safety assessments.

And then also the benefit when it comes to CV. When we look at the class in general, the class is growing year-to-date over 30% and one can say that seems like a very good growth. But when we look a little more closely at the new patient starts and the growth of that, we basically see that completely flattening.

And for that reason, we are a bit concerned and we are hopeful and optimistic that once we get both the new indication and new treatment guideline, that we will see a significant inflection. Jardiance needs to be the catalyst for the overgrowth of the class..

Thanks, Enrique.

Sue?.

Yeah. With regards to the MONARCH 1 submission, there really isn't that much more to say. We've made the decision that given the proximity of the MONARCH 2 interim, we'll wait for the MONARCH 2 interim. We believe that this is the fastest way of getting this medicine to patients.

And also given the breakthrough therapy designation that we've got on MONARCH 1, obviously we will continue to have discussions with the FDA..

Thanks, Sue..

Thanks..

Christy, if we can go to the next caller please..

We'll now move to Steve Scala with Cowen. Please go ahead..

Thank you. I have a couple questions. The long-term guidance is very reassuring, but I'm wondering why it was given at this time.

What perspective does Lilly have now that it didn't have at for instance your Analyst Meeting in May? Is it product related, is it industry related or is it something else? And then secondly for Jan in Alzheimer's, preclinical data suggests PD-L1 blocking could have a benefit in Alzheimer's disease.

Does Lilly have any plans to explore this area? And what dose of solanezumab is being used in the prodromal trial? Thank you..

Great. Steve, thank you for the questions. We'll have Derica take the first and if, Jan, if you'll take the second question or set of questions on Alzheimer's disease.

Derica?.

Hi, Steve. Really, our discussion on our longer-term guidance today is really just kind of the natural next step in progression or discussions that we've been having with the investment community. Recall that back in December, we began to do a more in-depth look at our R&D prospects.

We started with a deep dive on our Alzheimer's platforms as well as our animal health business. We were able to then follow that up in May with a deep dive discussion on the other four therapeutic, human pharma four therapeutic areas.

And based upon the substrate we talked about, and we shared there about the potential of 20 launches in 10 years as well as combined with our market guidance, is really what's supporting our extended discussion here today about those other items that could be affected, positively in this case, by the data points we've shared in our previous discussion.

So for us it's really just a continuation of the dialogue that we've been having. And again, as we see more in our business prospects, we will share more with you going forward as well..

Steve, this is Phil. Just real quick before turning over to Jan.

I think we've discussed in the past having some of these days that are not the soup to nuts Lilly commercial update, R&D update, financial update is really intended to ensure that we can spend quality time talking with investors and potential investors as well as the analyst community about specific parts of our business.

And we do think we achieved that both in December and in May by having that really focused on those topics and not having a particular discussion about financials at that point in time.

Jan?.

Yeah, well the whole area of immunology and the importance for Alzheimer's disease is one of our recent interests in research.

And I mean just to remind you, we already have a molecule in the clinic that actually most likely reduces plaques at least, and in animal models via microglia activation, the N3pG molecule, where actually we will report some data tomorrow in Toronto from the initial early studies in the clinic.

We're also have an interest in other mediators then of immune activation, and I think you will see us test new then immune activating agents in various animal models initially..

400 milligrams once a month. Same dose in prodromal as in the mild Alzheimer's study..

Great. Thanks, Dave.

Christy, next caller please?.

Thank you. We'll now move to Andrew Baum with Citi. Please go ahead..

Thank you. Two questions please.

First, could you outline your marketing plans for Jardiance assuming you get approval with the cardiovascular indication added? Expressly, are you building out your cardiovascular sales force or bolstering your primary care sales force for the product? And then second, could you remind us of the prophylactic use of loperamide? Was that included within the trial protocol for the individual abemaciclib program? And are you including it for any future ongoing trials given the GI diarrhea adverse event which has been characterized by the trials to date? Thank you..

Great. Thank you, Andrew. So Enrique, we'll go to you for the first question on what we're doing with regard to cardiovascular and primary care sales reps to support Jardiance going forward, and then Sue on the use of loperamide..

Clearly we view this as a very significant opportunity, so we're going to be fully resourced. And that basically means making all of the proper investments when it comes to ensuring that we have the right reach for both primary care, cardiologists, endocrinologists. So yes, we have a very robust plan together with our partner Boehringer Ingelheim..

Great. Thanks, Enrique.

Sue?.

Yeah, with regards to the diarrhea, no. We didn't have a prophylaxis loperamide in our studies. We have one study, our neoMONARCH, which is our neoadjuvant study that we have looked at that. We should have a report out of that this year.

But in our MONARCH 1, 2 and 3 studies, we did not require prophylaxis, and as a reminder in our MONARCH 1, the diarrhea was manageable with over-the-counter loperamide as needed and only one patient discontinued due to diarrhea..

Thanks, Sue.

Christy, next caller please?.

We'll now go to Jami Rubin with Goldman Sachs. Please go ahead..

Thank you. Enrique, just a question for you, again back on Jardiance.

Would you be satisfied if the CV data were included in the label but without the CV indication per se? And can you describe the guidelines process and the importance of updated guidelines and specifically what you need to see in order to see that obviously important inflection point with Jardiance? And then secondly, Sue, for you, when do you plan to file on MONARCH 2? Thanks..

Great, Jami. Thanks for the questions. So first to Enrique and then Sue..

Sure, so on the CV indication, first, we do feel optimistic. Now you asked me I would be satisfied. I will be honest. No. I would not be satisfied. We will make it work, but my view is that we basically have the appropriate data to be able to obtain a new indication when it comes to the reduction in the incidence of CV deaths on that specific population.

I don't recall the second part of the question..

The second part related to guidelines. Guidelines. And the importance of guidelines..

They are also very important. But clearly the way we view it is, in particular in the US, we view the FDA action date coming before basically new treatment guidelines. We could have new treatment guidelines in the US sometime early next year..

Great. Thanks..

Yeah, Jami, with regard to MONARCH 2, clearly it would depend on the data and if the interim data is positive, we would plan to discuss that with regulatory authorities and plan to submit it as soon as we could..

Thank you..

Sue. Christy, next caller please..

Next we have Tony Butler with Guggenheim Securities. Please go ahead..

Yes. Thank you. Just one brief product related or pipeline related question. I wanted to go back to CGRP, and less in cluster headache, but perhaps in overall migraine, as REGAIN and the EVOLVE studies are underway, there are other programs from other competitors which are moving forward as well.

And I was just curious, Dave or Jan, if you could just provide some clarity on the advantages that Lilly's program or antibody may have versus those of other programs, and whether you think you could be first to market.

Or if you're second to market, what in fact might be the attributes that your product may have over that which is first to market? Thanks very much..

Thanks, Tony.

Dave?.

Sure, yeah. Thanks, Tony. Well, we're excited about the galcanezumab program, which is the new name for a CGRP antibody. Putting aside the cluster, which again is a possibility to get to market earlier, although we have as was mentioned earlier, a slowdown in the episodic cluster study. As it relates to migraine, we remain excited about the profile.

It is very competitive, as you mentioned. There's at least three players kind of neck and neck from our read. Execution and enrollment and getting the studies complete is important. You'll see on clintrials.gov, we've actually closed the submission gating study, the critical path study which was the long-term safety study already.

So that puts us on a good path to remain on track. Ultimately, I think the product profile will need to achieve the maximum effect possible via this mechanism, with the minimally intrusive administration for patients. This will be a product used by healthy people in primary care offices, in everyday neurologists.

Simple injection and dosing protocols coupled with very strong effect will win. That sounds kind of boilerplate. But I think we're testing a couple different dosing setups. Others are testing different ones. We'll just have to see who can produce the best numbers with the minimum doses.

And I think that's what we'll be looking for as we read out the data sometime late next year..

Thanks, Dave..

Yeah, a small addition here is that the Amgen antibodies are against the CGRP receptor, whilst the other antibodies bind the free CGRP peptide. And also the older antibodies, intravenous, the Teva and Lilly and Amgen are subcutaneous injection..

Great. Thank you, Jan. Christy, if can we go to the next caller, please..

Thank you. Our next question comes from Alex Arfaei with BMO Capital Markets. Please go ahead..

Good morning, folks, and thank you for taking the questions. First for John and Derica, a follow-up regarding your long-term guidance. It is obviously reassuring but not really surprising, given that you're coming from a lower base following patent expirations and launching a number of new products.

So would you be willing to provide more color regarding the different scenarios that you mentioned earlier? And the follow-up, can you comment on the approximate magnitude of dividend increases that you're committing to, and is there a specific payout ratio target that you have? Thank you..

Alex, thank you for the questions. John, if you want to go ahead and take the first question and Derica the second..

Yeah. I think, Alex, the long-term guidance contemplates obviously a number of scenarios. We have products like baricitinib that are under regulatory review, abemaciclib, which is headed that way, products that's still in the pipeline, the sola readout later this year.

So there's still some, I guess, some big unknowns up ahead, coupled with the sure patent losses that we're going to experience with products like Cialis and Strattera, for example. So while there's still a lot of moving parts, I think similar to sort of the guidance we provided back in late 2009, we were entering this patent expiration period.

We wanted to provide some floor, some minimum set of expectations for investors, recognizing that there are scenarios that could take that above that floor. Now, we did call out the fact that this does not contemplate major changes in government reimbursement policy.

It does contemplate Alimta continuing to be patent protected in the US through the early 2020s.

So with those caveats, I think that we feel very comfortable providing that as a framework for investors thinking about Lilly in the next five years with all these potential scenarios, a number of which could provide upside above this number and then coupled with the guidance we've given about not only our operating, our OpEx to sales, but this morning reaffirming our belief that we could also improve our gross margin as a percentage of sales over this period as well..

Thanks, John.

Derica?.

Alex, in regard to the magnitude of dividend increases, we're not prepared to provide any commentary on that here today. We've increased our dividend over the last two years. One could think, well, why the commentary if we're already kind of on that glide path.

Well, while we've done that, we've never committed to going forward each year that we would increase our dividend. So we wanted to be more clear about that today and to set that expectation..

Yeah, I think it's probably safe to assume that you will see over time some decrease in the payout ratios since we had that spike at pretty high levels. We went through the patent expiration period.

But as Derica mentioned, we can't be more specific than we'll have a slightly lower dividend increase, probably the net income increase to bring that down somewhat. Stay tuned for more as we go forward. We can go to the next caller please..

Our next question comes from Colin Bristow with BoA Merrill Lynch. Please go ahead..

Good morning, and thanks for taking the questions. Just a few quick ones. So on Jardiance, the 2Q sales looked a little light versus what was implied from scripts. If you could give any more color around the impact of discounting, rebating and inventory buildup, be helpful.

And second on the Trulicity REWIND trial, can you remind us if it is just a futility look or is there potential for early stoppage? And if the latter, how should we be thinking about this, given the outcome of Novo's LEADER study, and the fact that I believe you're approaching a similar duration of treatment? And then just finally on solanezumab, can you just confirm we should still expect a top line update before year end? Thanks..

Great, Colin. Thank you for the questions. We'll go to Enrique for the Jardiance and Trulicity questions and then to Dave for the solanezumab confirmation..

Yeah. So on Jardiance, you are right. If you look at the scripts and sequential script growth, it will have implied higher revenues. There are two things that are weighing down on Jardiance.

One of them, we've had some gross to net adjustments during the periods that were from prior periods, and second we also saw much higher utilization on our copay cards. We recently have changed the design of our copay card so it's less generous than it used to be. But that takes a little bit of time to basically wash out.

So we should expect an improving picture when it comes to that. In terms of Trulicity, we do have an interim later this year. Clearly we've all seen the LEADER data.

Probably the best way to think about the interim for Trulicity, but if we were to expect a similar, were to observe a similar hazard ratio versus what LEADER showed, we would not stop the trial.

So given that we're going to have a significantly less number of events than basically Novo had at the conclusion of their own trial, now we are confident on the profile of the product and now we just really need to wait for the interim.

But we'll either stop or we will – if we stop we will know; if we continue to with the trial clearly we will have to wait..

Great. Thanks, Enrique.

Dave?.

Yeah, so on sola, we continue to expect top line as we announced I think in the Q1 call, we've completed enrollment on time and we're just waiting for the last patient visit. There are some variability around that but it's measured in weeks. So we expect to have a top line by end of year..

Great. Thank you. I know we have a number of callers still left in the queue. We're going to try and shoehorn in one more and then I apologize to those who won't have had a chance to ask a question. We will definitely call you back when we get back to our desks. So, Christy, if we can go to the last caller before we have John wrap up the call..

Thank you. And due to time constraints our last question will come from Marc Goodman with UBS. Please go ahead..

Yes, morning.

First on the gross margin comments, can you give us a sense of the push and pulls over the course of the decade where some of the products that have higher gross margin that'll be bringing it up and what'll be bringing it down? And then on abema, can you talk about what are you waiting for before starting the early breast cancer studies? Thanks..

Great, Marc. Thank you for the questions. So Derica, if you'll handle the gross margin question, and to Sue for the early stage plans for abema..

Hi, Marc. In regards to gross margins, clearly when we endured the impact of the loss of many of our biggest products, but at the same time they were also small molecule. So at the gross margin line they were very highly profitable. These are products like Cymbalta, Zyprexa and Evista.

Then as those products expired, those revenues were replaced with insulins becoming our biggest brands in franchise in Lilly at the moment, which obviously is coming with a lower gross margin or lower profitability. And that's where you've seen the decline in our gross margin rate over the this YZ period.

Going forward, it's really going be dependent on the nature of the molecules and which ones are launching at what time. So if you look at products like Jardiance, we booked our portion of the income so it actually has a boost to our gross margin as a percent relative to our base.

Likewise, when you look at the opposite, you've got baricitinib which we own, but we have a pretty high royalty rate that we also pay in the high 20s. So the mix effect is really what's going to drive or have a significant impact on what that gross margin profile looks like over time.

However in aggregate, when we look at all the pushes and pulls, we still feel very confident that in total our gross margin will improve between now and the end of the decade..

Great. Thanks, Derica.

Sue?.

Yeah, with regards to the early phase breast cancer plans, as a reminder, we do have the neoMONARCH study ongoing which we plan to read out yet this year. And other plans will be informed by the data coming out..

Thank you, Sue.

John, can you close the call please?.

Okay. Thanks, Phil. We appreciate everyone's participation in today's earnings call and your interest in our company.

We continue to be pleased with the success we've had implementing our innovation-based strategy, and we're excited by the potential we have to make life better for people around the world and to provide substantial returns to our shareholders.

Hopefully, the additional clarity we provided on our midterm financial expectations is helpful as you consider our future prospects. As always, we look forward to keeping you appraised of our progress.

Also, this is the last earnings call for Ilissa Rassner, and I'd like to thank her personally for her considerable contribution to our IR efforts over the past four and a half years, and to wish Ilissa luck in her new role here at Lilly. Finally, if you have questions we weren't able to address during today's call, please contact our IR team.

They'll be happy to help. Have a great day. Thanks everybody..

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