David A. Ricks - Eli Lilly & Co. Philip Johnson - Eli Lilly & Co. Derica W. Rice - Eli Lilly & Co. Enrique A. Conterno - Eli Lilly & Co. Jan M. Lundberg - Eli Lilly & Co. Anthony Ware - Eli Lilly & Co. Jeffrey N. Simmons - Eli Lilly & Co. Susan Mahony - Eli Lilly & Co..

John T. Boris - SunTrust Robinson Humphrey, Inc. Mark J. Schoenebaum - Evercore ISI Charles Butler - Guggenheim Securities LLC Christopher Schott - JPMorgan Securities LLC Andrew S. Baum - Citigroup Global Markets Ltd. Gregg Gilbert - Deutsche Bank Securities, Inc. David R. Risinger - Morgan Stanley & Co. LLC Jami Rubin - Goldman Sachs & Co.

Timothy Minton Anderson - Sanford C. Bernstein & Co. LLC Steve Scala - Cowen & Co. LLC Seamus Fernandez - Leerink Partners LLC Marc Goodman - UBS Securities LLC Geoffrey Christopher Meacham - Barclays Capital, Inc. Richard J. Purkiss - Piper Jaffray Ltd..

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2016 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the conference over to your host, Dave Ricks. Please go ahead, sir..

Thank you and good morning. Thanks for joining Eli Lilly & Company's fourth quarter 2016 earnings call. I'm Dave Ricks, Lilly's President and CEO. Joining me on today's call are Derica Rice, our Chief Financial Officer; Dr. Jan Lundberg, President of Lilly Research Labs; Enrique Conterno, President of Lilly Diabetes and Lilly U.S.; Dr.

Sue Mahoney, President of Lilly Oncology; Chito Zulueta, President of International Business; Jeff Simmons, President of Elanco Animal Health; Dr. Tony Ware, who is the interim President of Lilly Bio-Medicines; and of course Kristina Wright, Chris Ogden, and Phil Johnson of the Investor Relations team.

During this call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide 3 and those outlined in our latest Forms 10-K and 10-Q filed with the SEC.

The information we provide about our products and pipeline is for the benefit of the investment community. It's not intended to be promotional and it's not sufficient for prescribing decisions. Before discussing key events for the quarter, I'll start with a summary of our progress since the Q3 earnings call using our strategic objectives framework.

Starting with Grow Revenue, in Q4 we generated worldwide revenue growth of 7%, which was driven by 9% volume growth in our pharmaceutical business, led by her new products. Prices declined 1% in Q4.

On our strategic objective Expand Margins, total operating expenses as a percent of revenue declined over 400 basis points compared to Q4 of 2015, while our non-GAAP gross margin percent excluding the effect of FX on international inventory sold was essentially flat. Under the heading of Sustaining the Flow of Innovation, here in the U.S.

in our collaboration with BI, the FDA approved and we began promotion of a new CV [Cardiovascular] indication for Jardiance, and we launched our long-acting insulin Basaglar. And in Europe, the European Commission approved Lartruvo for soft tissue sarcoma.

Finally, on Deploy Capital to Create Value, we completed the acquisition of Boehringer Ingelheim's U.S. Animal Health Vaccine business. We announced an agreement to acquire CoLucid Pharmaceuticals, which will add a promising molecule for acute migraine for our late-stage pipeline.

And we announced an increase of 2% in our quarterly dividend, and we repurchased $300 million of stock. We expect to make continued progress in 2017, and we remain on track to achieve our midterm goals for each of our strategic objectives.

Now let's move on to slide 5 for a more detailed review of the key events that occurred since our last earnings call. New product launches continued.

As I mentioned, in collaboration with Boehringer Ingelheim, we received FDA approval of the new CV indication for Jardiance in December and launched in January, right after the mid-December launch of Basaglar. Our initial sales were largely due to stocking, but we are pleased with initial feedback from customers.

We also launched Lartruvo for advanced soft tissue sarcoma in both the U.S. and Europe, and the product is off to a strong start, while in Japan, we secured the price listing for Taltz in mid-November and launched the product for both psoriasis and psoriatic arthritis.

We are in the process of opening accounts and completing hospital formulary reviews. While it's very early, initial feedback and IMS data are positive.

In the Animal Health space, along with Aratana, we announced that Galliprant, a first-in-class product for dogs for the management of pain and inflammation associated with osteoarthritis, is now available to veterinarians here in the U.S. On the regulatory front, we made significant progress.

We received conditional marketing authorization from the European Commission for Lartruvo to treat adults with advanced soft tissue sarcoma. Also in Europe, we received a positive opinion recommending approval of baricitinib for the treatment of moderate to severe active rheumatoid arthritis.

In collaboration with Boehringer Ingelheim, we received multiple regulatory actions on the Jardiance family of products. A number of these actions were related to the EMPA-REG OUTCOME trial. The U.S.

FDA approved of a new indication of Jardiance to reduce the risk of cardiovascular death in adults with Type 2 diabetes and established cardiovascular disease. We were also pleased that the ADA [American Diabetes Association] issued updated diabetes treatment guidelines shortly after the FDA approval.

In Europe, the European Commission approved an update to the Jardiance label, including data on the reduction of the risk of CV death in patients with Type 2 diabetes and established CV disease. The U.S.

FDA also approved updates to the labels of Synjardy, Synjardy XR, and Glyxambi to include data on the reduction of the risk of CV death in patients with Type 2 diabetes and established CV disease when treated with empagliflozin.

Similarly, Europe's CHMP recommended an update to the Synjardy label to include data on the reduction of risk of CV death in patients with Type 2 diabetes and established CV disease when treated with empagliflozin.

Separate from actions related to EMPA-REG OUTCOME, the FDA approved Synjardy XR, a tablet containing empagliflozin and metformin extended release for the treatment of adults with Type 2 diabetes. The European Commission approved Glyxambi, a single pill combining Jardiance and Trajenta, for the treatment of adults with Type 2 diabetes.

Finally, here in the U.S., the FDA extended the NDA review period for baricitinib, and we now expect regulatory action early in Q2. Moving to slide 6, there was one significant data readout in Q4.

We were disappointed to announce that the EXPEDITION3 trial of solanezumab in patients with mild dementia due to Alzheimer's disease did not meet its primary endpoint. Since the solanezumab update we provided on our guidance call, we made the decision to terminate the EXPEDITION-PRO study of solanezumab in prodromal Alzheimer's disease.

After careful review of the data from the EXPEDITION3 study and given the overlap in patient populations between EXPEDITION3 and EXPEDITION-PRO, we did not find sufficient scientific evidence to support the hypothesis that solanezumab would demonstrate a meaningful benefit to patients with prodromal Alzheimer's disease.

In addition, the decision has been made to continue two ongoing public-private partnership studies in earlier stages of AD, the A4 study in pre-clinical AD and the DIAN2 study in dominantly inherited AD. In other news, the U.S.

Court of Appeals for the Federal Circuit upheld the District Court's decision that the Alimta vitamin regimen patent is valid and would be infringed by the generic challenger's proposed products. If the patent is ultimately upheld through all remaining challenges, including intellectual property review proceedings, Alimta would maintain U.S.

exclusivity until May 2022. We announced completion of the acquisition of BI Vetmedica, Inc's U.S. feline, canine, and rabies vaccine portfolio, which also brings a fully integrated manufacturing and R&D site and several pipeline assets. The acquisition diversifies Elanco's U.S.

companion animal portfolio by adding vaccines for a range of common conditions. We also announced an agreement to acquire CoLucid Pharmaceuticals for $960 million. When closed, this will add lasmiditan, a potential first-in-class non-vasoconstrictive migraine treatment to our pain management pipeline.

We believe this potential treatment for acute migraine complements our growing pain portfolio, specifically galcanezumab, which is in development for migraine prevention.

Along with AstraZeneca, we announced a worldwide agreement to co-develop MEDI1814, an antibody selective for A-beta 42, which is currently in Phase 1 trials as a potential disease modifying treatment for Alzheimer's disease.

In oncology, we announced an expansion of our existing immuno-oncology collaboration with Merck to add a new study for our Lartruvo with Merck's Keytruda patients with previously treated advanced or metastatic soft tissue sarcoma.

We also announced a partnership with Express Scripts to allow people who use Lilly insulin, in particular those who have no insurance or those who are in the deductible phase of their high-deductible insurance plans, to purchase product at a 40% discount using mobile and web platforms hosted by Blink Health.

Finally, in December we announced a 2% dividend increase, bringing our quarterly dividend to $0.52 per share. And during the fourth quarter, we distributed over $500 million to shareholders via the dividend, and we paid $300 million for share repurchases.

Now I'll turn the call over to Phil for a discussion of our financial performance during the quarter..

Slide 7 summarizes our presentation of GAAP results and non-GAAP measures, while slide 8 provides a summary of our GAAP results.

I'll focus my comments on our non-GAAP adjusted measures and 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 fourth quarter and full year GAAP results.

Looking at the non-GAAP measures on slide 9, you'll see that Q4 2016 revenue increased 7% compared to Q4 2015, reaching $5.8 billion. Gross margin as a percent to revenue was essentially flat at 77.4%.

the effect of foreign exchange rates on international inventories sold resulted in a benefit in both this year's and last year's quarter, with the benefit being slightly larger this year. Excluding this FX effect, our gross margin percent decreased by 20 basis points, going from 75.7% in last year's quarter to 75.5% this quarter.

Total operating expense was unchanged compared to Q4 of 2015. Each of the component parts of total operating expense, marketing, selling, and administrative expenses and R&D expense, was also unchanged. In marketing, selling, and administrative expenses, higher spending to support new products offset lower spending from late life-cycle products.

In R&D expense, recall that in Q4 2015 we had about $135 million in late-stage termination charges for basal insulin peglispro and evacetrapib, while in Q4 this year we had about $75 million in charges related to the EXPEDITION3 study. Excluding these charges, R&D expense grew 5% due to higher late-stage clinical development costs.

Other income and expense was income of $16 million this quarter compared to the $45 million reported last year. Our tax rate was 17.9%, an increase of 4.4 percentage points compared with the same quarter last year. This increase was primarily due to the inclusion in Q4 of last year of the full year 2015 benefit for certain U.S.

tax provisions, including the R&D tax credit. This was partially offset by a higher net discrete tax benefit in this year's Q4, which included a tax benefit of approximately $40 million related to the early adoption of the new accounting standard for stock-based compensation. At the bottom line, net income and earnings per share both increased 22%.

We achieved the significant earnings growth by delivering high single-digit volume-based revenue while keeping OpEx flat. Slide 10 contains non-GAAP adjusted information for all of 2016, while slide 11 provides a reconciliation of reported and non-GAAP EPS. 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 12 in the gray highlighted row at the bottom of the table, you'll see the 7% revenue growth I mentioned earlier.

The effect of foreign exchange on revenue growth was minimal this quarter, and our worldwide revenue growth on a performance basis also rounded to 7%, and was driven entirely by volume. By geography, you'll notice that U.S. pharma revenue increased 16%, driven almost entirely by volume as well. Trulicity was the main driver of U.S.

volume growth, with meaningful contributions also coming from Humalog, Taltz, and Jardiance. As cited in our press release issued earlier this morning, we benefited this quarter from a $130 million favorable adjustment related to changes in estimates, rebates, and discounts primarily related to Humalog.

From a growth rate perspective, this was partially offset by the gross-to-net benefit experienced in Q4 2015. The decline in EuCan revenue of 9% was driven by the negative effect of price, and to a lesser extent unfavorable foreign exchange movements and lower volume. On a constant currency or performance basis, EuCan revenue decreased 7%.

This decrease was driven primarily by lower volume and price for Cymbalta and Alimta, partially offset by the uptake of new products, including Trulicity, Cyramza, Basaglar, and Jardiance.

In Japan, pharma revenue increased 9% in total, driven by a 13% benefit from a stronger yen and to a lesser extent increased volume, partially offset by a 7% negative price effect from the latest biannual price cut. On a constant currency basis, Japan pharma revenue decreased 4%.

This performance decline was attributable to the entry of generic olanzapine this past June. Excluding Zyprexa, Japan pharma revenue in Q4 grew 9% on a constant currency basis, led by Cyramza, with meaningful contributions from Cymbalta and Trulicity.

Turning to emerging markets, revenue this quarter was unchanged, as the negative effect of FX was offset by higher volume. On a performance basis, emerging markets revenue increased 3%, as growth in Cialis, Humalog, Trulicity, Cyramza, Trajenta, and Jardiance, partially offset by lower sales of Alimta and (15:48).

Also, this quarter our pharma revenue in China decreased 4% due to FX, while revenue increased 1% on a constant currency basis. Turning to Animal Health, this quarter worldwide revenue increased 3%, while excluding the effect of foreign exchange increased slightly higher at 4%, U.S. revenue growing 2% and OUS revenue growing 5%. The U.S.

increase was driven by new companion animal product launches, while the OUS increase was primarily driven by higher food animal revenue. On slide 13, you'll find this same price, rate, and volume analysis, but for the full year. As we've done in recent quarters, let's now take a look at the drivers of our worldwide volume growth on slide 14.

As I mentioned earlier, excluding FX, our worldwide revenue grew 7% this quarter, driven by an 8% increase in volume. In total, our new products, Trulicity, Cyramza, Jardiance, Taltz, Basaglar, Lartruvo, and Portrazza, were again the engine of our worldwide volume growth. You can see that these products drove 8.9 percentage points of volume.

Our meal-time insulins Humalog and Humulin in total contributed nearly 2 percentage points of volume growth, while our Animal Health products contributed 40 basis points to volume. Due primarily to declines outside of the U.S.

resulting from loss of exclusivity, Alimta trimmed 1.5% from volume growth, while loss of exclusivity for Zyprexa, Cymbalta, and Evista provided a drag of just over 2 percentage points. Now let me turn the call over to Derica..

launching new products with excellence; reloading our late-stage pipeline from inside and outside our walls with assets of equal or greater value than our graduating class; driving increased productivity across our enterprise to expand our operating margins and create investment capacity; and investing in the core drivers of our business, talent, scientific capability, and technology platforms, to ensure our future growth prospects.

While policy and environmental uncertainty are high, we see our innovation strategy to drive volume growth through new brands as both valuable and durable. In my 26 years with the company, I can't remember a more exciting time. This concludes our prepared remarks. Now I'll turn the call over to Phil to moderate the Q&A session.

Phil?.

Great. Thanks, Derica. We'd like to take as many callers as possible, so we do ask that you limit your questions to two or a single question with two parts. Thank you in advance for your collaboration with this request. Kevin, can you please provide the instructions for the Q&A session? And we're ready for the first caller..

Thank you. Okay, your first question is from the line of John Boris, SunTrust. Please go ahead..

Thanks for taking the questions. So, Dave, a lot of fanfare this morning on CNBC regarding your meeting with Donald Trump. He obviously highlighted turning down regulation, improving the tax outlook, and also obviously a focus was on price.

Does, after this meeting, President Trump understand the level of discount that's going on within DOD, VA, that Medicaid is getting products for free, Medicare Part D hasn't broken the budget? And what would happen under ACA if it goes away? The greater than $100 billion that the industry is contributing out of its SG&A line as a tax, would that go away? And then the second question, you did put out a release early on reorganization, obviously cut one head to streamline decision-making, but there seemed to be a greater emphasis on China, especially in light of you having run the operations there.

Will you be changing any of your reporting going forward?.

Dave, those are for you..

Sure, thank you, John. We had a good meeting with the President this morning. It was a broad-ranging discussion. We touched on several of the issues there.

And your question in terms of innovation, the President was very interested in understanding how our business works and what the opportunities are to further grow the American innovative engine in the biopharmaceutical industry. Of course, we talked about taxes and how that could be a positive catalyst for more investment and growth in the U.S.

industry. We talked about regulation. I think he made some comments on camera about that. He's interested in finding ways to reduce and streamline regulation, both at the FDA side but also in healthcare markets that the government plays a role in. And then of course, we did speak about pricing.

On that last point, I think we all understand the concern he's raising and of course others are that consumer out-of-pocket costs seem to be growing and growing faster than other payers in the system and how we can do a better job as an industry of getting discounts through to consumers, particularly those in high-deductible plans and government programs.

We did not get into elaborate policy detail in terms of the U.S. pricing environment. But I think there will be time for that later, and I left the meeting with some confidence that the people who we'll be working with closely as legislation moves forward have a good grasp of those facts.

Your second question was repeal of ACA and the taxes the industry pays. Of course, we haven't seen any specific legislation here. I think the industry said it was basically $100 billion over 10 years that would have been paid in to cover ACA. That's both in terms of the unspecified fee and other concessions in the original 2009 package.

I'd be reluctant here to get into specifics on that because we haven't seen the specifics on the repeal or, for that matter, any pay-fors in the replace.

But we're preparing for all those scenarios and working closely with policymakers as well as other parts of the industry on good policy that can promote consumer-driven choice and more broadly available medications in these uncovered populations or in the current ACA populations. The final question I think was on the reorganization.

And of course, we did announce the reorganization, which removed actually several senior management jobs really to flatten the organization and make sure our executives are as close to the markets that matter and the launches that matter as we go ahead.

And that was a primary goal was really to emphasize the importance of these new product uptakes and having our business presidents squarely focused on those and making sure that there's a clear line of sight to the customer for them.

We also want to improve our proximity to China, as you mentioned, particularly for drug development, where we can do more I think to speed up our innovation into that market, which has an undeniable long-term opportunity for the sector.

We also asked Enrique take on a broader scope of responsibilities, including payer and so forth, hosting responsibilities for the major markets. So that's already announced and rolling out and I think aligns clearly with our stated priorities..

Our next question is from the line of Mark Schoenebaum, Evercore. Please go ahead..

Hey, guys. Thank you for taking the questions. And first, thanks to Phil and the whole organization for helping out my team while I was gone. I really appreciate that. I'd like to ask one business question and one science question I suppose.

The business question is Sanofi's biosimilar Humira, can you just give us an idea of your expectations for market entry, timing of market entry, and what your plans are to mitigate that? I thought that would be helpful as that gets a little closer.

And then number two, I noticed you said on the call that, I think if I heard you right, you're halting the prodromal trials on solanezumab. And that was interesting to me because I'd be curious. Given that you guys are one of the smarter Alzheimer's companies, I'd be curious to know what your current thoughts are on the A-beta hypothesis.

Was the failure of solanezumab a failure of the molecule and/or was it a failure of the A-beta hypothesis to be – is A-beta behind Alzheimer's? And with the halting of the prodromal trial, I assume no longer – you don't believe it was simply the patient population enrolled.

Therefore, that leaves molecule-specific issues and the hypothesis in general. I'd love to hear you talk on that. Thank you so much..

Thanks for the question, Mark. Dave, if you'd like to, take the first one. And I did get some feedback that there might have been a little bit of echoing, so we'll mute here in the room as you provide your response.

And then, Jan, if you'd like to lead off answering the second question, our view of the failure of solanezumab in the mild Alzheimer's population. And, Tony, feel free to complement his answer as well. Over to you, Dave..

I think the question related to biosimilar – I think Mark said Humira from Sanofi, but I'm not aware of a biosimilar Humira program at Sanofi, correct?.

Humulin – Humalog..

Humalog, yes, okay..

Sorry, my bad..

So maybe Enrique can handle that one..

So we of course are prepared for that event. We had in a certain way the fortune of launching a biosimilar glargine in Europe and now a follow-on insulin glargine in the U.S. So that's great preparation in itself because now we're going to be on the other side of that.

And we are thinking how to best ensure that Humalog can continue to be an extremely strong franchise for Lilly. I won't discuss our specific plans, but I would say that we're very well prepared..

Great. Thanks, Enrique.

Jan?.

The amyloid-beta hypothesis and the connection to Alzheimer's disease has strong evidence from genetics, where if you have too much amyloid in your brain, you get early Alzheimer's disease.

And also the opposite, if you have less amyloid-beta production then by mutations in the APP in the BACE1 cleavage side, you also seem to be protected from dementia.

The key question is so how do you translate then these genetics into realities of pharmacological treatment in an aged patient? And here there are a variety of approaches that have been used.

And it's also a key one here to think about if you have an antibody with access to brain, 0.1% through the blood/brain barrier, how can you compare that result then to, for instance, an oral BACE inhibitor, which some of them go 100% into the brain and are I think more likely to have a marked effect than on the free amyloid beta? And the second question is clearly then how early do you have to treat? And I think we should recognize that even if you have mild Alzheimer's disease, your brain has been accumulating amyloids for decades, and you almost have maximum amyloid in your brain already.

So I think there could be two components here, like I say. If solanezumab really entered the brain enough to affect amyloid beta, I think our biomarkers like amyloid PET didn't really change very much by solanezumab, nor did the actually tau then changes, which are more related to neurodegeneration change.

So from that standpoint, we didn't see any objective measures I think that we changed the amyloid content in the brain, nor then neurodegeneration. Is this against or does this prove that the amyloid hypothesis is wrong? My view is it's too early to say. We need to wait for even more powerful agents.

And the next in turn are the oral-based inhibitors, which are more likely I think to have an even stronger effect on the amyloid beta in the brain. And in addition then, we need to look at earlier stages of Alzheimer's..

Thank you..

Tony, anything to add?.

Yes, Mark, I think our view on the prodromal trial is that when we saw the results of EXPEDITION3 in patients with mild Alzheimer's disease, which of course were disappointing, when we looked at the prodromal, the patients in prodromal, these are not as distinct clinical divisions as you might think.

There's a great deal of overlap between these two populations. And we felt within any given visit, a patient could be on one side of that or the other. So we felt as if that hypothesis had been tested, that those patients were close enough that the prodromal trial would be unlikely to be successful.

As you point out and as per Jan's remarks, there are three differences, three potential variables here. There's the clinical stage we just talked about. There's the overall a-beta hypothesis itself, and then there are molecule-specific aspects as well. So those are the three sliders on the equation that we need to try to figure out..

Thanks so much..

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

Next is from the line of Tony Butler, Guggenheim. Please go ahead..

Yes, thanks very much, a single question though for Derica, and it relates to gross margins, Derica. Certainly as the seven newer products that you call out have made an increasing contribution, as you noted, 12% in the quarter to overall revenue, one might expect gross margins to be able to move higher.

I guess I'd love for you to comment on the pushes and pulls there, and more importantly, how you think about that as that contribution exceeds 12% certainly for the calendar year, even beyond 2017. Thanks very much..

Sure. The good news is there's no substitute for top line growth, and so having the 7% revenue growth or in the quarter the new products driving almost 9 percentage points of volume-driven growth is tremendous, and really the kudos go to the team in pulling that off.

When you get to the gross margin percent, you did not see the improvement you may have been expecting. That's really driven more by mix. So in the quarter you did see, for example, on our insulin business, where you'll see as it gets more weight and we have negative pricing in that regime, that becomes a drag on our gross margin percent.

And for now, insulin still is our largest product until the other new products catch up. So what you really saw in the quarter was more a mix effect..

Thank you, Derica..

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

Okay, our next question is from the line of Chris Schott, JPMorgan. Please go ahead..

Great, thanks very much, just two questions here. Maybe first, can you talk about business development priorities? You recently announced an interesting but relatively small deal, but bigger picture, maybe a question for Dave.

When you think about how Lilly has historically approached business development, should we think about a similar approach under your leadership, or are there any differences in how you're thinking about business development relative to your predecessor? Second question was coming back to Alzheimer's and BACE.

How are you thinking about your BACE program and your molecule relative to Merck's program? Are there any important similarities or differences we should keep in mind as we consider potential read across from the Merck Phase 3 data later this year? Thanks so much..

Questions, Dave, if you'll answer the question on BD priorities, feel free since you're obviously very well in this space to make an initial comment on the AstraZeneca BACE program we have, and the other BACEs that we're developing and relative to the Merck program, maybe, Jan or Tony, feel free to chime in as well.

Dave?.

Sure. Thanks, Chris.

In terms of business development, I don't see a change in our general approach, which is what we've said for a while, which is we see value in deploying capital on business development where we can really complement our core therapeutic areas, where we're looking at acquisitions or licensing transactions that can bring products into the portfolio to drive growth for the future and to do that with a lot of discipline on value.

And so that's what I think we've been saying for years. I do think as we enter this phase coming up, where in our therapeutic areas there appear to be attractive alternatives for investment outside the company as well as inside, we've got a key period to make decisions on advancing assets into Phase 3 over the 1.5 years or so, as Derica mentioned.

We need to look at both sources of innovation and we'll do that. The CoLucid transaction, which is one we just announced, I think is a good example of that.

So I think the rate may be different based on our circumstance as we're growing the company and have perhaps more opportunities to move assets into Phase 2 and Phase 3, but the criteria really isn't different from how we've thought about this in the past.

On the Alzheimer's BACE inhibitors, I think we've talked about this for a while, but the Merck program has two distinct studies. The first one is a classic first-generation type design in the sense that they have a mixed, mild, and moderate population and no requirement to have amyloid present to be in the study.

And we know from prior studies like this, whether it be Lilly or other sponsors, you can end up with 20% – 30% of the patients who actually don't have Alzheimer's disease. In addition, for the reasons Jan mentioned earlier, later probably not better in terms of effect size.

So the Lilly program with AstraZeneca and the later Merck program have those features built in. We have two studies with AstraZeneca. So if Merck I think has a positive signal of any sort, I think we'd feel good about that in terms of BACE inhibitors as a target. If there's no signal, I think we'll have to do some thinking.

That's how we're looking at that upcoming readout. Maybe Tony or Jan could add to that..

No, I don't have anything additional. I think you highlighted the differences between them. We have two studies. The lead study has both patients with MCI [Mild Cognitive Impairment] and prodromal and mild Alzheimer's disease, the earlier phases, in them. And then the second study that we entered Phase 3 on are patients with mild Alzheimer's disease.

And in every case, we have verified the amyloid going forward. We have a single endpoint, which is a cognition endpoint, which also differs from the Merck program. They have more of a classic, as Dave says, dual or co-primary endpoint for the first study, and then they've announced that the primary is the CVR sum of boxes for the second study..

And if I may add then, both the Merck and the AstraZeneca BACE are not selective for the BACE1 versus the BACE2 enzyme. And we have two other BACE compounds also in clinical development. And in Phase 2 we have our so-called BACE4 inhibitor, which is low-dose.

It's highly potent, 100% brain penetration, which means that you have less peripheral overexposure in a way then to get the brain affect, and potentially functionally less active on BACE2.

And we recently then also entered for the first time I think now a selective BACE1 inhibitor into clinical development, and that agent then avoids the impigmentation which you see then in experimental animals during tox studies..

Thanks, Jan. Kevin, if we can, go to the next call, please..

Next is from the line of Andrew Baum, Citi. Please go ahead.

Hi, a couple of questions, please. Would you care to characterize the magnitude of the financial impact from potential dual-eligible reform or alternatively provide us the delta in percentage terms between net prices for Medicare and Medicaid? And then second, you recently recruited Levi Garraway and Christi Shaw within R&D and SG&A respectively.

Could you outline what their mandates are, particularly in relation to building your immuno-oncology franchise, which obviously is not where ideally you would like it? Many thanks..

Andrew, thank you for the questions.

Dave, would you like to take that second one first? And then you do you want us to answer here in the room the question on the dual-eligibles?.

Yes, that makes sense. Andrew, thanks for the question. We have brought in two senior executives recently. We're excited by both their willingness and excitement to join the company, but also what they can add probably in the very short term. Levi is joining Sue Mahony's team, really taking the role that Richard Gaynor had.

So he's got all the clinical-phase oncology portfolio and obviously brings a great skill set to do that. I think in terms of immuno-oncology, he's got expertise in that field among other fields of oncology.

And it's probably difficult to say too much about what we hope he'll do, but I think clearly it's a competitive field and having a new look at what we're doing, how we combine products, how we could potentially accelerate our efforts in certain areas is something that we're hoping Levi can help us with. Christi is a commercial person.

She started her career at Lilly, most recently ran Novartis's U.S. business. And she's coming into the job I was in, which is a go-to-market and drug development job at running Bio-Medicines. I think she's a strong diverse talent that I think is really an industry veteran who understands the U.S. market extremely well.

And so when that opportunity came to pull her onto the team, we made that move, and I think it's going to be great to have her. She starts April 1, so you'll start to see her on the road there in Q2..

Great. Thank you, Dave.

Derica?.

In regards to your question regarding the dual-eligibles, the best way that I could probably characterize that is that the impact of that would be on the order of magnitude on the industry of the Affordable Care Act is how you should be thinking about it..

It's been a few years, Andrew, but probably four or so years ago, I think the Congressional Budget Office had estimated the cost of moving dual-eligible and low-income subsidy folks from the Medicare price into Medicaid, and they had estimated that at about $110 billion, $115 billion cost for the industry over a 10-year period, very similar to what the expected cost is of the ACA.

We have not said if the bully (49:55) exposure to that kind of a proposal would be greater or lesser than what the ACA cost is, but we have said in the past that the ACA 2011 through 2015 was running on the order of magnitude of $500 million to $550 million a year on average as far as the cost to Lilly for greater rebates in pharma.

I hope this gives you some order of magnitude..

Thank you..

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

Yes, and that's Gregg Gilbert, Deutsche Bank. Please go ahead..

Thanks. First for Enrique, in the past, Enrique, you flagged the concern about SGLT-2 new patient starts slowing. What are your latest thoughts on that subject now that you have a label and the updated guidelines? Perhaps you could give some color beyond just scripts. Then my second question is for Jeff.

Can you give us some flavor around your outlook for the key parts of your business for 2017 and what some of the pros and cons were in the fourth quarter? Thanks..

We'll go to Enrique, and then go to Jeff..

Sure, so we are clearly very excited about the new label for Jardiance in the U.S. and the new treatment guidelines for diabetes published by the ADA. We've launched now this new indication in early January. And we are thinking, I'll be honest, pretty big about the opportunity that we have in front of us given the indication that we have.

Clearly for us to be successful, the class has to grow or more specifically Jardiance has to grow.

And we think of that not just as we think about what is the Jardiance share in the SGLT-2 class, but what is the overall share that Jardiance could get when we think about people with Type 2 diabetes, and in particular in the segment where Jardiance is indicated for cardiovascular risk reduction, which is in people with Type 2 diabetes and established cardiovascular diseases.

You can imagine that is as much as 30% of people with Type 2 diabetes, so very, very significant opportunity. It is too early to comment given that we have basically the first week of scripts, which is the first week that basically we launched the product.

But I expect that we will see the uptick and we will see this in terms of new patient starts right away..

Thank you..

Jeff?.

Gregg, on the Animal Health business, as you know, in Q4 Elanco revenue increased 4%, so we saw the growth start to come back. This was driven by companion animal growth from new product launches primarily, and also I think some expanded partnerships and distributors around the globe as we continue to increase our footprint.

Operating margins also I would state expanded to 24% in Q4. That's in comparison to 19% a year ago, so we continue to make progress on integrating our recent acquisitions, and we anticipate further improvement as we go into 2017.

So as you look at our strategic agenda, I think a few key things in 2017, first the completion of the BI acquisition that's integrated. We're taking orders. The teams have all been trained. We'll see 6% growth come from that in 2017. As Dave mentioned, we launched Galliprant in the U.S. in coordination with Aratana.

This will expand our portfolio in companion animal therapeutics. We'll continue to see our base business expand through innovation, even on the food animal side, as well as just execution in bringing the value of the capabilities that we've gotten from the acquisitions through.

And some of the external factors we see moderating and stabilizing as you look at Latin America and dairy.

So in summary, I would say our margin improvement will expand to that mid-20s, as we've mentioned, and look to see our growth will return to grow in our base business to the mid-single digits, mostly in the second half of the year, and then again have the BI acquisition growth come through as well..

Great. Thank you, Jeff. Kevin, if we could, go to the next caller, please..

The next questioner is David Risinger, Morgan Stanley. Please go ahead. Your line is open, sir..

Great, thanks. Sorry, I had you on mute there. I have two questions. First, Dave, if you could, comment on how the meeting with President Trump concluded and next steps we should expect from the administration. And then second, I was hoping a member of the team could comment on the abemaciclib Phase 3 readout timings ahead. Thank you..

Great, Dave, thank you for the questions. So, Dave Ricks, if you'll answer the first part of Dave Risinger's question, then absolutely we have Sue Mahony here, who can address your second question, Dave..

Thanks, Dave. As I said earlier, we had a positive and broad ranging discussion.

And I was impressed with the President's appreciation for what our industry is, which is really a crown jewel of America enterprise in the sense that we invent things, we can change lives in terms of healthcare outcomes, but also we're a great employer and source of economic growth, jobs, and exports.

We touched on lots of things, tax, regulation, as well as the healthcare repeal/replace discussion. So there's a number of follow-ups that were cited that will be happening through staff and on the Hill with key members of Congress.

The specifics on timing and so forth I'm not at liberty to share here, but I was encouraged overall by the sense a) that there will be changes made, likely rapidly. Most of those will involve the legislative branch. And that there will be follow-up with the White House to make sure we're making progress as we go along.

But there's not too many specifics I can share in terms of exact timing. Just overall, I think it was productive to engage the President, educational for both sides, and I think we can go forward and really look at enacting policies that can both help the industry but also healthcare in the United States..

Great.

Sue?.

So with regards to abemaciclib readouts, we're anticipating getting the MONARCH-2 data and having that read out this first half of year. With regards to – and that's the fulvestrant study. The MONARCH-3 Phase 3, we should have an interim the first half of this year.

Our base plan, as we've said previously, is that we will continue through the final, which we could see the end of this year..

Thank you, Sue.

Kevin, if we could, go to the next caller, please?.

Our next caller, Jami Rubin, Goldman Sachs. Please go ahead..

Thank you, a question for you, Dave. Do you see the opportunity to improve the company's operating margin goals? I think that if memory serves me right, three, four years ago you really set out a goal to achieve SG&A and R&D at 50% or lower. Again, that was set up three, four years ago, maybe even longer.

I'm just wondering if you see opportunities to either update that goal you set for 2018 or where you see it going. And the reason I bring it up is yes, you had a real high-quality quarter this quarter, but you could have massively beat if expenses, came in line, even at the midpoint of your guidance.

Both SG&A and R&D were at the very top of your guidance. And for the full year, your operating margins were 21.7%. I think that is the absolute bottom of the industry.

So can you talk about with your – driven by your new pipeline, what the magnitude of potential improvement that you see for operating margins? Are there structural impediments such as mix effects that will keep margins below industry average? How should we think about it over the next three to five years? Thanks..

Okay, thanks, Jami. Over to you, Dave..

Sure. Thanks, Jami, great question and one we're spending a lot of time on as well. Of course right now, we're working against the prior goal you cited, which is to get our SG&A and R&D total operating expenses as a percent of sales to 50% or less in 2018. So that's the near-term goal we're very focused on.

We've reiterated that again in December, and that's obviously an improvement over where we are today and what we're reporting for 2016.

I would highlight, although we're at the high end of the ranges in terms of our guidance for the quarter on expenses for R&D and SG&A, year over year good progress in Q4, and we did have some one-time items in Q4 which adversely affected that.

That said, I think my overall perspective on this question is we have multiple ways to improve the operating margins of the company. And as we launch new brands and grow the top line, that's clearly one.

I think if we can really repurpose investment behind those priorities and maintain a lower growth rate, in some cases much lower growth rate in the middle of the income statement, we can deliver tremendous leverage on the bottom line. You can see that in Q4, putting aside the Street estimates, what kind of leverage is available in the business.

And we're aware of where we stand in the industry. I think we're not a single-product company or close to it, like some of the comparables even approaching our size. So that breadth I think does have inefficiency built into it. It has other advantages. We run a global operation. We want to be a global company, not just a multi-market company.

That has an implication. But by and large, I think your question is can we improve beyond what we set out in 2018. And I'm personally focused on delivering on the 2018 commitment, and then we'll likely set a goal beyond that for improved operating margins toward the balance of the decade..

Thank you..

Derica?.

Jami, this is Derica. Just to maybe add a little bit of color to Dave's comments, recall that the guidance that we provided said we get to 50% by 2018. We also on that same guidance, going back to last summer and our July earnings call, we said we would improve our gross margins between then and the end of this decade.

And our starting point was around the mid-70s for gross margin. So that implies that at least at a minimum by 2018, our operating margins will be at least 25% or greater. So if OpEx is 50% of our revenue line, today our gross margin is around 75%, or said differently, our COS is around 25%, so if we get to 50%, we maintain or improve on the 25%.

That implies that the floor and operating margin you should be looking at in 2018 is a minimum of 25%. And so to Dave's point is, that's what we said we will get to by 2018. We never said that we will end there, that that wasn't the end goal. That was the intermediate goal. And so there's still progress being made..

Thanks, Jami, for the question.

Kevin, if you can go to the next caller, please?.

That's Tim Anderson, Bernstein. Please go ahead..

Thank you, a couple of questions. One is a higher-level payer question.

Do you think that the relationship between drug companies and PBMs will come under more government scrutiny as it relates to rebates? And kind of a thought exercise, from your perspective, would it be good or bad for drug companies to have that whole rebate process potentially go away? Second question is on Alimta.

You noted that that is the chemotherapy drug used in KEYNOTE-189.

How does the trajectory of Alimta change from where it is today, if that trial is positive or if the Merck regimen gets early approval in May on the Phase 2 data they filed on? What does your 2017 guidance assume, and could there be upside in 2017 and also beyond 2017?.

Thank you for the questions. Dave, if you'd like to take the first question that we received on scrutiny of the relationship and the business relationships with PBMs and pharma companies. Then over to Sue on the question on Alimta in combination with Keytruda..

Sure. Thanks, Tim. I think a lot was written about that question. To be honest, we have good relationships with all the major PBMs. Of course, it's a business transaction and we're on opposite sides of the table. They do their job very well.

They negotiate hard for rebates and discounts for their customers, most of which are large commercial plans or Part D. And we do our job, which is to sell the value and try to maintain formulary position. There are always tugs and pulls in that and products are listed and delisted, but overall I'd say we have a good relationship with the PBMs.

Of course there's only one major pure-play PBM at this point. But Express Scripts and Lilly have a good relationship, and we announced this Blink Health partnership as an example of that, innovating together to try to solve some of the payment problems.

I think hypothetically, if we didn't have rebates, would I worry long term about our future? My answer is no. I think we're in the business of making innovative products that help patients. We need to do that in a way that creates value in the healthcare system. How we get paid for that value, there are probably lots of ways.

As you know, in international markets many, many places where we have productive and profitable businesses, we don't have PBMs or anything like it and we don't have rebates, and we do just fine.

So I think because of the breadth of our portfolio because of our new product mix, because of the company's focus on volume growth across several key markets, I think as Derica said in his comments, we have a durable strategy going forward should there be some big disruption, which I'm not sure I see right now.

But I think on either side of that, our model would work well. Enrique can add anything to that and then maybe the Alimta question to Sue..

Enrique?.

No, nothing from my side..

Sue, on Alimta?.

So, Tim, let me answer the Alimta question. Clearly we can't give guidance with regards to a product. That said, we are very pleased to see the data from KEYNOTE-021G and also the fact that the FDA have accepted it for filing, with a PDUFA date, as you know, in May.

And we also are looking forward to the Phase 3 data, which again we should see that in September time. I think with regards to what this means for Alimta, Alimta has been under pressure, particularly in the second-line setting with I-Os coming through in the first line setting very little at this point.

This data is the first data that shows that adding an I-O agent to Alimta-carbo [carboplatin] combination shows not only a good overall response rate, which we think we saw a doubling response rate, PFS of about 13 months.

But also although the survival data wasn't different between the two arms, we saw a pretty good survival both at the 12-month and the 24-month mark, which I think was 72% versus 75% of patients survived at that point.

So I think we're excited by the data, and it is the first chemo combo and I would say the only chemo combo with KEYTRUDA or any I-O agent. We await to see what the other data shows this year with the other trials that are ongoing and maybe next year too with the I-O/I-O combos and the chemo combos.

But clearly this, in my view, can do no harm to how people see Alimta. It is the standard of care in first-line setting, and we continue to see that this is additional data that adds to the multiple trials that we've seen with improved overall survival with Alimta..

Great, thank you, Sue. Kevin, we can go to the next caller..

And that's Steve Scala with Cowen. Please go ahead..

Thank you. I have two questions. Can you provide any perspective on the reasons for the delay in the baricitinib PDUFA? So that's the first question.

And the second question is what should we conclude about Lilly's 2017 guidance in light of the fact that I believe Lilly has exceeded the top end of the initial EPS guidance range in each of the last six years? Thank you..

All right. Steve, thank you for your questions. So we'll go to Tony Ware for the first question on the baricitinib NDA review here in the U.S., and then over to Derica for your second question on guidance.

Tony?.

Thanks, Steve. In any regulatory review, the FDA submits various information requests, and then we respond to those as well as we can.

The FDA makes a determination once it receives any of these information requests as to whether additional analyses that we have provided, and that's what they are is new analyses of the data that they already have, are sufficiently complicated so that it would extend the time that they would require to review the application.

And that determination is made entirely by them, and we don't have much insight into the rationale for that. I want to point out that they did not ask us to do more studies, which is an important point. So that's about really all I can say definitively.

I would point out, of course, that this application in the wide world of applications that we send to them, it would be on the more complex side. It's five Phase 3 studies. There are different endpoints, different patient populations, different comparators, and different doses in some cases about that.

So the fact that it would take them a little longer to take a look at this medicine than some of the other applications I think shouldn't be too surprising. But I'm optimistic that we will get to a good place with the FDA and that we will be able to meet the new data in April..

Great. Thank you, Tony.

Derica?.

Regarding your question pertaining to guidance, having been in this job for a while, it's been a wonderful ride. If you look at the last few years, we have exceeded our guidance in some of those years. However, in 2016 we actually came in on the lower end of our guidance, if you think about the range that we provided.

So it's not only always true that we've exceeded. But when I think about 2016 performance, what we really are encouraged by and I am is the way we ended the year with very strong revenue performance. We're driving 8 or almost 9 full percentage points of growth from our new product launches.

It's very much living up to the expectation that we had set when we provided our outlook for the YZ period. And having achieved that, then it does give us opportunities, as Jami was saying in her earlier question, to work on the middle of the income statement to improve our margins.

And so given the way that we finished the year, I'm highly encouraged about our prospects for 2017. I think our guidance is very reasonable. I think our ability to achieve the range of $4.05 to $4.15 in EPS is very much within our grasp.

And it implies that we're going to take those top line trends and we're going to translate that into about 300 basis points of OpEx through sales growth and achievement (1:10:41). So that's what we're going to be focused on.

And I think Dave summed it up well when we were all out at the JPMorgan Conference together, launch with excellence, improve our margins through productivity, and you'll continue to hear us talking about in 2017 as well as to how we're advancing our pipeline.

And so that is something I want to make sure we don't lose sight of because that's what long term continues to make this engine grow..

Thanks, Derica.

Kevin, next caller, please?.

Next is Seamus Fernandez, Leerink. Please go ahead..

Great, thanks for the questions, so just a couple here.

For Enrique, can you talk a little bit about the opportunity to continue to expand your margins within the diabetes business, particularly in the wake of or in the midst of the arms race pullback that you're seeing from competitors with regard to the field force? I think on your update conference call on the promotional efficiency of the business, you stated that no additional sales reps had been added despite the significant increase in the number of products in the portfolio.

So just wondering if you see more opportunity as you continue to grow that business for additional leverage. The second question is more broadly for Dave and maybe to some degree Enrique, given your new role.

Can you guys talk a little bit about the willingness to utilize your relationships with managed care, particularly in areas like IL-17 and with the Taltz portfolio? Is now the right time to start to work those relationships or accelerate them? And do you see similar opportunities for those types of interactions on the oncology side of the business? And then just one final question, Dave, can you just give us a general sense of how you're thinking about business development on a go-forward basis? Do you see it more as partnerships, or do you see it more as outright acquisitions? I ask that question more in the wake of the decision to walk away from the partnership with Adocia, which again certainly was a surprise to that company who was a partner.

And we've seen some questions raised with regard to how the partnerships have been executed in the past. So it would be nice to know how you guys are thinking about the business development strategy going forward. Thanks..

So I'm not sure we understood exactly, Seamus, the middle question you had about leveraging the relationships with payers on Taltz or oncology.

Can you be a little more specific on what you're looking for there?.

Just a willingness whether you'd be willing to go to exclusive formulary access or utilize more aggressive discounting despite what are areas of strong potential growth for the industry and for the company in order to participate in that growth earlier?.

Okay, thank you for that clarification. Enrique will lead off with the ability expand margins in diabetes.

Dave, then if you'd like to comment on the second question on leveraging the relationship and how that might evolve with the payer group and your BD priorities, then we'll come back into the room so if there's anything you want to add to that middle question on the oncology front, please do so.

Enrique?.

Sure. So we are indeed seeing very significant opportunity to continue to leverage the income statement when it comes to diabetes. We have very strong sales growth, which is driven by volume. As we have mentioned in the past, we're getting some of the benefits from our technical agenda when it comes to diabetes on the manufacturing side.

And as we've said, that is for us several percentage points worth of benefit that we're getting, and those benefits continue to accrue and gross margins continue to improve.

And finally, when it comes to SG&A, we are basically able to with the commercial footprint that we have support the broad range of products, including all of the products that we have recently launched. So we do believe we have the right infrastructure to support continued growth without us having to add additional commercial infrastructure.

When we look at the number of people out there, we are a little bit below some of our competitors when it comes to diabetes, even post some of the reductions that we've seen from them. But at the end of the day, we have to do what works for us.

And I think the numbers speak by themselves, not only very good revenue growth but we are basically gaining share across all of our products in all of the key geographies. So it is a pretty good run that we're having right now..

Great, thank you, Enrique.

Dave?.

Hi, Seamus. First of all, in terms of specialty markets and leveraging our U.S. managed care presence, we have a great team. We've got strong relationships, not just with PBMs but with other managed care entities.

And I think as a broad-based pharmaceutical company, it's an advantage when we're entering new spaces because we already have that payer connection both for immunology and oral oncology that that base will serve us well. You can add abema [abemaciclib] should we have positive data and be able to submit, but I think it's a strength of the company.

Maybe what you're really asking is will we leverage the portfolio to drive more exclusive formulary coverage? I would just say in general, that's not our aim. I think we want to compete with as much open access as possible in as many classes as we can because, as someone launching new products, that's a policy position that makes sense for us.

Of course, we have incumbent products too. But all things equal, we would prefer patients have access to as many brands as possible, and we compete based on the differentiation of our products. That's more or less what we try to do across the whole of the portfolio. On BD, I'm not exactly sure what you're getting at there.

As I said earlier, it will be an important part of what we need to do going ahead to build out the portfolio and keep upgrading value within the portfolio, whether it be through licensing or M&A. We have a number of very successful licensing arrangements ongoing and in the past.

To name a few, of course, the Boehringer Ingelheim arrangement, Pfizer on tanezumab, AstraZeneca on BACE, even the partnering we've done with major oncology firms in terms of combination development with some of our assets I think are all examples of Lilly's open for business on partnerships.

There are some specifics around ultra-rapid insulin which I won't go into to here, but I think all partnerships require a shared sense of what the future needs to look like as well as a compelling profile of a product. And when we have those things, we've done very well. If you have information to the contrary, I'd love to hear from you about it.

But partnering will be a key part of what we do along with that smaller M&A space, as I discussed, and I think it's a strength of the company..

Thank you..

Comments on oncology?.

No, I would just say the same as what Dave said. We will compete based on the differentiation of the product. Clearly, what the data tells us will help us to better understand what levers we pull across the whole of the marketing mix..

Thank you, Sue. Kevin, next caller, please..

Next is Marc Goodman, UBS. Please go ahead..

Hi. First question is you had mentioned that there was $130 million adjustment, mostly Humalog. Can you tell us what was the actual number for Humalog, and what were the other products that were impacted? And then second, help us understand just the way that the revenues – I understand the partnership with BI, but Jardiance and Trajenta.

And I'm just looking at the way that the U.S. numbers have progressed throughout the year, and they seem to be bouncing around. Just give us a sense here. In the fourth quarter versus the third quarter, was there anything unusual going on? Was there any stocking? Jardiance really ramped up a lot.

You see Trajenta coming down a lot, probably much more than what trends would tell you on script trends. So maybe you can just help us understand some of the dynamics there. Thanks..

Thank you for the questions, Marc. We'll go to Derica for your first question, and over to Enrique.

Derica?.

Hi, Marc. You're correct. We did have a $130 million gross net benefit in the fourth quarter. What we've said is that a good portion, a sizable portion of that is attributable to Humalog. But we have not provided the absolute numbers behind it or any of the other products affected..

Enrique?.

When it comes to Jardiance and Trajenta revenue in the U.S., we do see numbers in the diabetes category move a bit based on the estimates for rebates and discounts. This is not just an item for Lilly. It's an item for any company in the diabetes space given the sizable rebates that are paid to payers.

In this particular case, it is Boehringer Ingelheim that basically does the contracting and the estimation. In the case of Jardiance, we saw a slight benefit in the fourth quarter.

And in the case of Trajenta, we basically saw a negative impact in the fourth quarter, the negative impact probably closer in terms of Lilly revenue nearly probably $20 million. So we expect to see that volatility when it comes to the diabetes product.

What we try to look at is really longer term what are some of the trends that we basically see from a volume perspective and also from a pricing perspective..

Great, thank you. Kevin, if we can, go to the next caller..

Next is Geoff Meacham, Barclays. Please go ahead..

Good afternoon, everyone. Thanks for the question, for Dave, another policy question.

Was there any discussion today in your meeting with President Trump on the role of PBMs and the role they play in the pricing equation? Do you feel like this could be a bigger part of the drug pricing conversation going forward? And on then on the galcanezumab Phase 3, some data from your competitors, namely Amgen, when you look at that, what would you think is the line for a clinically meaningful benefit? And then finally, with the CoLucid deal, you'll have a range of products.

What do you think in this space more broadly is still fertile ground for innovation? Thank you..

Great, Geoff, thank you for the questions. Dave, obviously the first one we'll pass over to you, and feel free if you want to comment on either of the following two. And then both Tony probably and Jan maybe will add some color here in the room as well.

Dave?.

Thanks, Geoff. In terms of PBM specifically, that wasn't a centerpiece of the discussion with the President. Of course, pharma has recently put out some work just to put some facts into the picture in terms of what the total drug spend is in the nation and how much of that is innovative, generic, or going into the channel, if you will.

I think it's available on their website if you want to look at it. That was referenced in the meeting, and I think it always does surprise people that fully one-third of spending in the U.S. is not going to manufacturers but going to other entities. I think the President was interested in that.

Mostly we discussed how to get value to consumers who particularly in the ACA plans or in high-deductible plans have limited formularies. They think they bought insurance and they have limited coverage or are paying a lot of out-of-pocket costs, and how to address that situation.

And so PBMs themselves weren't mentioned specifically, and we did discuss channel partners broadly, but more as an educational point. In terms of CoLucid, I'll start there. Obviously, that fits in well with our existing interest in pain and migraine specifically.

It is abortive treatment, so people take that when they're experiencing or about to experience a headache.

I think it has the key benefits of potentially being labeled for use in patients who have cardiovascular risk factors, which is a major issue with triptans, the major class in that setting, and will fit hand-in-glove with our promotional, commercial, and medical efforts, even future clinical efforts with our potential antibody galcanezumab, for preventing migraine.

I guess the question on effect size, I can defer to Tony on that in terms of what we hope to see vis-à-vis Amgen..

Hi. Regarding the CoLucid or lasmiditan, we're encouraged by this as a novel mechanism. There hasn't been a new mechanism to really stop a migraine that's ongoing for many years now. Nearly 7 million people in the United States take a prescription medicine for that, and a lot of them don't get better.

And as Dave points out, a lot of them could potentially benefit if they didn't have cardiovascular disease. In fact, there was a recent survey by the American Neurological Association that said 22% of the patients currently taking triptans actually have what would be considered a cardiovascular contra-indication. And I'm sure these aren't bad doctors.

I'm sure it's patients that really are so desperate they're willing to take the chance. So we think that there's a lot of room for innovation for that.

And of course with the novel mechanism, the Phase 3 study that was carried out by CoLucid showed that many of those patients had already had a poor response to triptan, but nonetheless responded well when they received lasmiditan. So we're encouraged, and we think that this is a significant innovation for this.

For galcanezumab, if we look at our data for Phase 2, we're encouraged by the data that we've seen, and we hope to see the same thing for Phase 3. And there we saw 70% of the patients had at least a 50% reduction in migraine days. We had nearly a third of patient had no migraine days whatsoever.

And these are patients, of course, that have in some cases dozens of migraines a month. This is a big difference in terms of whether people can go to work or can take care of their kids and a lot of meaningful benefits for this. So if we end up in the range that we saw in Phase 2, we'll be very pleased..

Great. Thank you, Tony. Kevin, we'll take one last caller before having Dave wrap up the call today..

That's from Richard Purkiss, Piper Jaffray. Please go ahead..

Thanks for taking the question.

Just given Trulicity's really strong performance, could Enrique and maybe Jan just run through thoughts on how they see the upcoming competition from Novo's semaglutide, also how they view its retinopathy data and just hopes for the REWIND study?.

Richard, thank you for the questions. Enrique, if you want to lead off and Jan can....

Sure. So we are very excited about the growth of Trulicity. We're having great sequential growth, both driven by the overall strength and the health of the GLP-1 class, but also because of the share growth with Trulicity. I was just reviewing our latest data, and Trulicity now nearly has a 32% new-to-brand share in the GLP-1 class as of last week.

And so it's really, really outstanding performance by the team. Overall for us, continued class growth is probably the most important factor, and we're excited. Maybe I can provide some color because we recently started reaching additional prescribers as of late last year, basically in the last quarter.

And we've seen significant continued adoption by new prescribers. So that basically speaks to continued growth as we look ahead for this product. We do look at the competitive environment and we do look at semaglutide as a potential competitor in the near future.

And they do have good efficacy data in a number of trials, including a head-to-head against Trulicity. But they also have reported an increasing retinopathy that was significant as part of one of their trials. So we need to see at the end of the day what the full label will be. And we are of course very prepared, but we really like our chances..

And then thoughts on the REWIND study and a readout?.

REWIND, we recently had an interim readout. We were basically told that the study will continue as planned, which basically means that we're looking at 2019 for the readout of the cardiovascular outcomes data for that study..

Thank you, Enrique. We're almost at the top of the hour, so, Dave, we'll turn it over to you to close out today's call..

Thanks, Phil. We appreciate your participation in today's earnings call and your interest in Eli Lilly and Company. Driven by new product launches, Lilly is entering a new growth period. The combination of top line growth and margin expansion over the balance of the decade provides a compelling thesis for investors.

I look forward to keeping you informed of our progress, and please follow up with our IR team if you have questions we've not been able to address on today's call. Have a great day..

Thank you, ladies and gentlemen. That does conclude your conference. Again, thank you for joining. You may now disconnect. Have a good day..