Eli Lilly and Company (LLY) Q4 2010 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Q4 earnings conference call [Operator Instructions] I'd now like to turn this conference over to our host, Vice President of Investor Relations, Mr. Phil Johnson. Please go ahead.

Good morning. Thanks for taking the time to join us for Eli Lilly and Company's Fourth Quarter 2010 Earnings Conference Call. I'm Phil Johnson, Vice President of Investor Relations. Joining me are our President, CEO and Chairman, John Lechleiter; our Chief Financial officer, Derica Rice, our President of Lilly Research Laboratories, Dr. Jan Lundberg; and Ronika Pletcher; and Jill Thoren from Investor Relations. 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 Securities and Exchange Commission. 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 is not sufficient for prescribing decisions. We accomplished a great deal in 2010, while rapidly adapting to significant external and internal challenges. Here are some highlights. For the full year, we again delivered strong financial performance, generating 6% revenue growth, and we were able to leverage this 6% revenue growth into 8% non-GAAP net income growth, as we made substantial progress reducing headcount and containing costs. Our strong operating performance, along with prudent management of working capital generated nearly $7 billion of operating cash flow, easily covering capital expenditures of about $700 million, and our dividend of roughly $2.2 billion. During the year, we did experience pipeline disappointments with semagacestat, teplizumab and tasisulam. However, our scientists remain focused on speeding innovation to patients, making significant pipeline progress. Advancing 16 new molecules into Phase I testing, nine molecules into Phase II testing, and two molecules into Phase III testing. We also concluded a number of business development deals with a bias towards those that provide current or potential near-term revenues. Our strong financial performance, focus on speeding innovation to patients and targeted use of business development all support our goal of successfully navigating our upcoming patent explorations and emerging with an even greater strength and capacity to drive future growth. Since our last earnings call, we've made significant progress on a number of fronts. In clinical news, we began Phase III trials of our antibac antibody for both rheumatoid arthritis and lupus. Based on an interim review of long-term safety data, and after complication with the FDA, we made the decision to begin Phase III trials later this year of mGlu2/3 of monotherapy treatment for schizophrenia. And along with our partner, Incyte Pharmaceuticals, we disclosed promising Phase IIa data in rheumatoid arthritis for our JAK-1/JAK-2 inhibitor. In regulatory news, we received FDA approval of Cymbalta for the management of chronic musculoskeletal pain based on clinical trials in patients with chronic low back pain and chronic pain due to osteoarthritis. And we'll begin active promotion for this indication next week. We also received FDA approval for Axiron as replacement therapy in males for conditions associated with a deficiency or absence of endogenous testosterone. And we expect to launch the product midyear after building sufficient launch quantities. Health Canada approved Byetta to improve glycemic control in patients with type 2 diabetes. And we also submitted sNDAs for Byetta used in combination with basal insulin and for Cialis for benign prostatic hyperplasia. On the legal front, the U.S. District Court ruled that judgment would be entered in Lilly's favor in the Alimta compound patent challenge. Including a recently obtained six-month pediatric exclusivity, this patent provides protection for Alimta until January 2017. And the Court of Appeals for the Federal Circuit heard our appeal of the U.S. District Court's ruling invalidating our Strattera method-of-use patent. As argued at the appeal hearing, we feel there is a strong basis for the CAFC to overturn the district court ruling. We are awaiting a decision by the CAFC. And in the meantime, an injunction from the CAFC prevents generics from launching. Finally in business development news, we announced and completed the acquisition of Avid Radiopharmaceuticals. Avid's lead asset, florbetapir, was assigned a priority review by the FDA. And just last week, an FDA advisory committee recommended approval of the beta-amyloid imaging agent if certain conditions are met related to physician training and re-reading of existing brain scans. Along with Boehringer Ingelheim, we announced a broad strategic alliance to develop and commercialize two oral diabetes compounds from BI and two basal analog insulins from Lilly. As we've done in previous calls, we'll focus our comments on the non-GAAP results, which we believe brought insights in some underlying trends in our business. This view excludes certain items such as restructuring charges, asset impairments and other special charges. On Slide 7, you can see the revenue grew 4% in Q4 to nearly $6.2 billion. As I'll show more detail in a minute, volume continue to be the major driver of our revenue growth. Gross margin as a percent of revenue increased 4.2 percentage points from 75.9% to 80.1%. Roughly 2/3 of this increase was due to the favorable effect of changes in foreign currency exchange rates on international inventory sold. Specifically, changes in the foreign currency value of the U.S. dollar substantially increased cost of sales in Q4 2009 but slightly decreased cost of sales in Q4 2010. The remaining improvement in gross margin as a percent of revenue was due to lower manufacturing costs, a tangible result of our ongoing productivity improvement efforts. This quarter's total operating expense, defined as the sum of R&D and SG&A, grew 8%. Within operating expense, marketing, selling and administrative expenses grew only 2% as higher marketing and selling expenses outside the U.S. were partially offset by lower administrative expenses and a company-wide cost containment efforts. R&D expense, on the other hand, grew 18%. Approximately 2/3 of this increase was due to higher than normal charges related to business development activities and termination of clinical trials. Other income and deductions improved due to primarily to lower miscellaneous other expense and, to a lesser extent, lower net interest expense. In addition, our tax rate fell by four percentage points largely due to the recognition in Q4 2010 of the full year impact of the extension of the R&D tax credit. Net income and earnings per share increased 24% and 22% respectively. For the year, you can see that we generated leverage between revenue and net income, as revenue grew 6% while net income grew 8%. We achieved this leverage between revenue and net income despite foreign exchange being a drag on our gross margin percent for the full year, higher than normal charges flowing through R&D in 2010 and a 1.6 percentage point increase in the full year tax rate, largely due to the $85 million tax charge taken in Q1 2010 as a result of U.S. healthcare reform. Slide 8 shows our reported income statement, while Slide 9 provides a reconciliation between reported and non-GAAP earnings per share. Additional details about our reported earnings are available in today's earnings press release. As you can see on Slide 10, for both the fourth quarter and the full year, foreign exchange had little effect on revenue growth as a weaker euro was offset by strength in other foreign currencies, including the Japanese Yen. Consequently, performance growth and total revenue of 5% for both the quarter and the year was driven by 3% volume growth and a favorable 2% impact from price. In both periods, we saw robust, double-digit volume growth in our Japanese Human Pharmaceutical business and our Global Animal Health business. Now let's look at the rest of the income statement. Slide 11 shows the year-on-year growth of select line items of our non-GAAP income statement with and without the effective changes in foreign exchange rates. The numbers in the first column are the same as those you saw earlier on our non-GAAP income statement. If you look at the top of the second column of numbers, you'll see the 5% performance growth in revenue I mentioned previously. Below that, you'll see the cost of sales actually decreased 2% excluding the effect of foreign exchange. As a result, gross margin grew 7%. Operating expenses grew faster than revenue this quarter. The larger than normal R&D charge, as mentioned earlier, drove the majority of the 9% performance growth in operating expenses. As a result of this increase in operating expenses, our 5% performance growth in revenue translated into 3% performance growth in operating income, while the lower tax rate this quarter boosted growth in EPS to 10%. Finally, you'll see in the last column that for the year, we've leveraged 5% performance growth in revenue into 7% and 8% growth in operating income and earnings per share, respectively. We achieved this leverage due primarily to lower manufacturing costs. For your information, on Slide 12, we provided the year-on-year growth of select line items of our reported income statement with and without the effect of foreign exchange rates. Next, I'll briefly cover some highlights from our quarterly pipeline update. Slide 13 shows our pipeline as of January 24 and highlights changes since our last earnings call on October 21. Movement of molecules to the next phase of development are shown by green arrows and additions from business development are shown by green stars. They both demonstrate our focus on addressing our upcoming patent expirations through innovation, both that coming from our own labs, as well as from outside our walls. You can see that we added two compounds under regulatory review: florbetapir, the beta-amyloid imaging agent from Avid and linagliptin, the oral DPP-4 inhibitor for diabetes from BI. The BI alliance also brought a Phase III compound, BI 10773, an oral SGLT-2 inhibitor. We also saw significant movement in the pipeline as Axiron was approved. We began Phase III testing of our antibac antibody for both rheumatoid arthritis and lupus. Four molecules began Phase II testing, three new molecules began Phase I testing, and we terminated development of five molecules and sold one molecule to a third-party. Now, I'll turn the call over to Derica to cover some of the key events we anticipate in 2011 and a detailed discussion of our 2011 financial guidance. Derica?

Thanks, Phil. Having received FDA approvals late last year, we're preparing to launch Cymbalta for chronic musculoskeletal pain and Axiron for testosterone deficiency. We have a large number of potential regulatory approvals, including Bydureon in the EU and a number pending here in the U.S.; linagliptin for type 2 diabetes in collaboration with BI; liprotamase, our recombinant pancreatic enzyme replacement therapy, and florbetapir, Cialis for BPH and Byetta in combination with basal insulin. Expected regulatory submissions include our response to the FDA complete response letter for Bydureon and sBLAs for Erbitux, a first-line metastatic colorectal cancer, head and neck cancer, and non-small cell lung cancer. In terms of Phase III trials, we'll complete the DURATION 6 trial comparing Bydureon to Victoza. We also expect to present initial results from the Phase III trial and advanced nonsquamous, non-small cell lung cancer of Alimta induction followed by Alimta maintenance therapy. Following the initiation of Phase III trials late last year for both NERI and depression and our antibac antibody in RA and lupus, Phase III trials are slated to begin this year for mGlu2/3 in schizophrenia, our novel basal insulin analog and our new insulin glargine product and potentially for our anti-IL 17 antibody in RA. Now as I move on to guidance, I'm going to take a bit more time today than I have in the past to walk you through it, as I want to make sure you understand how we expect some of the more substantial drivers to affect our results in 2011. Now clearly, more sales of Zyprexa and Gemzar outside of Japan due primarily to global patent expiration as well as the incremental impact of U.S. healthcare reform will have a significant negative impact on our 2011 results. In addition, we'll face some near-term earnings dilution from our strategic diabetes alliance with Boehringer Ingelheim. At the same time, we expect continued strong performance in the rest of our business in 2011 including the three countercyclical growth engines we've discussed for some time, Japan, Emerging Markets and Animal Health, as well as and a number of our patent-protected products in the U.S. and in Europe. In addition, we expect to see continued benefit from our cost reduction and productivity efforts. I want to make sure you have good visibility into this growth within our business. I'll start with a discussion of our bottom line EPS expectations and then review our individual line item guidance. As you've seen in our press release, we expect 2011 non-GAAP earnings per share between $4.15 and $4.30. Our 2011 reported EPS guidance range is $0.23 lower due to the estimated IP R&D charge from the BI alliance. On a non-GAAP basis, this represents a decline of between 9% and 12% when compared to 2010. So how does this 9% to 12% EPS decline break out between the negative EPS impact of the items I mentioned earlier and the continued growth in the rest of our business? I'll start with the latter. The underlying EPS growth we expect to see from our business before factoring in expected sales decline in Zyprexa and Gemzar outside of Japan due primarily to patent expirations and U.S. healthcare reform and the BI Alliance. Now as we've discussed before, we've been making targeted investments in Japan, our Emerging Markets and Animal Health and more broadly in our remaining patent protected products. And also, we've been aggressively reducing headcount and controlling expenses as we re-base the size of our business. We've seen these efforts pay off in 2010 and expect to see the same in 2011 and beyond. In fact, our 2011 non-GAAP EPS guidance of $4.15 to $4.30 implies a growth contribution of roughly 15% from these parts of our business. In Japan, our sales growth has been outstanding at recent years fueled by the launch of products and indications that we're launch more earlier in the U.S. and Europe. On a local currency basis, sales in Japan grew 15% in 2009 and 25% in 2010. As reported by IMS, currently we are far and away the fastest-growing major pharmaceutical company in this important market. And we're seeing strong growth from a host of products in Japan. Please note that, going forward, I'll be citing local currency growth for certain products in Japan, as well as in Europe. The effect of foreign exchange for any individual product is similar to that shown on Slide 10 for that relevant geography. Now Zyprexa, our largest-selling product, grew 8% on a local currency basis in 2010, and we expect continued growth. In Q4 last year, Zyprexa became the first atypical antipsychotic approved in Japan for bipolar mania. And later this year, we plan to submit for approval in bipolar depression. Now remember, we maintain exclusivity in Japan for Zyprexa until December of 2015, and we expect Japan to help drive what we hope will be a significant tail of Zyprexa sales post 2011. Alimta was approved for non-small cell lung cancer in Japan in Q2 of 2009 and achieved the best share of market uptake in the first line nonsquamous segment of any market in the world. It is now our second-largest product in Japan, and we see continued room for growth, as we believe more patients with nonsquamous cell histology can benefit from the treatment with Alimta. We've also been driving increased share of market with Humalog. This product has been growing at roughly twice the insulin market growth rate and registered 14% growth in local currency in 2010. We are focused on continuing the strong momentum. And we expect to seek significant growth contributions from Cymbalta, which was launched in Q2 of last year, and FORTEO and Byetta, both launched this past quarter. Now turning to emerging markets. Revenue grew 10% in 2010 on a local currency basis. As we've shared with you in the past, we've been making targeted investments in six markets: China, Russia, Turkey, Korea, Brazil and Mexico. And these investments are paying off. Volume growth has accelerated in each of these markets with the exception of Brazil. From 2009 to 2010, volume growth accelerated from 18% to 21% in China, from a minus 7% to a positive 21% in Russia, from 4% to 20% in Turkey and from a minus 2% to a positive 19% in Korea, and from 1% to 7% in Mexico. More broadly, for the 12 months ending September 2010, IMS showed that Lilly ranked first in sales growth at 12% among the 10 leading multinational companies across five emerging markets: China, Turkey, Korea, Brazil and Mexico. We remain focused on driving profitable growth in emerging markets. We see significant opportunities to do so with our core assets, including Cymbalta, Cialis, Humalog and Alimta. While the majority of our efforts will be concentrated on maximizing opportunities from our core assets, we will continue to look to supplement this organic growth with targeted business development. On a local currency basis, our Elanco Animal Health business grew 12% in 2009 and 14% in 2010, significantly outpacing overall industry growth. This solid growth was driven by our Food Animal business and by Comfortis, our oral flea control products for companion animals, which has had a strong uptake here in the United States. Going forward, we expect Animal Health revenue growth to benefit from international launches of Comfortis, including in the EU this quarter. In addition, Elanco has built a robust innovation pipeline and is poised to maintain double-digit growth in the coming years with launch as expected for multiple products targeting high-value markets, such as livestock immune enhancement, control of parasites in companion animals and pain control. This quarter in the U.S., we'll launch Assurity, a topical flea treatment for cats, and Trifexis, an oral flea and heartworm treatment for dogs. We've also built a substantial development capability in animal health vaccine and have demonstrated a willingness to drive the growth to this business via business development. Apart from continued strength in these three countercyclical growth engines, we also see opportunities for growth in a number of patent-protected product outside of the emerging markets in Japan. Now let me cite a few examples. On a local currency basis, Cymbalta grew 15% in Europe last year. Here in the U.S., Cymbalta continues to fare well in its existing mood and pain indications in a market dominated by generics. And we'll begin active promotional efforts next week for Cymbalta's latest FDA-approved indication, management of chronic musculoskeletal pain. 2010 local currency growth of Alimta was 20% in Europe and 17% in the U.S. This year, we anticipate submitting the results of our S124 study to the FDA for approval of Alimta induction treatment followed by Alimta maintenance treatment in patients with advanced nonsquamous, non-small cell lung cancer. In our Diabetes business, Humalog registered solid 6% local currency growth in Europe in 2010. Now while sales in the U.S. were essentially flat, in the second half of the year, we saw sustained growth in our new prescription share of rapid and middle time analog market for the first time in years. We've also improved Humalog access, which should reinforce the positive sharemarket trend as we begin 2011. Now for Cialis, in Europe we have continued to extend our leading DOT and cash share market. While in the U.S., Cialis has continued to gain market share in a declining ED market. At the end of last year, we've submitted Cialis for the treatment of benign prostatic hyperplasia to the FDA and could have an action before the end of this year. Finally, we continue to seek consistent growth in shared market for Effient in the U.S. and in Europe. 2010 sales total $115 million, and sales in the fourth quarter were $47 million. We remain committed to this product, and based on the clinical data we've generated along with Daichi Sankyo, we believe Effient has an important role to play in the treatment of ACS patients undergoing PCI. In addition to maximizing opportunities to drive top line revenue growth for the company, we've also been focused on driving greater productivity. Through deliberate and determined actions, we're tracking to achieve the headcount and cost containment goals we laid out in September of 2009. As of December 31, 2010, excluding strategic headcount additions in key emerging markets in Japan and business development, we had reduced headcount by 3,450 or nearly 2/3 of our goal of 5,500. And we're on track to meet or exceed our goal of reducing our projected 2011 cost by $1 billion. We saw some of those benefits of these efforts in the leverage we generated in 2010 between revenue growth and net income growth, and we expect to see an even greater benefit in 2011. Now hopefully, the information I've shared illustrates the opportunities we see for many areas of our company to generate future top line growth and to deliver on our productivity improvement goal. It is through these opportunities and efforts that we expect to generate mid-teens earnings per share growth, excluding the impact of the Zyprexa and Gemzar sales reductions outside of Japan, U.S. healthcare reform and the BI alliance. Now let me turn to those other items. Outside of Japan, we estimate that Zyprexa and Gemzar sales will decline significantly in 2011 compared to 2010 driven by patent expirations. In total, we anticipate this will lower EPS growth by approximately 15 to 17 percentage points. We are already seeing rapid erosion of Gemzar sales in the US and expect to see some continued erosion in international sales where we lost patent protection in many markets in early 2009. We also anticipate Zyprexa sales to decline rapidly post patent expiration, which occurs in April for some international markets and September for most major European countries, and in October, in the United States. Compared to 2010, U.S. healthcare reform could lower 2011 revenue by an incremental $170 to $270 million and add an additional $150 million to $200 million in non-tax-deductible operating commitments through the pharmaceutical industry fee. Combined, we estimate this could reduce 2011 EPS growth by approximately 4.5 to 5.5 percentage points. Finally, we expect our strategic diabetes alliance with Boehringer Ingelheim to reduce 2011 non-GAAP EPS to increase SG&A and R&D expenses. Specifically, we expect this alliance to reduce 2011 non-GAAP EPS growth by approximately 4.5 to 5.5 percentage points. However, we view this near-term earnings dilution very differently than that from patent expirations or governmental actions. Clearly, we've anticipated that the near-term earnings dilution is a precursor to longer term EPS accretion. And that this alliance adds economic value to Lilly and its shareholders and is thus a good investment for the business. So while we face major headwinds in 2011, we've taken a number of actions designed to significantly mitigate this negative impact and position the company to continue to invest in our long-term growth potential, while funding our dividends, capital expenditures and targeted business development. Now I'll provide some color commentary on our [ph] guidance. In terms of the top line, we anticipate 2011 revenue will be flat to slightly increasing compared to 2010. Excluding the anticipated decline in Zyprexa and Gemzar sales outside of Japan and the incremental impact of U.S. healthcare reform, we would expect 2011 revenue to grow in the mid- to high-single-digits. We expect gross margin as a percent of revenue to decline approximately two percentage points due to the negative effect of patent losses, the Puerto Rican export tax and the anticipated negative effect of foreign exchange on international inventories sold. Marketing, selling and administrative expenses are projected to grow in the low- to mid- single-digits. Now it is important to note that the new pharmaceutical industry fee will be booked in this line item of our income statement. In addition, we expect to have substantial additional marketing and selling expenses as a result of the alliance with BI. Excluding anticipated expenses from the pharmaceutical industry fee and the BI alliance, we would anticipate marketing, selling and administrative expenses to be essentially flat. Research and development expenses are expected to be relatively flat. This growth rate is affected by the higher than normal charges in 2010 that flowed through R&D. Excluding these charges from the base period, R&D expenses would be expected to grow in the mid-single-digits with much of this growth driven by our portion of the anticipated clinical trials spent for BI's DPP-4 and SGLT-2 inhibitors. For the year, other income and deductions are expected to be a net expense of between $50 million and $150 million driven largely by net interest expense. The tax rate is anticipated to be approximately 21.5% for the year, while the IRS has not provided a final ruling on U.S. tax treatment of the Puerto Rican export tax. For the purposes of our guidance, we have assumed that this export tax will be creditable in the U.S. Finally, we expect operating cash flow to be more than sufficient to fund capital expenditures of approximately $800 million to $900 million, as well as the dividend and continued business development. Slide 19 provides a reconciliation between reported and non-GAAP EPS for 2010 and the associated growth rates from these numbers to our 2011 guidance. This concludes our prepared remarks. And now, we'll take your questions. Operator, first caller, please.

[Operator Instructions] Our first question comes from the line of Catherine Arnold from Credit Suisse. Catherine Arnold - Crédit Suisse AG: I wanted to ask you on the product side about the mGlu program. Obviously decision to advance out into Phase III is a positive sign in regards to some of the issues that surfaced in some of the earlier work. I was wondering if you could talk about if seizures were not an issue in the data such that you felt comfortable moving forward. And when we'll be able to see a Phase II data? If the profile similar to what was sort of hypothesized in the nature article that was published on the compound back in time? And then just one other question I'd like to ask you which is about Bydureon. I'm wondering if the MEA has come back to you with any more questions on the QT front since the FDA decision was handed?

Catherine thank you for your questions. We'll have Ronika handle the question on mGlu2/3. And either Jan or I will talk about Bydureon in the EU.

But you might remember back in 2009, we started a safety and tolerability study for mGlu2/3. It started out as a six-month study. And in that study, our intent was to get better understanding on some of the earlier observations on the mGlu trials. That study, we now have six-month data on that study, which we plan to actually disclose at a European event in April. That study actually did have two additional seizures in that study. Of those two, one of the patients had the seizure actually before they were randomized the drug. And the second patient actually had their seizure after they came off of the study drug and before initiating the typical. So we are now getting that additional information to help us understand. But we feel confident in the data that we have so far on that six-month study to now go ahead and move ahead with our Phase III program. And that's also in combination with our prior Phase II, or Phase II studies that were presented and published back in 2007 and 2009.

Catherine, before Jan answers the question on Bydureon in the EU, we also did have a discussion with FDA to review this interim data in coming to the decision to move forward into Phase III. Jan?

We are, as you know, in a regulatory review in that area. And we will receive some more comments the first half of this year. We are quite confident that we are on track with the EU submission. And so far, the QT issue has not been raised as an issue by the EU regulators.

One other thing for Catherine for the mGlu trials. In the shorter term of the QT phase studies earlier, as you're aware, we did have a number of occurrences of these seizure-type events. I believe the total number was 8. I think this longer-term data that we're generating only having had two events to date, again, one prior to randomization and the other one coming after the patient has discontinued for lack of efficacy and started up the typical -- gives us hope that this is actually something that will not be a particular issue for the drug. Again patient's age is extremely important to monitor, going forward. We've extended that to go out 12 months. I look forward to presenting our six-month data in April, but the 12 month data subsequently when that's matured.

We have a question from the line of Tony Butler with Barclays Capital.

Two brief questions, principally for John. One is, can you give us some idea of how you're going to go out and market the chronic pain indication in Cymbalta? Clearly a positive. The question is, I'm assuming that's more PCP or have greater PCP direction, and what would that message be distant from its use as an antidepressant? And then second, again, staying with you, John, if possible. I'm just curious how you think or if you could provide some color around a couple of institutions, principally in India and Korea, have made comments or seem to be gearing up for the introduction in Europe, possibly generic insulins or generic alternatives. And while generic insulin may not necessarily be a focus proper to Lilly -- I guess, it could be over into Humalog. And I'm just curious about how you think those potential generic biologic entries into the European market over the next couple of years? And if you think that's really a possibility?

Tony, this is John. I'll take both your questions. First of all, we'll be launching Cymbalta for chronic pain next week. Here in the U.S., we feel well prepared for that launch, and we feel like we've got the right sales force coverage for the right physicians to make sure that the appropriate message is getting out there. I'm not, right now, at liberty to discuss the range of tactics, et cetera. But it's obviously a very important new indication for, as you know, for a molecule that now has five or six approved indications in different countries around the world. It's going to be Cymbalta, as Derica pointed out. It's going to be an important growth driver for us in this beginning of this YZ period. With respect to insulins, I think it really remains to be seen how big of a threat so-called generic versions of insulins will be. We're not blind to this. We're keeping a careful eye on it, as you know. Insulins are a different kind of biologic product. Their production outputs are in the thousands of kilos, as opposed to molecules like EPO and others. The capital investments required, the complexity of the technology around insulins, I think, serve as more of a barrier to entry perhaps for would-be competitors, then it's going to be the case in other therapeutic categories. But obviously, we're going to stay very plugged in to this. I think it's very important to keep in mind that we believe the world can benefit from new and improved insulins, which is why we're excited about our two insulin analogs that we disclosed. We were now partnering with BI to bring to the market. In addition, delivery technology has moved a considerable ways since the era of the violent syringe. And Lilly going to continue to pioneer new and more convenient ways to administer insulin as part of our value proposition for all those products going forward.

Our next question comes from the line of Bert Hazlett with BMO Capital Markets.

I have a quick one on insulins and then just two pipeline questions. On the insulins, how much did the Wal-Mart deal add to the Humulin franchise? And is that sustainable? Then just briefly, regarding Amyvid, could you talk about the timeline for the re-read of the Phase II studies for Amyvid? And is that the gating item for resubmission? And then when is the next interim safety look for solanezumab, [ph] the A beta Alzheimer compound?

If you want, I'll take initial shot and then Derica [ph] on the insulins and then Jan will take you to questions for the pipeline. On the insulins for Wal-Mart, I don't believe we're going to be quantifying the specific impact from that. Clearly, there's going to be a ramp up in that business. So I wouldn't take some of the initial data necessarily being the run rate for growth going forward. But clearly, it's a very important deal that we struck with Wal-Mart. We're very pleased with the initial results. I'd also say that in general, it seems that globally, we're having a very good run growth of Humulin, which for very strategic reasons, I believe that [ph] been taking as the market is opening itself up a bit to our Humulin. So, Jan, for the pipeline?

Yes. In relation to Amyvid, the time line for re-read, as we have stated before, it's like it's been months, not longer. So we are looking positively on that one. In relation to -- solanezumab, as you know, most of the Phase III studies have now been enrolled, and the duration is 18 months. And we will have an interim readout. I don't want to comment on exactly when, but we are following, I think, on track to deliver this molecule.

And just to be clear, Bert, there is an asset to end of -- when Jan was saying months. So it's a matter of months. We don't really have a specific time. Obviously we're working through expeditiously with the FDA. But it is something we think we'll be able to address here in the relatively near term.

Just to clarify if I heard your question correct on Wal-Mart, that deal was with Humulin, not Humalog.

Our next question comes from the line of Tim Anderson with Bernstein.

On the tax rate guidance for 2011, that is below 2010 and it's below where you previously suggested. The tax rate might ultimately creep up, too, and I'm wondering what's driving this in 2011 and what we should again expect over the longer term? And then second question on 2014 guidance that you've given before. I got on the call late, but I'm not sure if you've talked about 2014 or not. Is that still on track? And then third question, a quick one, just Emerging Market revenue growth in fourth quarter?

Sure. Tim, in regards to your question about the tax rate, let me remind you, there's three moving pieces here. First of all, with the patent expirations with Zyprexa and Gemzar, the mix effect of that create upward pressure on our tax rate. Also, the second factor affecting our tax rate, which also creates upward pressure, is the pharmaceutical industry fee, which is non-tax-deductible. What's creating a lowering pressure on our effective tax rate is the assumption that we'll be able to credit the Puerto Rico excise tax. So that's how we get to the tax rate that you saw. In regards to the 2014 guidance, Tim, we did not discuss that on the call today. And we still look forward to update that at our June Analyst Meeting in New York.

One other thing to keep in mind, Tim, for the 2010 effective tax rate is that we did have in Q1 that $85 million charge due to the future taxation of the retiree drug subsidy that drove up the overall tax rate for the full year by about 1.3 percentage points. That will not be recurring in our 2011 or going forward numbers. And then in terms of the emerging market, as we've said in the call, the full year growth rate was 14% total. Well, actually it's 10% performance, a very robust growth. We did have a spike in Q3 that came down a little bit in Q4 due to timing of orders. Specifically in Q4, we had about 6% total growth, nearly all of which was from performance despite -- we have references that compares to 18% growth in Q3, 16% of which was performance. Some of the things that we saw, for example, Tim, to give some color. There would've been some Zyprexa orders, for example, in Brazil but would have expected to come through in Q4. They did not come through in Q4. They did come through early this Q1. So again, we think, by looking at that full-year number gives you a better trend for how the emerging markets are growing. And again that's 10% performance.

Next question comes from the line of John Boris with Citi.

First question for Derica, on international sales in 2010, total international sales for 2010. Is it possible to get some information on percent of sales of that international component that's coming out of Japan and coming out of emerging markets? Second question on your Diabetes portfolio, Byetta in particular. If you look at the Canadian label, it does increase a small increase in QTC that they've highlighted in that label. Can you just help us understand that and also maybe walk through what the implications are on that for the U.S. label and for Bydureon? And then last, is it possible just to get an update on where you are at with your own fully humanized GLP-1 program going forward? Any update on enrollment and timing of release of results there?

John, let me start with how to characterize our international sales. So today, about a little over 45% of our total revenue base is outside of the U.S. And if you were referring back to -- if you refer back to Slide 10, you'll see from the PRV, if you look at just the total year here what was really driving our overall revenue growth. So in Europe for the year, we had 3% volume growth. In Japan, we had 26% volume growth. And the rest of the world, so in those markets outside the U.S., we had 6% of volume growth. And when you break that down, you really saw even in Europe where we are already in some YZ aspect in terms of Gemzar erosion, we still were able to drive good volume growth. And so when we look forward, we really see those markets, like the emerging market in Japan, really acting in a countercyclical manner compared to what we're going to see in the U.S. in 2011, as well as in Europe major markets in 2011 with the Zyprexa effect. So this is where we anticipate driving the future growth.

Real quick in terms of the sales numbers on that Slide, John, 10, which is the effective price rate in volume on revenue. You'll see that the full year revenue for Japan actually passed $1.5 billion for the year. And then in terms of emerging markets, as we commented during the prepared remarks, over 10%, essentially roughly 10% of our sales now are coming from emerging markets. I don't have the exact percentages for you broken out by the international, but I think hopefully those two numbers will allow you to make that calculation. And then for John for the Canada Byetta.

Yes, John, I think -- first of all, we're very pleased to have Byetta approved in Canada. And I don't have the label language in front of me but my recollection is this is not a counterindication or a warning. The fact is that the FDA is asking its own questions for Bydureon on QT. And whether or not that's connected with questions that Canadians might have. It's something I can't speculate on, but we're obviously well along with meeting what we understand to be FDA's requirements, so that we can refile Bydureon in the second half of this year, and ultimately hopefully gain approval for that.

Program? We are really pleased with that program. We've actually initiated four of the award studies, all of last year. As well as, we had an ongoing thing with adaptive trial that is progressing well as well. We plan later this year to actually probably start a CD study. So we're pretty pleased with the progress of that program and look forward to sharing some data in early '12.

Our next question comes from the line of David Risinger with Morgan Stanley.

A couple of questions. First, maybe you could just help us understand the solanezumab interim look for 2011. What are the scenarios for that interim look? Typically Phase III trials have to run to completion. Is it a DSMB interim look or -- what exactly is the interim look? That's the first question. Second, in terms of other key late stage pipeline results to watch in 2011, what are the few that are most important that you're focused on in terms of Phase III results? And then third, could you just update us on the Strattera and Cymbalta patent litigation outlooks, please?

Sure, Dave. I'll take a shot at your first two questions. Maybe ask Ronika to help on the last one. So for solanezumab, the interim look, your question. I think you're tracking exactly correctly that for efficacy, these trials need to run all the way to completion to be able to have in this particular case statistical powering to be able to show the slowing of progression of the disease. So this will be a look that's a safety look. So these trials can only be stopped early for either safety issues or for very curious signals that there's no way the primary endpoint could be met. They cannot be stopped early for efficacy. In terms of the Phase III data, a couple of the major ones that were mentioned on the call are private ones, I would highlight to you, as well, which would be the DURATION-6 data head-to-head with Bydureon versus Victoza. I believe that should be becoming here probably in the first half of the year. Expectation would be much like we have the past. You probably have the top line results press release with subsequent presentation at a medical meeting. Timing of that medical meeting is difficult to know if that might be ADA or EASD. And then obviously with Alimta, we continue to build out that franchise and are very hopeful that we'll be able to do so with the S124 study that Derica mentioned that is Alimta induction, followed by Alimta maintenance therapy. You may recall that the current maintenance indication that we have is for Alimta used in the maintenance setting followed by a first line treatment with platinum agents.

Just to add to that with regards to Cialis for BPH, we have plans. I'm disclosing data here in the first quarter. We have already been accepted with an abstracted EAU in March. As well as -- and the European Association of Neurology will have a combo or at least a co-administrative study with the alpha blockers and develop with BPH. Those are another set of Phase III data.

I just want to mention that we've got FDA action dates for florbetapir, which received a priority review status. This is the Avid beta-amyloid imaging agent. For Linagliptin, this is BI DPP-4. And also for liprotamase, the molecule that we acquired with Alnara.

So Strattera, as we mentioned on the call, we're awaiting the decision. We feel very confident that the CAFC should in fact overturn the district court ruling and have included the assumption that we maintain the Strattera patent in the guidance we've issued for 2011. Cymbalta, last update we had, we remain on track for a trial to start here in the U.S. District Court for Southern Indiana on June 6 of this year.

Our last question comes from the line of Chris Schott with JPMorgan. Christopher Schott - JP Morgan Chase & Co: My first on the gross margin and the two percentage point decline, can you just give us a little bit more granularity on how we should think about the magnitude of the impact of the loss of Zyprexa and Gemzar sales on gross margin relative to some of the factors you mentioned? I guess you said those two products had much of the impact or some of the things like Puerto Rico play a bigger role? And then the second question was on SG&A expense. You mentioned flat SG&A x healthcare reform and the BI announcement. With the restructuring initiatives you've announced, I guess I would've anticipated a bit more of a decline in 2011. Can you just help us a little bit better the pushes and pulls that are going into SG&A in 2011?

Chris, this is Derica. Let me try to address both of your questions. In regards to gross margin, we will see a downward pressure on our gross margin driven by the mix effect due to the loss of the Zyprexa and Gemzar patent. And so that's going to create a negative pressure. You're also going to see negative pressure on gross margins attributable to the Puerto Rico excise tax. Because it's an excise tax, it will actually flow through comps or manufacturing costs, thus reducing our gross margins. And then obviously it's offset or credited through the tax rate in the line item below that. And those are the two factors that's driving the decline in our gross margin by approximately two percentage points in aggregate. I'm not prepared to break those out into pieces. In regards to the SG&A and being flat, if you exclude the Pharmaceutical industry fee as well as the BI alliance aligns expenses, what you see is kind of a mix-up in the U.S. and our European markets. You are seeing a dramatic decline in our overall operating expense base in terms of SG&A. But as I highlighted on the call, we are making strategic investments in some of our key emerging markets, like China, as well as in markets like Japan, where we are expecting to drive significant countercyclical growth as we go through this period of YZ. So that's what's driving the overall effect of SG&A being essentially flat. John?

Well I want to thank everyone for taking time for taking time this morning for this update on Eli Lilly and Company. As always, we appreciate your continued interest in our company. We fought, and for the most part, overcame significant headwinds to post strong financial performance in 2010. This was highlighted by volume-driven revenue growth. On a performance basis, we delivered increasing gross margin as a percent of revenue. We gained leverage between revenue and operating income growth and posted a robust 8% net income growth. We prudently managed working capital and capital expenditures, and once again generated strong operating cash flow. We're pleased with our performance and our progress in 2010. We're excited about the opportunities before us in 2011. As Derica discussed, we entered this year with a keen awareness of the challenges posed by the patent expirations we faced in the YZ period ahead. But we have a focused strategy centered on innovation that we're aggressively pursuing. Over the last year, we advanced 16 new molecules into Phase I clinical testing, nine molecules into Phase II testing, and two molecules NERI for depression and our antibac antibody for rheumatoid arthritis and lupus into Phase III testing. We concluded a number of business development deals with a bias toward those that provide current or potential near-term revenues. We acquired florbetapir with our acquisition of Avid Radiopharmaceuticals. And just last week, an FDA advisory committee recommended approval of the beta-amyloid imaging agent if we provide appropriate physician training and successfully re-read existing brain scans. And our strategic alliance with Boehringer Ingelheim includes the development and commercialization of two oral diabetes compounds from BI, including linagliptin, which could be approved this year and two basal analog insulins from Lilly. In addition, we are preparing to launch Cymbalta for chronic musculoskeletal pain and Axiron for testosterone deficiency and have a number of potential regulatory approvals, including Bydureon in the EU and several pending here in the U.S. At the same time, we expect continued strong performance in the rest of our business in 2011, including the three countercyclical growth engines we've discussed for some time. Lilly is, today, the fastest-growing pharma company in Japan and the fastest-growing among the top 10 multinational companies in key emerging markets, while Elanco Animal Health is outpacing its industries growth, as well. We'll continue to take advantage of this countercyclical growth, as well as the growth in a number of our patent protected products in the U.S. and Europe. Our strong financial performance, our focus on speeding innovations to patients and targeted use of business development all support our goal of successfully traversing and emerging with even greater strength and the capacity to drive future growth. We'll continue to act with urgency and purpose to overcome the challenges we face. And as always, we will keep you informed of our progress. Thanks again for joining us. Have a great day.