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

Chris Schott - JPMorgan Securities LLC Seamus Fernandez - Leerink Partners LLC John T. Boris - SunTrust Robinson Humphrey, Inc. Timothy Minton Anderson - Sanford C. Bernstein & Co. LLC Andrew S. Baum - Citigroup Global Markets Ltd. Umer Raffat - Evercore ISI Steve Scala - Cowen & Co. LLC Jami Rubin - Goldman Sachs & Co.

LLC Gregg Gilbert - Deutsche Bank Securities, Inc. Geoff Meacham - Barclays Capital, Inc. Vamil K. Divan - Credit Suisse Securities (USA) LLC Tony Butler - Guggenheim Securities LLC Alex Arfaei - BMO Capital Markets (United States) David R. Risinger - Morgan Stanley & Co. LLC.

Ladies and gentlemen, thank you for standing by and welcome to the Eli Lilly Q2 2017 earnings call. For the conference, all participant lines are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. [Operation Instructions] As a reminder, today's call is being recorded.

I'll turn the conference now over to Mr. Dave Ricks. Please go ahead, sir..

Thank you and good morning. Thank you for joining us for Eli Lilly & Company's second quarter 2017 earnings call. I'm Dave Ricks, Lilly's Chairman 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 USA; Dr.

Sue Mahoney, President of Lilly Oncology; Dr. Levi Garraway, Senior Vice President of Oncology Global Development and Medical Affairs; Christi Shaw, President of Lilly Bio-Medicines and Jeff Simmons, President of Elanco Animal Health. We're also joined by Kristina Wright, Chris Ogden and Phil Johnson of our IR team.

Today we'll cover our usual quarterly content in an abbreviated form. That will free up time for Sue and Levi to walk you through an update on our oncology strategy. We believe the increased clarity and focus that is part of our revised strategy will make us more competitive in this key therapeutic area.

During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide 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 is not intended to be promotional and it is not sufficient for prescribing decisions. I'll start by summarizing the quarter.

In Q2 we generated worldwide revenue growth of 8%, driven by volume growth in our human pharmaceutical business, once again led by our new products. We also continue to expand our margins.

Excluding the effect of FX on international inventories sold, gross margin as a percent of revenue increased by over 90 basis points and total operating expenses as a percent of revenue declined by over 390 basis points to 50.8%. We continue to make progress with our pipeline.

Highlights include the Japan approval for Olumiant for rheumatoid arthritis. The FDA granted priority review to abemaciclib in advanced breast cancer and Fast Track status to tanezumab for chronic OA and low back pain.

We presented detailed data from our Phase 3 studies of galcanezumab for migraine prevention, and for abemaciclib we presented detailed data from our Phase 3 MONARCH 2 study and announced initiation of a pivotal study in the adjuvant setting that has now begun.

In terms of capital deployment, just yesterday we announced an alliance with Nektar Therapeutics to develop and commercialize NKTR-358, a novel immunological therapy for the potential treatment of a number of autoimmune and other chronic inflammatory conditions.

We announced a collaboration with KeyBioscience on a potential new class of treatments for metabolic disorders which closed earlier this month. And we returned over $700 million to our shareholders through share repurchases and our dividend.

In other news, we received an important ruling from the UK Supreme Court upholding our Alimta method of use patents in four major European countries and we also reached a settlement with generic companies that will provide exclusivity for Cialis until at least September 2018.

Our continued progress in 2017 keeps us on track to achieve our midterm goals for each of our strategic objectives. Slides 5 and 6 contain more details on this these events as well as other events of note that occurred since our April earnings call.

I'd highlight that earlier this morning we issued a press release to provide an update on our meeting with the FDA to discuss the baricitinib complete response letter.

The FDA has indicated that an additional clinical study is necessary for resubmission in order to further characterize the benefit-risk across doses in light of an observed imbalance in thromboembolic events that occurred during the placebo-controlled period of the RA clinical program.

We disagree with the FDA's conclusions and believe the comprehensive clinical data demonstrate there is a positive benefit-risk profile that supports baricitinib's approval as a new treatment option for people suffering from RA in the United States.

In the European Union where baricitinib 2 milligrams and 4 milligrams have been approved since February of 2017, the CHMP recently agreed to update the label with a precaution for patients who have risk factors for DBT and PE. In Japan where baricitinib was also recently approved, the label includes a similar precaution.

Along with Incyte, we are evaluating options for resubmitting, including further discussions with the FDA or conducting an additional clinical study. The time to resubmission will depend on which option we pursue but is expected to be a minimum of 18 months.

We are disappointed that resubmission will be delayed, but we are committed to bringing baricitinib to people with RA here in the US. We're also committed to a robust life cycle plan for baricitinib as we see great potential in a number of other indications.

Moving to our financial results, 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 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. Looking at the non-GAAP measures on slide 9, you can see revenue increase of 8% that I mentioned earlier. Gross margin as a percent of revenue increased to 76.7%.

This increase was driven by higher realized prices and manufacturing efficiencies, partially offset by the negative effect of product mix and higher expenses to support new pharmaceutical products. Total operating expense was flat to Q2 2016, with marketing, selling and administrative expenses increasing 5% and R&D expenses decreasing 6%.

The increase in marketing, selling, and administrative expenses was driven by higher spending to support new products, partially offset by lower spending on later life cycle products. The decrease in R&D expenses was driven by a milestone payment in last year's quarter. Excluding this milestone payment, R&D expenses increased less than 2%.

Other income and expense was a $4 million expense this quarter, compared to income of $21 million in last year's quarter. Our tax rate was 21.7%, a decrease of 70 basis points compared with the same quarter last year. At the bottom line, net income increased 30%, and earnings per share increased 29%.

We achieved this significant earnings growth by delivering high single-digit volume-based revenue growth while improving our gross margin percent and significantly reducing our OpEx ratio, creating positive leverage.

Slide 10 details the same non-GAAP measures for June year-to-date, while slide 11 provides a reconciliation between reported and non-GAAP EPS. You'll find additional details on these adjustments on slides 35 and 36. Moving to slide 12, let's take a look at the effects of price, rate, and volume on revenue growth.

Effective foreign exchange was minimal this quarter. Excluding the slight headwind from FX our worldwide revenue growth on a performance basis was 9%, and was driven by volume, followed by price. It's worth noting that in our human pharma business each major geography drove volume growth this quarter. By geography, you'll notice that the U.S.

pharmaceutical business increased 19%, driven by both price and volume. Price growth was primarily driven by our late life cycle products, Cialis and Forteo while Trulicity was the main driver of U.S. volume growth with meaningful contributions also coming from Taltz, Basaglar, Jardiance and Lartruvo.

Excluding FX, European pharma revenue growth was 4% driven entirely by volume, despite significant headwinds on Alimta. Excluding Alimta, the rest of our European pharma revenue grew 10% on a performance basis led by Trulicity. In Japan, despite a large negative impact from the entry of generic Zyprexa last June, pharma revenue increased 2%.

Excluding Zyprexa, the rest of our Japan pharma revenue grew 16% in Q2, led by Cyramza, Cymbalta and Trulicity. Our pharma revenue in the rest of the world increased 3% on a performance basis this quarter. Patent expirations for Cymbalta for several countries, including Canada, negatively affected RoW revenue growth.

Excluding Cymbalta, rest of world pharma revenue increased 7% in performance terms, led by Humalog, Trulicity and Humulin. Turning to animal health, excluding the impact of FX, worldwide revenue decreased 8% driven by volume as price had a minimal impact. Food animal product revenue declined by 13% while companion animal product revenue increased 1%.

Animal health revenue benefited from the addition of BI's U.S. vaccine business, but revenue growth was negatively affected by buying patterns ahead of an SAP cutover that increased revenue in Q2 of last year by $40 million.

On a performance basis, excluding the BI vaccine acquisition and adjusting for last year's purchasing patterns, our animal health revenue decreased 13%, with similar declines in both food and companion animals. The food animal decline was primarily driven by market access pressure as well as by competitive pressures in cattle and swine.

The companion animal decline was primarily driven by competitive pressures in the parasiticides market. Slide 13 outlines the same information for our June year-to-date results. As we've done in recent quarters, let's now take a look at the drivers of our worldwide volume growth on slide 14.

In total, our new products comprised of Trulicity, Cyramza, Jardiance, Taltz, Basaglar, Lartruvo, Portrazza and Olumiant were the engines of our worldwide volume growth. You can see these products drove 10.7 percentage points of volume growth. Lower Cialis volume provided a headwind of 120 basis points, primarily due to lower volume in the U.S.

as a result of a decline in the overall ED market as well as increased use of off-label generic sildenafil, while lower animal health volume provided a headwind of 140 basis points. And the loss of exclusivity for Zyprexa, Cymbalta, Evista, Strattera and Axiron provided a drag of 280 basis points. Slide 15 provides a view of our new product uptake.

In total, these brands generated over $1 billion in revenue this quarter, with nearly half of that by Trulicity. These products represented 18% of our total worldwide revenue in Q2, up from 15% just last quarter. Moving to slide 16, you'll see the changes in foreign exchange rates had a small effect on our Q2 2017 results.

Growth in non-GAAP EPS was 29% including the effect of FX and 32% in constant currency terms. With that perspective on our Q2 financial results, I'll turn it over to Sue and Levi for an update on our oncology strategy..

Thank you, Dave. As I mentioned during last quarter's earnings call Q&A, in the first half of this year we took a fresh look at our oncology R&D strategy.

Having joined Lilly at the beginning of the year from Dana-Farber and Harvard, Levi played a key role in this review, providing a valuable new perspective, and we're pleased to have this opportunity today to share a summary of the output of our review.

I'll start with an overview of the oncology trends that we felt we needed to address, and then I'll describe our R&D strategy at a high level and then I'll turn it over to Levi to delve into more detail.

As we all know, despite many exciting advances, there remains significant unmet need in oncology, and many companies are pursuing this opportunity and the field is becoming intensely competitive. And with the financial pressures payers are facing, the pace of (14:16) innovation has increased.

We recognize that we must provide drugs that deliver larger increases in survival than we've traditionally seen in the past, and we are adapting our approach to respond to these trends in order to deliver breakthrough innovation to patients. Moving to slide 19, our strategy has two pillars.

The first is to build upon our key therapeutics that are already on the market or are nearing the market and that have the potential to be foundational agents. The second is to pursue new standard-of-care changing agents that clear a very high bar, and in a moment Levi will outline how we'll assess such potential.

On the second pillar, I would like to highlight that we intend to pursue breakthrough molecules across a variety of mechanisms, including, but not limited to, immuno-oncology.

Key to our efforts will be leveraging advances in scientific understanding to identify targets with a strong biological rationale, and we will focus on targets that attack human dependencies or overcome resistance, enriching the target population to drive a larger benefit.

Let me say a few words on the first pillar of our strategy, because we have a solid base on which to build. In addition to Alimta and Erbitux, we have Cyramza, which is approved in three different tumor types and has become a standard-of-care in the treatment of gastric cancer with particularly some adoption in Japan.

We hope to expand the use of Cyramza in gastric cancer (15:49) setting and to second line urothelial cancer, and we have Phase 3 trials that will read out this year and next to potentially expand Cyramza's indication into liver and first line idioform mutant (16:00) lung cancers.

In addition, we've seen promising early data on the combination of Cyramza with pembrolizumab in lung cancer, which represents an interesting area for additional study. Lartruvo is a monochromal antibody that inhibits platelet-derived growth factor receptor alpha.

Added to doxorubicin, Lartruvo is the first medicine in more than four decades shown to help patients with soft tissue sarcoma live longer when compared to doxorubicin alone, by 11.8 months, an 80% improvement.

We hope to extend the use of Lartruvo across additional lines of therapy for sarcoma, and in addition, we are studying Lartruvo in other cancer types. And lastly, abemaciclib is a selective inhibitor of cyclin-dependent kinases CDK-4 and CDK-6. Abemaciclib was purposely developed to be given on a continuous dosing schedule to induce tumor shrinkage.

We are encouraged by the single agent activity we've seen in heavily pretreated patients across multiple tumor types, and I'm pleased to have received priority review here in the US for our NDA submission of the MONARCH 1 and MONARCH 2 data in metastatic ER-positive HER2-negative breast cancer, the latter being in combination with fulvestrant.

We also look forward to presenting interim results from the MONARCH 3 study of abemaciclib in combination with aromatase inhibitors as initial treatment in endocrine-sensitive breast cancer patients at ESMO in September.

We continue to believe that abemaciclib could represent a potential best-in-class CDK-4 and 6 inhibitor based on the totality of the data, including magnitude and depth of response as well as progression-free survival and that it will become an important new treatment option for patients with breast cancer.

We aim to establish a broad presence for abemaciclib in estrogen receptor-positive breast cancer, not only in HER2-negative but also in HER2-positive disease. And as Dave mentioned earlier, we recently announced initiation of a study in the adjuvant setting, which we see as a significant opportunity.

Based on the biology of CDK-4, Ras-dependent tumors are also a priority, including our ongoing trial in KRAS mutation-positive non-small cell lung cancer. Finally, we see multiple opportunities to combine abemaciclib with novel molecules to enhance efficacy and address resistant mechanisms.

These assets, along with Alimta and Erbitux, represent a strong base from which to grow our oncology business. Now I'll turn it over to Levi..

Thanks, Sue. First, let me emphasize how remarkable the opportunity is in oncology these days, and it's particularly exciting here at Lilly Oncology R&D. Our team has the track record, the capabilities and the passion to make a difference for cancer patients, and I'm confident we'll do so.

Earlier, Sue pointed out that the competitive intensity in oncology requires that we raise the bar for clinical impact and innovation. I'll start by describing how we'll set that bar high in order to compete and win in this exciting field. Sue mentioned the term foundational agent.

As shown on the left side of slide 21, we think of foundational agents as having certain important characteristics. Principally, they inhibit a key dependency within the tumor. That is, a target or pathway essential to the viability of the malignant cells themselves or their ability to fend off the immune system.

Ideally, we can enrich for such dependencies using genetic or molecular biomarkers, but we must have strong evidence that the target is essential for the biology of the cancer cells. At the same time, we recognize that changing the standard-of-care in oncology usually requires combinations.

Such foundational regimens should be similarly rooted in biology, leading to rational combinations that drive meaningful clinical benefit in multiple malignancies. From a practical perspective, it becomes essential to employ rigorous and standardized criteria to determine whether a drug candidate could be a future foundational agent.

To accomplish this, we've developed a set of criteria that we can apply across the board to assets already in clinical development, assets we want to advance into the clinic and those we may want to bring in from the outside. First, we must have a clear hypothesis.

What is the dependency we're attacking? And how do we know this dependency is operant? Second, we need a clear path to enrich the relevant cancer patient population based on genetic or molecular criteria.

This patient enrichment doesn't have to be perfect, but we need one or more biomarkers that tell us we're likely oversampling for patients in whom the dependency is operant during clinical development. The biomarker discovery process really starts in the preclinical stages well before we even begin testing the regimen in patients.

Third, we must optimize the treatment early in development.

How do we know we've hit the target hard enough? Can we obtain serial biopsies to look at pharmacodynamics and assess the extent of target engagement or inhibition? How do we engineer a dosing regimen that minimizes off-target toxicities? The fourth and fifth criteria address key clinical and commercial hurdles we have to clear.

Is it looking like we're headed for an incremental or a substantial clinical effect? If it's the former, we either need a better patient enrichment strategy to drive a larger effect size, or we should stop developing.

And finally, we always need to ask ourselves, do we have an opportunity to win? Do we have a path to gain reasonable market share? This is where being first-in-class or best-in-class comes into play. Given the environmental trend Sue mentioned, we expect that fewer assets will clear the high bar set through this decision framework.

However, we should be in a position to drive those assets that do clear the bar more aggressively. We simply can't afford to spread ourselves so thin that we lack the speed and focus required to accelerate potential breakthrough agents and regimens that do meet these criteria.

Now, we've applied this decision framework to our current portfolio, and as we did so it became clear to us that there were a number of molecules that have the potential, depending on the clinical data, of course, to achieve the high bar we have set for standard-of-care changing foundational assets.

You can see on slide 22 that in addition to abemaciclib, which is under priority review at the FDA, we have identified six early to mid-stage assets that potentially meet the decision criteria that I just outlined. These are the assets where we're now focusing the vast majority of our internal R&D dollars.

These include agents targeting CHK1, ERK 1/2, the TGF-beta receptor and TIM-3. I'll say more about these in a moment. You can see that we've also included our PD-L1 inhibitor and PI3-Kinase/mTOR inhibitor which we intend to use primarily in combinations that boost other marketed or promising portfolio assets.

Together, these assets have the potential to be foundational agents or to anchor foundational regimens. We currently have three assets where we're awaiting data from ongoing trials before deciding if they will move into our priority internal pipeline, external partnership or out of our portfolio altogether.

For example, merestinib is a multi-kinase inhibitor currently in a registrational Phase 2 study, together with Cyramza in biliary tract cancer. If this trial meets its primary endpoint, it will become a priority asset for future life cycle development, potentially across multiple indications.

If not, we may pursue external partnerships to develop merestinib. The CSF-1 antibody is in exploratory clinical studies where the magnitude of efficacy will similarly dictate the path forward. For our Ang2 antibody we are currently evaluating potential patient enrichment strategies that could guide its development.

Thus, we expect clarifying data to emerge for each of these assets over the next several months. Finally you'll see a number of assets where we've already engaged or will be seeking external partners to advance clinical development.

In some cases, such as the CBC 7 inhibitor, Aurora kinase inhibitor and a novel CHK1 inhibitor, these assets are currently owned by third parties and Lilly retains rights to bring them back in-house if key milestones are met.

In most other cases we remain excited about the quality of our compounds, but believe that the optimal development paths will be best implemented in partnership with external entities that have specific or niche biological expertise.

In the case of galunisertib, which inhibits the TGF-beta receptor, we have two ongoing studies in combination with immune checkpoint blockade (25:14). The result of these studies will inform the development of our entire TGF-beta platform, which remains a priority focus.

By prioritizing our assets in this way, we are giving ourselves flexibility to bet more aggressively on portfolio assets with the highest foundational potential while de-risking others externally and importantly making room to bring external innovation into our oncology portfolio, and we'll talk more about that later.

Now I'll highlight three of our priority internal assets briefly to illustrate why we are focusing in this way. First, we have a highly selective ERK 1/2 inhibitor in Phase 1 studies.

ERK is a key oncogenic driver in many cancers, including a large proportion of Ras mutant cancers, nearly all BRAF mutant cancers and mini tumors driven by receptor tyrosine kinase aberrations. The upper left panel shows that the preclinical activity of our ERK inhibitor correlates strongly with alteration in the Ras pathway.

The lower left panel show that combinations of our ERK inhibitor with abemaciclib yields superior anti-tumor effects in KRAS mutant xenograph studies, including tumor regression. This molecule is currently in the fourth dose cohort of the ongoing Phase 1 trial and we're encouraged by the early safety and PK/PD data.

Within the next year we expect to both achieve our maximum tolerated dose and begin a series of combination studies with abemaciclib and other assets. These studies will be conducted in tumor types where an ERK dependency is pertinent such as KRAS mutant colorectal cancer, pancreas cancer, advanced lung cancer and others.

Next is prexasertib, a potent small molecule inhibitor of the CHK1 kinase. CHK1 has emerged as an interesting target in cancers with DNA repair defects or a so-called replicated stress in effect.

Prexasertib is a first-in-class agent and the left panel shows that we have seen objective responses with prexasertib monotherapy in both platinum-sensitive and platinum-resistant ovarian cancer. We have a molecular enrichment plan in place to explore monotherapy use in ovarian cancer and we see possibilities for prexasertib in other tumors as well.

We look forward to continued development of prexasertib in ovarian and other cancer types. Moving to our TIM-3 monoclonal antibody that just recently entered the clinic, TIM-3 is a PD1-like immune checkpoint.

It resides on the surface of T cells and tends to be activated at later cell of a factor T cell function than PD1 in what are often called exhausted T cells. Targeting TIM-3 may therefore help overcome resistance to PD1 therapies and may also enhance PD1 activity when used in combination.

Our approach is to take our TIM-3 antibody, which we believe may have a distinct inhibitory mechanism, and expedite its clinical evaluation. This antibody will be developed as a combination with our PD-L1 antibody in patients whose cancers are no longer responsive to existing checkpoint-based immunotherapy regimens.

Now, TIM-3 is just one of several IO assets in our pipeline. For example, we intend to speed development of two bispecific monoclonal antibodies designed against IO targets.

The promise of bispecifics is that you not only inhibit two targets present on distinct cell types within a single therapy, but you can also use the arms of the antibody to bring those two different cell types together – for example, a tumor cell and a cytotoxic T cell – and that potentially drives greater efficacy.

Together with our other preclinical IO assets and an active business development agenda, which Sue will now say more about, we believe that these R&D efforts will position us well to bring new value to patients in this exciting arena..

Thank you, Levi. In addition to the opportunities in our pipeline and our strong research capability, we will actively look to the external market to help us bring the best innovation to patients. Over the last few years we've undertaken a number of clinical partnerships and preclinical collaborations to build on our IO capability.

Moving forward, you will see us being more aggressive on the business development front, especially regarding early phase and pre-clinical assets. Specifically we will actively pursue assets that can combine rationally with our existing products, serve as new potential foundational agents and enable new IO breakthroughs.

The good news is that there is a lot of external innovation in oncology and we intend to be much more active in this space to ensure we have a competitive pipeline going forward. So to conclude, we already have a solid base to build upon with Alimta hopefully enjoying exclusivity in the US after 2022 and in Europe and Japan after 2021.

And with Erbitux, Cyramza, Lartruvo and soon abemaciclib is approved. By rigorously employing the framework that Levi described earlier, we'll focus on innovation that can deliver meaningful improvements in survival with a balance toward first-in-class and best-in-class assets.

We'll maintain a competitive pipeline by accessing more external innovation, particularly at earlier stages of clinical development. We'll focus only on assets that meet the high bar that we've described and move quickly to capitalize on promising early data.

And finally, we'll invest more heavily behind the bets we do make to drive robust life cycle plans that maximize the value that patients and investors can derive from our innovation.

So again, we have a strong base to build from, but we need to and we will make changes to be more competitive and to deliver innovation that is highly valued by patients and physicians.

This is a time of unprecedented growth and opportunity in oncology and it's an exciting time to be at Lilly where we have an opportunity to make major impacts on the lives of patients that suffer from the most deadly cancers. Levi and I will be happy to answer any questions that you may have during the Q&A session.

But now I'll turn the call over to Derica for a review of our overall corporate pipeline, progress on our potential key events and an update on our financial guidance for 2017..

talent, scientific capability, and technology platforms to ensure our future growth prospects. This concludes our prepared remarks. Now I'll turn the call over to Phil to moderate the Q&A session.

Phil?.

Great. Thank you, Derica. We would like to take as many questions as possible from the callers on the line, so we do ask that you limit your questions to two or to one two-part question. John, if you can please provide the instructions for the Q&A session, and then we're ready for the first caller..

Certainly. [Operation Instructions] First we'll go to the line of Chris Schott with JPMorgan. Please go ahead..

Great. Thanks very much for the questions. Just two here. First coming on baricitinib, can you just elaborate a little bit more on what a trial addressing DBT and PE would look like here? It seems like it ought to be a very, very large or very long-term study given the low event rate.

So along those lines, should we think about something significantly longer than 18 months delay if you have to run a study with baricitinib? Second question for me is on diabetes.

Any initial look or commentary on the 2018 kind of access or pricing as we go through this contracting season? I guess, should we think about any major changes to your access or price? I know you're not going to give 2018 guidance, but just kind of directionally, how should we think about the portfolios heading into next year? Thanks very much..

Great. Thank you, Chris, for the questions. So Christi, we'll go to you for the first question on baricitinib, and then over to you, Enrique, for the question on 2018 access for diabetes products.

Christi?.

Thank you very much for the question. As you probably saw in the press release this morning, we remain very disappointed, especially for the many rheumatoid arthritis patients in the United States who don't have access to bari in spite of its access in other countries and regions.

In terms of the clinical trial and how long that will take, we know that in exploring all of our options, the minimum amount for resubmission will be 18 months. We don't yet have clarity with the FDA. That will be discussions we have with them, exactly what kind of trial will help define better the benefit-risk profile of baricitinib.

But we are committed to a path forward working with the FDA on that.

And I'll summarize by saying in the end, all of these patients who are living with rheumatoid arthritis in spite of all of the great treatments that are available continue to suffer, and Americans deserve access to this treatment and we will continue to pursue not only rheumatoid arthritis but other indications with bari..

Okay. Thank you, Christi.

Enrique?.

Chris, so we do have, as you're aware, good access when we look across our brands, and we have a strong performance which helps our competitive position as we look at 2018. The negotiations at this stage are not finalized. It would be premature for me to comment..

Yeah. And Chris, we do typically allow the payers to actually make their announcements before we would comment on changes. I don't think we'll begin to hear any of those until August, September timeframe, likely.

John, if we can go to the next caller, please?.

And we'll go to Seamus Fernandez with Leerink. Please go ahead..

Thanks very much for the questions. So, just a couple here. In terms of the situation with baricitinib, you do mention other opportunities and indications. I think about a year ago at your Analyst Day you mentioned expectation for your atopic dermatitis study to wrap up with baricitinib. We haven't seen those data yet.

Just wondering when we might see those data? And if that is one of the indications that you're interested in pursuing? Just as a follow-up to that, given the DBT PE dynamics, can you just help us understand if RA patients are uniquely at higher risk of DBT and PE such that FDA would be a little more balanced when considering other indications? And then just a final question, as we look at sort of the opportunity for leverage, I know this question continues to get asked of Dave on a repeated basis, but as we continue to look at the leverage opportunity in the operating expense line, just wanted to get a better sense of if this is still viewed as a purely sales-driven opportunity or if you can work to control costs.

And just wanted to say thanks, Derica, for all of your efforts over the years. It's been a real pleasure..

Great, Seamus. Thank you for the questions. Chris, we'll go to you for the first two on baricitinib. Derica, if you want to comment on the third one? Obviously, Dave, feel free to chime in.

Christi?.

Sure. Thank you for the question, Seamus. We are pursuing other indications and continue our studies in atopic dermatitis as well as lupus, and we're also going to begin the psoriatic arthritis trial next year. In specific terms of atopic dermatitis, the Phase 2 data you will see presented at a scientific forum before the end of the year.

And then in terms of DBT and PE, yeah, there was one placebo-controlled trial in the RA study that showed an imbalance of DBT versus placebo.

The overall rate, if you look at the multiple Phase 3 trial, in 3,000 patients, the overall rate of DBT on patients treated with baricitinib was the same as what is published in patients on the overall background rate in rheumatoid arthritis in general.

So hopefully that answers your question and gives you a rationale as to why we disagree with the FDA, and why we feel very positive about pursuing other indications with baricitinib and continuing to find a path forward in RA with the FDA..

Thanks, Christi.

Derica?.

Thanks for your question, Seamus, and for your comment. In regards to our margin goals, as we stated, 50% was the goal for 2018. We think we'll go beyond that as we think about the remainder of the decade and beyond. In regards to how we get there, it's both.

It is attributed to us driving a strong revenue growth profile that you've seen here for the first six months of the year – 8% in Q2 alone. But it also is contingent on us continuing to drive a very deliberate productivity and cost containment agenda inside Lilly.

So when you look at our margin, if you look at just gross margin, you see the over 90 basis points of improvement, that was a combination of prices but also manufacturing efficiencies, and we saw that in Q1. And if you look at our OpEx, we improved our OpEx ratio by over 390 basis points alone in just the Q2.

So you will continue to see us executing on both profiles, launching with excellence, but then, yes, also driving a very deliberate cost containment and productivity agenda inside Lilly going forward..

And Seamus, just to put a little bit of numbers on your prior question. To our knowledge the published rates of DBT and PE for patients with RA do range from approximately 0.3 to 0.8 per 100 patient years, and the rate reported for all RA patients receiving baricitinib during our development program was 0.46 per 100 patient years.

John, if we can go to the next caller, please?.

And that will be John Boris with SunTrust. Please go ahead..

Thanks for taking the questions, and congrats on the results. So, question for Dave on the pricing front. Obviously, there continues to be some bantering that continues on the pricing front, but the industry has done a relatively good job to shift that to discussing, certainly high coinsurance, high deductibles.

It seems as though Lilly does give up a significant portion as a pass-through on rebates.

How can the industry help to shed additional light on that 50%, I think, that Lilly gives back in terms of rebates to give that back to customers for coinsurance, dependency in plans? Is there any thought about how you can do that through contracting with PBMs going forward to get better control over where that's going? The second question just for Levi, really appreciate the internal review that you gave but when you look externally, and if you had a wish list, are there certain things that you don't have within your portfolio that might be at the top of the list that you would like to bring in to Lilly's oncology portfolio? Thanks..

Great. John, thank you for the questions. Pretty straightforward. Dave, for the first one. And then over to you, Levi, for your wish list on your external innovation.

Dave?.

Yeah. Thanks, John. On the pricing debate in the U.S., of course, the battle will never be over. I think we need to continue to explain the value proposition we offer and defend the business model. But I agree with you.

We have staved off, I think, some of the worst ideas and continue to remain focused in Washington and the states on advocating for strategies that can actually bring down out-of-pocket cost for consumers.

As you point out, we published earlier this year that 50% of our list price is discounted on average, and patients rarely receive any of that benefit at the pharmacy counter. One big lever we've advocated for aggressively along with our pharma colleagues is through the Part D program, passing through rebates in the donut hole in some form.

That's still on the table. In commercial plans, we do see growing interest in the same idea from large employers, and if you look at the absolute inflation rate of net pricing in medications versus the out-of-pocket cost for patients, they're not close. Patient out-of-pocket costs are accelerating rapidly.

Finally, I'd say we've been a leader in prodding the system, if you would, through programs that work outside of insurance both through Express Scripts in this case, but I see other PBMs active in the space providing a discount program that works outside the insurance system and provides PBM-like rebates directly to patients.

We've done this in our insulin business with both Blink Health and more recently with the direct ESI program. We'll continue to do that to point out that net pricing is not something patients enjoy, but I don't expect this to go away overnight and we'll remain focused on it, John, to reduce the long-term risk to the business..

Thanks, Dave.

Levi?.

Well, thanks for the question. So as you point out, one of the most exciting areas of oncology has been just the amount of innovation that exists across the arena. And here at Lilly, Dave has really been pushing the idea of being more active in terms of bringing in external innovation so we're very pleased for that prioritization here within Lilly.

To your specific question about a wish list, we don't look at this at an asset-by-asset level, but rather we think about what can boost our strategy.

So what could be brought in that might combine well with some of our promising products and, just in general, what are some areas scientifically where it's been obvious that advances have been made and where, if we could leverage what we do well at Lilly in terms of clinical development, we could add value there.

So I would say it's not really an asset-by-asset basis but really letting the science drive strategy and certainly that would cover the gambit of both targeted therapy and immunotherapy advances..

Thanks, Levi. John, if we can go to the next caller, please..

We'll go to Tim Anderson with Bernstein. Please go ahead..

Thank you. A couple of questions. On abemaciclib, you described this as one of your foundational assets and later this year you'll present MONARCH 3.

Do you think that once those results are presented, the general takeaway from analysts and from oncologists is going to be that abema is clearly better than palbociclib when everyone does their side by side comparisons? Thus far, despite Lilly's claims of differentiation, there's not a lot of people that are convinced that it's truly a best-in-class product.

Second question is on Alimta and the timing of the ruling for the IPR. In the past, Lilly was willing to give a timeline because the rules for this sort of thing are pretty clear.

Most recently you've backed away from providing a timeline, and I'm wondering why the uncertainty this time around and what can we expect in terms of a timeline, if you have any updates..

Great, Tim. Thank you for the questions. I think, Sue, those are both for you..

Yeah, Tim, thanks very much. Yeah. Well firstly, on abema we're delighted that we have the priority review for MONARCH 1 and MONARCH 2, and we anticipate getting action on those Q1 of next year. With regards to MONARCH 3, we're presenting it at ESMO.

I think we've been pretty clear all the way through, Tim, that we do believe that we've got a differentiated medicine here and one that potentially could be best-in-class.

We've got to look across all of the data to assess that across the different clinical data, looking at PFS response rate, et cetera, and across different trials, and we've now got the MONARCH 1 data that shows single agent activity.

The MONARCH 2 data, which was in an endocrine-resistant patient population, a very homogenous patient population where we, to the best of our knowledge, have seen the highest PFS in any trial today in that population, and of course, we'll see the MONARCH 3 later this year. So we continue to be very excited by this molecule.

But I would continue to encourage you to look across all the data and all the trials as we assess this medicine. With regards to the Alimta IPR, we are now anticipating that we should get a reading on the IPR by the end of this year. That's the latest that we know, okay? And if we know any more, we'll let you know, but that's our understanding..

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

We'll go to the line of Andrew Baum with Citi. Please go ahead..

Thank you. A couple of questions, please.

The obvious bedfellow for prexasertib given the mechanism and the lack of overlapping top (50:41) would be a PARP inhibitor, so what's your appetite for larger and later biotech deals around, in your own words, a potentially foundational drug in the form of a PARP? Second for Levi, how does your TIM-3 differentiate itself from Novartis? I think both target hospitals (51:01) if I read your slides correctly.

And then finally on the outlook statement in relation to animal health, could you break down for us how much of the competitive pressures, market slowing that you're seeing is market-specific versus merely portfolio-specific? Thank you..

Andrew, thank you for the questions. So, Dave, we'll go to you for the appetite for large later-stage biotech deals. On to Levi for the question on TIM-3. And then Jeff, over to you for the drivers in animal health.

Dave?.

Yeah. Thanks, Andrew.

Just to – not commenting specifically on the PARP inhibitor idea, and maybe Levi if I could just chime in on that, but the frame we have on M&A and business development isn't necessarily limited by size but rather by logic, which is we're interested in things that add to our portfolio where we can create new value for patients in the health care system, maybe through combinations or through individual assets.

We're not interested in business combinations that create a short term cost synergy.

We've said in the past that those would include small and mid-sized M&A and so in that regard, I guess your question is would we rule out M&A, small and mid-sized? No, we wouldn't if it made sense on the first basis, which is adding to our portfolio in a way that creates new value for the health care system..

Great. Thanks, Dave.

Levi?.

Yeah, just adding on prexasertib I would agree with Dave and certainly your point about PARP inhibitors, this particular combination is interesting, but there are actually several potential interesting combinations that we're pursuing with prexasertib.

So what we think about this, as Dave mentioned, sort of the totality of what the science supports as opposed to a particular deal or exchange.

With regard to TIM-3, our preclinical evidence suggests that our TIM-3 molecule has a distinct mechanism of TIM-3 inhibition than some of the competitor molecules, and this could be of potential importance because unlike, for example, PD1 where the relevant ligands are well understood in terms of the reason why an anti-PD1 works in cancer immunotherapy, there are actually several ligands for TIM-3 and the relative contribution to those ligands in the tumor immunology context is less clear.

So obviously it's early days. We'll need to await clinical activity to determine whether that's a clinical distinction, but preclinically, that does appear to be a potentially important difference..

Thank you, Levi.

Jeff?.

Yeah, Andrew, I think I'll just put in a broader context the animal health situation, and then I'll answer the mix versus the market or portfolio. You know, as we signaled earlier this year, we did expect Q2 to be a challenging quarter.

Part of this was due to the higher buy-in a year ago with the SAP cutover, but there are really three issues that Dave mentioned in his comments that have impacted our Q2 results in animal health. One, competitive pressures in comp animal parasiticides. Two, market access in food animal. That is portfolio-driven. And competitive pressures in cattle.

So, on the first issue just real quickly, on the competitive pressures in comp animal parasiticides, we continue to see new entrants. We continue to see the space become more crowded. However, we do see positives for us in our comp animal business and I'll touch on two. Galliprant, our deal with Aratana, that growth is meeting expectations.

And then our BI vaccine portfolio, that is also on track with our expectations. As you move to market access, this is where there's a portfolio factor. Posilac, and this is mainly the big driver here in Q2, or rbST, it's a productivity product in the dairy market. We have seen U.S.

customers chosen to forego the benefits of this with the oversupply of milk and lower prices. We've seen kind of the clean food label movement, and then you combine this with the unfavorable economics in dairy. And then I think the last issue is just food animal competition primarily in U.S. beef.

And this is just increased bundling activity and more aggressive pricing. That's some market-driven, but as well portfolio. But I've put our focus and where our focus is, is on this medium and long-term agenda. Accelerating innovation, changing our mix into these higher-growth product segments and improving productivity.

We've recently launched or soon will be launching a number of new products. Two in aquaculture, a vaccine and a parasiticide, a salmonella vaccine in broilers, and we've recently received an approval for our flea-tick combo product in the EU.

So our business mix is improving with vaccines, nutritionals in comp animals (55:40), and it's becoming a larger part of our business. Finally, I would just say that we've got many productivity streams that will improve overall operations in both manufacturing and sales efficiency..

Thank you, Jeff. John, if we can go to the next caller..

And that would be Umer Raffat with Evercore. Please go ahead..

Hi. Thank you for taking my question. I actually wanted to focus on marketed products, if I may. And perhaps starting off on the diabetes side. I was curious what the dynamic is behind Humalog franchising pricing pressure in the U.S., but Humulin franchise has seen pricing tailwinds this quarter. So that was one.

On Taltz perhaps in psoriasis, curious to how you're thinking about how IL-23 competition impacts the trajectory going forward or not. And then finally, I found it interesting that you mentioned Alimta U.S. is tracking at decreased demand, despite the Keytruda approval in KEYNOTE-021G and I was just curious what the dynamic is there. Thank you..

Umer, thank you for the question. So, Enrique, we'll go to you for the Humalog and Humulin pricing dynamics. Christi, to you for the question on IL-23 impact to Taltz. Then Sue, the U.S. Alimta question.

Enrique?.

Sure. So as we've noted during previous earning calls, we expect some volatility around our U.S. Humalog sales. We expect that to continue, given that we make estimates on rebates and discounts at the end of each quarter. We do not learn about the actual utilization until later periods.

Now maybe the best way to characterize Humalog is to basically try to look at the underlying performance and try to normalize it for some of these changes that are related to prior periods. When we normalize Humalog, Humalog sales are declining about 5%.

There is growth in the low single-digit when it comes to volume, but pricing is basically declining in the mid to high single-digits.

Now, why is price declining if we continue to see pressure when it comes to increased rebates? Also, we basically see a continued shift towards a mix of the segments where the higher rebated segments are basically growing faster, i.e., Medicaid to point one example. In the case of Humulin, I think the situation is a bit different.

So we grew in the U.S. Humulin 11%. I think we need to keep in mind that when it comes to Humulin now, 60% of our revenue in Humulin is really – almost 60% is coming from U-500 and only the rest from U-100. They have very different trends. U-100 is declining while U-500 is basically increasing right now revenue at about 20%.

So different dynamics there and that's why I think is you're seeing the reported results. Thanks..

Thank you, Enrique.

Christi?.

Hi, Umer. Yes, we're still very excited about Taltz and what we're seeing in the marketplace that the study is translating into the real world, we're seeing fast response, clear response and we think we've set a pretty high bar if you look at the NBRx growth.

With the IL-23s coming to market however, we do believe it's an opportunity for patients to raise the bar on their own expectations so that the market will actually grow for the newer agents which will help all of the new agents that have higher efficacy, especially if you look at the head-to-head trials.

So we expect to see the market of the newer agents grow and we're very excited. As you know, we talked at our last earnings call that we submitted for psoriatic arthritis for Taltz and we expect to hear back by the end of the year on our submission..

Thank you, Christi.

Sue?.

Yeah. With regard to Alimta, well, we've seen a steady decline in Alimta's share of market over the year or so, really due to IL competition, as well as some of the targeted agents like the ALK inhibitors. So this has been pretty consistent and we've seen that. So we do have a decline over last year, although we did see an increase Q2 versus Q1.

We think that's mainly buying patterns. The KEYNOTE-021 G data clearly is important and we're delighted that the NCCN has now listed that as a Category 2A, so we do believe that we will see a use there, although it's too early to say how much use at this point.

And it's also important to note that with the combination with Alimta it's probably going to be used in the PD-L1 low patient population of which Alimta has got about a 50% market share there. So although we believe that we will see use, we don't anticipate that we're going to drive growth of Alimta through this..

Great. Thank you, Sue. John, next caller, please..

And we'll go to Steve Scala with Cowen. Please go ahead..

Thank you. First, a question for Dave on baricitinib, it seems that Lilly and FDA have a significant difference of opinion on regulatory requirements. How, in your experience, are such differences resolved and what are the mechanisms and timeframe for doing so to get the best possible outcome for Lilly? So that's the first question.

And secondly, why is the baricitinib psoriatic arthritis trial initiation being delayed? Is it to clarify the landscape for the molecule overall or is it some indication-specific reason? Thank you..

Your question, Dave for the first general question on the situation with FDA and then, Christi, to you for the second question on psoriatic arthritis..

Yeah. Thanks, Steve. Obviously, as Christi said and we noted in our remarks, we're disappointed with the outcome. I think we do have clarity on what the FDA's point of view is. It's just not our point of view and therein lies the difference. Now they're the regulator. We need to engage with them and find the best path forward.

Considering time but also label quality for baricitinib and RA. The resolution of this, to me, there's a variety of tools available to us. One of those is to do new clinical work as we indicated that the FDA has requested we do that. That's something certainly we're scoping and looking at now.

In addition, all of the original for FDA studies we did in the Phase 3 program continue and so we continue to pile up events, albeit on a baricitinib-only basis to compare to background rates, et cetera, and I think that's important.

And then launching in Europe and Japan will quickly eclipse the number of patients treated in clinical trials with those treated in the real world and I think that's also an important set of data to help us work through what is the safety issue of low incidence, which I think Seamus asked about earlier, how do you resolve that.

It's going to be a combination of those levers coupled with other tools we can use, whether it be labeling or otherwise to work through this FDA situation. We're trying to give investors a reasonable expectation as to the timeline for resubmission and then approval because we know that was a big open question.

That all said, and as Christi said, we're highly committed to the asset. We've got a long IP runway. We think JAK inhibitors are a profound improvement for patients, in particular baricitinib, given its unique profile in early RA especially and we aim to get it there, along with other NILEXes which we could pursue, like atopic derm, SLE, et cetera.

So it's definitely disappointing, but we're committed to move forward, and we have a variety of tools to advance this one..

Thank you, Dave.

Christi?.

Yes. And on the question on psoriatic arthritis, based on the fact it's the same division reviewing RA and psoriatic arthritis, we felt it was prudent for us to take a pause, ensuring that we incorporated feedback from the FDA so that as we pursued the indication we knew that we were aligned.

And so that's what we've done, and that's why now we're telling you that we are going to push the go button. And in 2018, we'll be pursuing that trial for bari in psoriatic arthritis..

Thank you, Christi..

Thank you..

John, if we can go to the next caller, please?.

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

Thank you.

Just sticking with that topic on baricitinib, at what point – or is there actually a point where you just decide it's not worth going forward, just given that there are other newer agents coming to the market and RA is a really entrenched market to begin with? I mean, is there a point that you just say it's not worth it? Or not? And then should we also assume that the atopic dermatitis and lupus indications are also put on hold until you get better clarity with FDA? And then my other question relates to SUSTAIN-7, which I believe should be reported out sometime in the third quarter.

Can you remind us, Dave, your expectations for that study? I think you've said before that you would expect semaglutide to show better efficacy but maybe worse safety than Trulicity. And if SUSTAIN-7 is positive, how do you maintain market share of Trulicity? Thanks very much..

Thanks, Jami. So, Dave, let's go to you for the first question on baricitinib's procedural aspects and if we ever get to a point where we wouldn't go forward with RA. And then, Christi, if you'd comment on plans for atopic dermatitis and lupus? And then, Enrique, on our view on SUSTAIN-7.

Dave?.

Yeah. Thanks, Jami. The bottom line is we're a long way from anything like that point that you're highlighting for a couple of reasons. I think, first, rheumatoid arthritis remains both a large unmet need and the largest category in the autoinflammatory space. Baricitinib has proven profound benefit, best-in-class.

We of course did the Humira head-to-head and methotrexate head-to-head, and so what we need to do is put behind us the sunk cost of this and just go forward and see how competitive is the next investment given the opportunity we have in that space and the unmet need available? We feel very strongly that that's positive, and we're going to be pushing forward.

The IP runway, as I mentioned, is very long – probably through the end of the next decade. And the way the market works, as you're pointing out, is it's dense with competition. A breadth of indication strategy is probably important for any JAK inhibitor, and without RA in that mix, it probably affects the competitiveness of all of the indications.

So right now we're focused on getting to the next step. We're confident we're going to get through this with the FDA. And Christi can comment on the other indications, but we're moving ahead. And of course remember, the OUS environment for baricitinib is very positive. We have a great label in Europe and Japan.

Those TNF markets are also very large, and we're focused on executing the launches in those spaces. And they'll need additional indications as well..

Thanks, Dave.

Christi?.

Yes. So the psoriatic arthritis trial was the only trial that we've paused. We've had good conversations with the derm division at FDA. Atopic dermatitis and lupus have not been paused. They are continuing as planned.

And as I said before, we expect data to be released at a scientific session before the end of the year on atopic derm, and we expect data on SLE either later this year or beginning of next year..

Thank you, Christi.

Enrique?.

So, Jami, when it comes to SUSTAIN-7, of course we have to wait for the result, but based on some of the modeling that we've done, what are we expecting, which I think is your question.

One is, we expect that they're going to show a difference when it comes to weight, and we believe that they're going to show a small difference when it comes to hemoglobin A1c. Clearly, we need to weigh all of that against any label that they may receive, and that is up to the regulators.

But as you are likely aware, as part of SUSTAIN-6, semagluta showed a signal when it comes to (01:08:27). And the specifics of how was that defined is whether it's blindness, hemorrhaging, ocular injections and so forth. So, clearly we need to wait for the totality of the data and further discussions that Novartis will have with the FDA.

We view this as an important competitor to us and we are very much prepared to continue to grow Trulicity going forward..

Thank you, Enrique. John, next caller, please..

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

Hi. Maybe just going back to clean up on animal health.

Dave, any updated thoughts on Elanco and how it fits into the long-term value creation story you have for Lilly? I assume you've had adequate time now to really dig in on that? And then on the pipeline, is there anything you could share about what was learned in the interim analysis for the BACE inhibitor? And on the DACRA, if I could call it that, how might that be differentiated from Trulicity? Thanks..

Hey, Gregg. Thank you for the questions. Dave, if you want to comment on the first animal health question? And then, Jan, if you like to maybe comment on the interim that we had for the BACE inhibitor as well as the DACRA, and Rick, absolutely feel free to comment on that one as well.

Dave?.

Yes. Gregg, I think this question has come up before and I'll say the same thing which is in any case we need to constantly review our portfolio. We need to make sure all of our assets, we have a basis for holding and driving incremental value versus what anyone else can do and animal health is no different from that.

Right now, as Jeff indicated in his answer in terms of the performance issues, and in my early days here, we've been very focused on operational improvements that we've put together a number of companies including Novartis combination.

And in my experience, and also I think in our real experience, it takes some effort and work to get to true operational effectiveness after that kind of combination. We also have some environmental headwinds we need to reposition against. Jeff outlined a response to those. So that's really our focus right now. But your question is a good one.

We'll constantly be asking ourselves that question and of course if we have a new thought about that, we'll come back to the investment community..

Great. Thanks, Dave.

Jan?.

Right. In relation to the interim BACE study, this analysis looked at the safety and also assessment if there were cognitive worsening and the sample size re-estimation. And the recommendation was to continue the preferred trial as planned and not change the size of the trial.

The continuation of this trial, we should remind also people that it is in amyloid-positive patients and it's the prodromal and the mild population.

If we talk about the new DACRA and the calcitonin amylin receptor agonists, this is an interesting new class of agent that potentially could have a superior weight loss with a competitive glucose lowering. That's one way of describing it, potentially less nausea as well.

And the key thing here could be insulin sensitization and this agent is different from the GLP-1s since it doesn't release insulin but rather enhanced sensitization for insulin which could mean even a better durability of the glucose lowering effect..

Great. Thank you, Jan.

John, if we could go to the next caller?.

We'll go to Geoff Meacham with Barclays. Please go ahead..

Good morning, guys. Thanks for the questions. Just had a few. On galcanezumab, lots of data across the CGRP landscape this year.

How are you guys thinking about the payer attitudes before the filing? I can't remember, have you guys – is the launch reflected in your long-term revenue growth guidance? And then a bigger picture question on biz dev, you guys provided a pretty specific strategy on oncology.

How much does valuation inform the decision or the urgency and what's the relative attractiveness to other categories such as neuroscience, inflammation, et cetera? Thanks..

Okay. Geoff, thank you for the question. So, Christi, if you could comment on how we view pair attitudes in the migraine space. Derica, if you can comment on whether or not galcanezumab is in our sort of midterm financial expectations. And then, Dave, you'll take the last question.

Christi?.

So we're very excited, first of all, about galcanezumab. If you think about patients losing up to 50 days of their life every year and being able to cut that in half, it's just an amazing proposition. We do know we're not going to be the only product on the market, and we'll have a lot of competition but I think we have a couple of things.

One, I don't – we don't see any other CGRP data that's better than our own. We look at the data and see that if you look at the response rates, about 60% of patients respond, have a greater than 50% response rate, 33% at greater than 75% response rate, and about 12% or 1 in 8 patients will have 100% response rate.

So we feel like we have a very strong efficacy profile, couple that with a really good benefit risk ratio. So that's number one on galcanezumab. On the contracting piece, the great thing that we have at Lilly is a background in neuroscience, and we have a pain platform.

It's not just galcanezumab, but as we go to payers soon after galcanezumab we'll be looking at lasmiditan, which already completed one Phase 3 study. The next Phase 3 study will be completed by the end of the year.

And then follow that a little bit further with our partnership with Pfizer on tanezumab, we're looking at really putting a dent in the opioid crisis in the United States. And as we look at the entire platform, we feel pretty confident with our discussion – going into discussions with payers in the U.S..

Thank you, Christi.

Derica?.

Jeff, the simple answer is yes, it is in, but on a probable-ized basis, as we do with the majority of our late-stage portfolio assets..

Perfect.

Dave?.

Yeah. So, I guess your broad question on BD, with any transaction, oncology is no different, we're going to look at several factors, of course, how it fits within our strategy both clinically and business-wise, the portfolio and the opportunity to combine it with other things is of course very important to oncology.

And then – so that depends on the assets we're holding. And then of course we look at the valuation that we need to – any transaction needs to produce returns well above our cost of capital on a risk-adjusted basis. So when we go through all those filters, it does diminish the field of available targets.

And we also, at Lilly, I think we're pretty flexible. We're not – we don't have to own things outright. I think we're happy to share risk, et cetera, and oncology is no different from that. Relative attractiveness is an interesting question.

I would say in recent times we've seen the price points for oncology, particularly post PoC, are very challenging to get to a number.

Our strategy, as communicated today by Sue and Levi, is to really open up that field and look at earlier projects, maybe take a little more risk, trading in front of the proof of concept, but making scientific judgments and then seeing those bear out.

In that way we could probably do more transactions that might be smaller, and if we make the right judgments, have that pay off for our shareholders. Relative to other areas, oncology has a lot of targets. But I would say relatively the pricing is on the higher end. We like immunology a lot.

There's also a lot of targets there and pricing, while creeping up, is still good. You saw the deal yesterday on the Nektar transaction, which we thought was an exceptional financial transaction and fits our strategy and is a compelling clinical asset.

And then in other fields, like KeyBioscience, Jan was just talking about the DACRA platform, there are opportunities. So across our five TAs, oncology included, we look at everything, and we are disciplined on our financial analysis, but also strategy and clinical value..

Great. Thank you, Dave.

John, if we can go to the next caller?.

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

Great. Thanks so much for taking the questions and thanks for the overview on the oncology strategy. So a couple of follow-ups just on the oncology side. CSF-1R I think is a mechanism that we've heard pretty good interest from (01:17:05). So I was a little surprised when you mentioned that's more of a Tier 2 asset now.

And you said it was a magnitude of success that (01:17:11) you wanted to see.

Maybe you could just give a little more detail on what you're looking for from that asset in terms of the efficacy? And then a more general question on that front, we've seen other mechanisms, like dose (01:17:22) for example, where you don't see much efficacy as a single agent, but it does seem to have value in combination.

So how do you think about that when you're making your prioritization decisions sort of at early stage? And maybe putting your mechanism as a lower priority when there might be an opportunity in a different indication or in combination.

And then second just on abemaciclib, following up on some of your earlier comments, we've heard for a while about some of the opportunity here for this class and this drug outside of breast cancer. And you mentioned non-small cell, I think squamous and I think pancreatic cancer on your slide.

Can you just give us a sense of when we might start seeing some more data on these other tumor types to get a sense of potential for the drug and the class outside of breast cancer? Thanks..

Great. Vamil, thank you for the questions.

Levi, if you'll take maybe the first two for sure, the CSF-1R and then how we view agents that might not have single-agent activity but could be useful in combos? And then Sue and Levi, maybe you can both contribute to answer the last question on timing for readouts for abema outside of breast cancer? Levi?.

Sure. Well, thanks for the question. So with CSF-1R, just going back to our decision framework, there are several considerations that we have when we're looking at whether or not an asset is going to clear the bar. In addition to the scientific rationale, we're also looking at clinical magnitude and even also the commercial landscape.

And I think with CSF-1R in particular, that's an example of where it's a crowded space, and so our decision making about how aggressively we invest will be determined by the distinctive characteristics of our agent and our study, so – and we have a couple of studies ongoing that will inform that.

With regard to the other question, you're absolutely correct. It is a very important point that as we build rational regimens we are increasingly seeing that key members of regimens may or may not have that impressive single activity, and IDL could be an example.

One could even argue that some of the other Cetacaine (01:19:21) inhibitors were examples of that.

So, this is another example of why it's so important to think about the scientific rationale; what is the biology that's operant, what are we trying to target, and is there a reason to believe that if we put a combination together we'll get a much greater effect than we might see with any individual component.

So, in general, so there's not a specific answer to the question, obviously it will depend on the particular combinations and indications, but you're absolutely correct, this is increasingly something we're considering.

What's the target regimen, the combination we want to put together and the aggregate biological rationale and not just the individual components..

With abemaciclib, let me start and you may want to say more about the other indications, but the lung indication for the KRAS mutant lung, we should have that data in Q4 this year, so you should see that data then or at least we'll do a top line then and then we'll present the data at an upcoming meeting after that.

And then with regards to the other studies, we are on an ongoing study in pancreatic cancer.

At this present time we should see probably data on that next year sometime, and you want to comment on another?.

Yeah, sure. So beyond that we also have abemaciclib in conjunction with trastuzumab and I would call the MONARCH HER study which is a HER2 positive- HR positive (01:20:47) breast cancer. That one is enrolling, and it may take a couple of years to have that readout.

But then beyond that we have a number of combination studies that we are doing with abemaciclib so that's relevant to the second question. So we have – those are earlier-stage, but there are several, both portfolio assets and partnered assets, that we are looking at in combination with abemaciclib.

So, we have a significant life cycle plan that we continue to add to that will read out over the coming years..

Thank you, Levi. Thanks, Sue.

John, if we can go to the next caller?.

We'll go to Tony Butler with Guggenheim Securities, please go ahead..

Thanks, thanks very much. Enrique, back to Humalog, if I may, you made a reference to volume being up, but I'm curious about the class as a whole, of rapid-acting insulins continuously down.

Is that solely based on price? Or does that actually reflect some level of a decline in overall demand and what might those patients actually be moving toward or moving into as opposed to those rapid-acting agents? And then secondly very simply, Christi, when the resolution for baricitinib with the FDA, whatever it may be, another trial or some negotiation or patients who, you know, you look out in Europe and you're able to supply data to the FDA.

The question really is, when you refile does the entire NDA clock restart at – the 12-month timeframe or is there some other fraction of that which we need to look forward to? Thank you..

Tony, thank you for the questions. So we'll go to Enrique for the Humalog class question for the rapid-acting insulin and then, Christi, do you want to comment or I can comment on the second question on the very (01:22:40) timeframe once we resubmit.

Enrique?.

Yeah. The main impact here when we look at the meal-time insulin class is really related to pricing.

Now we do have, when we look at the growth rates of that class, the growth rates have come down, the class is still growing but it's growing less than it was growing two, three years ago and clearly this is part of basically increased utilization of both SGLT-2s and GLP-1s..

Thank you, Enrique, and Tony, and your question, when we resubmit our anticipation would be that the FDA would need to declare that a type 1 or type 2 resubmission and you would have I believe something like a 3 or 6 month timeframe then for them to have a PDUFA date and provide their answer to the resubmission..

Thanks, Phil. Thank you, Enrique..

John, if we could have the next caller, please?.

We go to Alex Arfaei with BMO Capital Markets, please go ahead..

Good morning, folks, and thank you for taking the questions. A couple on Trulicity which had a great quarter.

First, on the cardiovascular outcome study, the REWIND study expected next year, how confident are you in that study given that two out of the four CV outcome studies with GLP-1s have failed to show a benefit? Is there anything in the design or patient characteristics that would basically suggest that the probability of success was more than a coin toss? And then when can we expect the results from AWARD-10 evaluating Trulicity and Jardiance? It would seem like that's a promising combination.

My understanding is that the study has completed. Just wondering when we can see the results. And then finally were there any notable inventory changes for Trulicity and Taltz this quarter? Thank you very much..

Alex, thank you for the questions. Actually, before we go on, just to clarify the last answer that I'd given. I think a type 1 is actually a two-month turnaround, not three months. And the type 2 is in fact six months.

Enrique, if we can go to you for the question on how we're viewing the chances for success of the REWIND trial for Trulicity and timing for AWARD-10 to read out. And then if you want to comment if there were any issues or changes in inventory levels for Trulicity, and, Christi, if you want to comment on Taltz.

Enrique?.

Sure. So, it's really dangerous to speculate when it comes to how different trials are going to read out. We do have, I think, a very good experience when conducting cardiovascular trials in the diabetes space.

I think Lilly probably has designed and conducted more trials than anybody else in this space, either by ourselves or with some of our partners. So, we feel confident that we've designed the trial in the right way, as we are awaiting on the results clearly.

When you look at the different GLP-1s, I would say that not all GLP-1s are comparable, so we continue to like our chances. When it comes to your question on inventory for Trulicity, nothing material when it comes to inventory.

We had some favorability related to changes in the estimates for revision (01:26:00) and discounts may be in the neighborhood of about $15 million out of a $380 million base, in the case of U.S. revenue. And as far as AWARD-10, we should be disclosing that at an upcoming medical conference..

Great. Thank you, Enrique.

Christi?.

An easy answer for me, in regards to Taltz there. No – nothing unusual. We're really happy in fact to see that the volume and the demand is the reason for the uptake..

Great. John, we have time, I think, for one last question from the line..

And we'll go to David Risinger with Morgan Stanley. Please go ahead..

Thanks very much. So, I wanted to just ask a high level update, please. And then a couple of minor quick questions.

So with respect to the outlook in Washington, it seems like the Trump administration and Congress are focused on matters other than drug pricing, but it would be great to hear your updated perspective and outlook on pharma's focus in Washington and any developments you think investors should be anticipating with respect to drug pricing in the second half of this year? And then in terms of my more minor questions, KEYNOTE-189 is listed as an internal readout on your slide but not external.

Is that simply because Merck will issue the external press release? Or, do you not expect an external press release in the second half of this year? And then finally, Derica, on gross margin guidance that was reduced from 77% to 76%, can you just talk about the key franchises and specifically what drove that, whether it's mix or any other factors? Thank you..

Great, Dave. Thank you for the question. So, Dave Ricks, we'll go to you for the first question. Sue, for the KEYNOTE-189 timing question. And then Derica for gross margin percent.

Dave?.

Sure. Thanks, Dave. Probably, we spend a long time talking about what's happening in Washington but I'll try to be brief.

Look, we've responded to the concerns as an industry and as a company, I think, pretty well, in terms of putting pro-actively aligned ideas from across the industry on the table that can leverage the power of the marketplace and competition to help consumers with their out-of-pocket costs.

We talked about some of these through time, whether it be rebate pass-through and the donut hole, outcomes-based pricing, FDA speeding up the backlog of generic approvals and the like. So we put all that on the table. I think everybody, in any position of authority knows about the aligned pharma agenda. We do expect an executive order.

They keep saying, soon. I would say in the second half you should expect that. We hope that it includes many of the ideas we put forward. My personal view is that won't end the discussion about drug pricing.

I think we saw even yesterday, Democrats put this as a prominent feature in their "Better Way" paper, and we have a number of budgetary votes coming up in the fall that may include pay-forwards that include the drug industry. So we need to be – continue to be on our game.

I think we've got a good team at pharma now, I think Lilly's doing our part within that, and the industry's on top of its game here. But there is still quite a bit of risk in the environment. I wouldn't want anyone to think otherwise..

Thank you, Dave.

Sue?.

Yeah, with regards to KEYNOTE-189, remember this is outcomes-driven, so it will depend on outcomes, but our expectation is we could have a top line press release later this year, maybe early next year, with data being presented next year..

Great. Thank you, Sue.

And Derica?.

Dave, it's solely attributable to the FX effect on inventories sold, and given the late movement that we've seen recently, this is what we anticipate.

Underlying that, we continue to see very good operating performance of our manufacturing operations, and recall in the slide deck we provided you all and the supplemental in this call is slide 34, we always provide a look at our gross margin both with and without the FX effect..

Thanks, Derica. That puts us at the bottom of the hour.

Dave, if you'd like to wrap up the call?.

Yeah. Thanks, Phil. We appreciate your participation in today's call, and your interest in our company. Driven by the new pharmaceutical products through the first half of 2017, we're generating solid revenue growth, and we continue to improve our margins, leading to even faster income growth.

We believe that Lilly's stock is a compelling investment given the diversity of our product portfolio and our top and bottom line growth prospects over the balance of the decade.

We hope that the update shared by Sue and Levi on our oncology R&D strategy provides you with greater clarity on how we intend to up our game in this really important therapy area, to deliver new medicines that can redefine expectations for cancer patients. I look forward to your continued interactions, and keeping you informed of our progress.

Please follow up with our IR team if you have questions we have not addressed on today's call. Thanks and have a great day..

Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect..