LLY | Q1 2015

Operator: Good morning ladies and gentlemen and thank you for your patience in holding. Welcome to the 2015 financial guidance conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during today’s call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Phil Johnson. Please go ahead.

Phil Johnson : Thank you, Angela. Good morning and thank you for joining us for Eli Lilly and Company’s conference call to provide an update on our strategy and to discuss our financial guidance for 2015. I’m Phil Johnson, Vice President of Investor Relations. Joining me on today’s call are John Lechleiter, our Chairman, President, and CEO; Derica Rice, our Chief Financial Officer; Dr. Jan Lundberg, our President of Lilly Research Laboratories; Sue Mahony, President of Lilly Oncology; Enrique Conterno, President of Lilly Diabetes; Dave Ricks, President of Lilly Bio-Medicines; Chito Zulueta, President of Emerging Markets; Jeff Simmons, President of Elanco Animal Health, and Alyssa Rasner and Robling of the Investor Relations team. 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 2 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 it is not sufficient for prescribing decisions. In prior guidance calls, we focused almost exclusively on our financial guidance for the current year. On today’s call, we’ll first provide you with details on refinements we’ve made to our innovation-based strategy and update our midterm financial outlook, and then we’ll cover our financial guidance for 2015. Also, please note that in this morning’s press release, we indicated that our 2014 non-GAAP financial guidance remains unchanged while we’ve revised our 2014 GAAP EPS range to reflect restructuring charges we expect to recognize in the fourth quarter of 2014 as we continue to reduce our cost structure, and also the charge associated with the recently announced deal with Adocia. We’ll provide details on our 2014 results on our Q4 earnings call on January 30. Now I’ll turn the call over to John Lechleiter to discuss our strategy. John?

John Lechleiter: Thanks, Phil. Thanks to all of you on the line for taking time to participate in today’s call. The start of 2015 is an exciting moment for Eli Lilly and Company. We’re transitioning from a challenging period of patent expirations to a period of growth, driven by the launch of new products, the promise to provide new solutions to some of the most vexing medical problems we face today. To understand the context for our strategy moving forward, it’s important to consider what Lilly was facing back in 2008. Over the period that lay ahead, expiring patents would cause us to lose one-third of our revenue and a significantly greater percentage of our profits. As you know, we put a plan in place to overcome this challenge and rebuild our company. We shared this plan with the investment community at our meeting in New York in December 2009. We said at that time that during this patent expiration period, we would drive growth in Japan, emerging markets, and Elanco, along with key brands unaffected by patent expirations that we would replenish and advance our pipeline with a goal of 10 new molecular entities, or NMEs, in Phase III by 2011. We would reduce headcount by 5,500 and reduce our cost structure by $1 billion by the end of that same year, and we would achieve at least $20 billion in revenue, $3 billion in net income, and $4 billion in operating cash flow for each year through 2014. The results speak for themselves. Over these past five years, Elanco was among the fastest growing animal health companies and doubled in revenue. Lilly was among the fastest growing pharma companies in Japan where we doubled our volume. We had good growth in emerging markets, including doubling our sales in China, and we saw solid growth among our key enduring brands. We actually surpassed our pipeline goal with 12 NMEs in Phase III at year-end 2011, peaking at 13 by early 2013. We exceeded our headcount and expense reduction goals and we achieved our revenue, net income, and operating cash flow goals through 2013. In 2014, the trough of this patent expiration period, we may fall just shy in revenue and net income as we have already indicated. Now as our pipeline continues to advance, we’ve positioned the company to resume growth. In 2014, we launched three new medicines

Derica Rice: Thanks, John. Having heard from John about our strategic choices, I’d like to elaborate on our key objectives, including our midterm financial outlook, and then walk you through our financial guidance for 2015. As we have navigated through this patent expiration period starting late in the last decade, we sought to balance opportunities and risk across the near, medium and long-term. Our approach involved meeting certain financial minimums and operating goals in the period from 2009 to 2014, growing revenue and expanding margins post-2014, and sustaining R&D output to yield a more reliable stream of product launches. It was really very critical to balance these objectives. For example, prioritizing our near-term net income goal at the expense of advancing our pipeline or at the expense of the quality and quantity of our research output might have produced the highest near-term EPS but compromised our mid and long-term growth prospects. That was not acceptable. Given the magnitude of the lost revenue, profits and cash flows from patent expirations, maintaining this balance was not easy and it required significant management discipline, but we met this challenge and going forward we’ll apply this same discipline to balance our objectives. So what are our objectives now that we have emerged from the YZ period? They are outlined on Slide 12. We intend to drive year-on-year revenue growth throughout the balance of this decade, spurred by new product launches from our pipeline. Next, we aim to turn that revenue growth into even greater earnings growth by controlling costs and leveraging existing infrastructure. At the same time, we must maintain a sustainable flow of innovative medicines, and finally we’ll deploy capital to create value, which includes returning excess cash to shareholders via both the dividend and share repurchase. I’ll now provide a bit more perspective on each. Coming out of 2014, we are well positioned to drive revenue growth. We have a strong in-market portfolio of products across our diabetes, oncology, bio-medicines, emerging markets and animal health businesses that provide a solid foundation which has now been reinforced with the acquisition of Novartis Animal Health. From this foundation, we expect revenue growth throughout the balance of this decade to be driven by our pipeline

Operator: Our first question comes from the line of Mr. Mark Schoenebaum with Evercore ISI. Please go ahead.

Mark Schoenebaum: Hey guys, thanks a lot. First of all, I just want to say thanks for the slide deck, especially the slide that walks through the steps in getting to the guidance - I thought that was great. On the revenue, if I might, I appreciate that you gave overall revenue guidance; you’re not commenting on specific products. Maybe in just a general sense, I was wondering if you could let us know if you’re generally comfortable with the range of consensus numbers for some of the newer products, namely Cyramza and dulaglutide. I was wondering if you could give some color as to your general expectation in 2015 and longer term, if possible, for how diabetes pricing might play out, and then what your expectations are and how that’s included in your guidance thinking. Finally on the pipeline, I noticed on the pipeline slide you now have--maybe this is old, but I hadn’t noticed before, you have two BACE inhibitors, one in Phase I. Is that Phase I drug part of the AZN collaboration, and then the Phase I Alzheimer’s antibody in the slides labeled as N3pG - pyroglu, I believe, will there be Phase I data in 2015 on that? Thanks.

Phil Johnson: Great Mark, this is Phil - thanks for the questions. Derica, if you wouldn’t mind answering the first question on revenue expectations for some of the newer products over time, then we’ll go to Enrique for diabetes pricing assumptions here in ’15 and the view moving forward; and then Jan, if you’d like to comment on the Phase I BACE inhibitor and data for the M3pG monoclonal antibody. Derica?

Derica Rice: Good morning, Mark. In regards to specifics around the key products that we’re launching as part of driving the growth, as you know, in the past we’ve never provided specific revenue forecasts at the product level, and we’re not in a position to do that here today. What I can say is that if you look at our base business, including the new product launches, we’re looking at a mid-to-high single digit base business growth, and then obviously it’s being dampened by some of those headwinds I outlined, whether it’s FX or whether it’s the remaining tail of the patent expirations that we’re experiencing in the U.S., the $400 million around Cymbalta and Evista, or the pending patent expirations we have for Cymbalta coming later this year in Europe. But we feel very good about our outlook in terms of our base business growth and our ability to leverage that top line growth into even greater bottom line growth.

Phil Johnson: Enrique?

Enrique Conterno: Very good. Mark, Happy New Year. As I think about the payor environment, there are two dynamics that I think we are seeing basically play out. Number one, we see additional plans narrowing formularies, so we see this continuing trend, but a very important trend as well now that we’ve had a few years with this type of effect is that the plans that have narrowed their formularies and have made an exclusive decision on a particular drug are not shifting back, so there is no switching back and forth from some of those plans. So those two dynamics are important as we think about how do we model and how do we basically work through our projections and our plans when it comes to the different payors. More specifically, commenting on the mealtime market, we did see some additional plans basically narrowing their formulary this year differently than past years. Novo got the higher share of life going exclusive. As we think about the GOP1 class and if we think about Trulicity, I will say that our discussions are going, I would describe it, as very well, so we believe that we have a product that adds significant value and that value is appreciated by payors. I would say the same thing with Jardiance - clearly much more competitive, maybe less differentiation with the other products, but we see good progress in our discussions on contracting.

Phil Johnson: Great, thanks. Jan?

Jan Lundberg: Yeah, the beta secretase inhibitor field, we see as very important in the Alzheimer’s area, and as you know, we have a compound that has just started Phase II with the AstraZeneca collaboration. We also want to have additional back-ups in this area, and that’s why we have moved another BACE inhibitor into Phase I. We see this as part of the AZ collaboration with obviously an option for that compound. In relation to M3pG, which is our plaque-specific antibody, we are pursuing a Phase I study in patients, and the aim is to have data this year.

Phil Johnson: Great, thanks Jan.

Mark Schoenebaum: Happy New Year, thank you.

Phil Johnson: Thanks, Mark. Angela, could we have the next caller, please?

Operator: Our next question comes from the line of Tim Anderson with Sanford Bernstein. Please go ahead.

Tim Anderson: Thank you. A few questions. Going back to pricing, just widening the discussion, pricing pressures turned up in diabetes and respiratory over the last one to two years. Investors are wondering if there is going to be more to come in other large disease areas. I’m wondering what your view of this is - do you think U.S. pricing pressure is going to be confined mostly to the areas where we’ve seen it already, or do you think it could spread to new areas? Then a question on necitumumab and ramucirumab in lung - are you confident in U.S. and European approval of those products given the modest absolute level of benefit that we’ve seen in the Phase III results, and then can you update us on the launch plans for glargine in Europe in terms of timing?

Phil Johnson: Great, thanks for the questions, Tim. Dave, if you wouldn’t mind taking the first question on pricing and how we may see that expanding or not into other therapeutic categories compared to what we’ve seen so far? Sue, if you’d comment, please, on the approvals for lung for ram-neci in U.S. and other geographies; and then Enrique, the last question, if you could handle that one, please. Thanks. Dave?

David Ricks: Sure, Tim, I’ll take a shot at the broad question on pricing. In general, clearly over the last five years since Obamacare and other dynamics, mergers, et cetera, we see increasing power in the payors in the U.S., and I have no doubt that they would like to continue to exercise pressure on the pharmaceutical industry to reduce pricing. I think where we see that manifest is when there is a less differentiation between products and categories, so that these payors can drive therapeutic switching particularly in the narrow formularies that Enrique was describing earlier. So there is a trend to having increasing narrow formularies bit by bit each year, and where we have less differentiation in our products, I think one would worry more about that. Where there is differentiation, I think Lilly continues to believe that we can command value for the products and achieve formulary access at the same time.

Phil Johnson: Thanks, Dave. Sue?

Susan Mahony: Okay, yes, morning Tim. With regards to necitumumab, we announced last year that we completed our [indiscernible] submission to the U.S. FDA, and we feel confident that based on positive Phase III data in overall survival in first-line squamous, an area that there’d been no advance in the last two decades, we feel good about our potential for approval hopefully later this year in this area. With Cyramza, at the end of last year, we received approval based on a priority review in second-line lung cancer, again based on overall survival benefit in both squamous and non-squamous. We are hoping to replicate what we believe has been a successful gastric launch in lung cancer here in the U.S. this year.

Phil Johnson: Thanks, Sue. Enrique?

Enrique Conterno: We expect to launch our new glargine product post-the expiration of the Lantus patent in Europe. Clearly in Europe, we typically see a sequence of launches country by country, but we should expect to see this starting in mid-2015.

Phil Johnson: Great. Angela, next caller, please.

Operator: Our next question comes from the line of Tony Butler with Guggenheim Securities. Please go ahead.

Tony Butler: Good morning, thanks very much, and Happy New Year. Questions around margins, if I may. Derica, if I think back over the many years I’ve followed the company, one of the more profitable years was recently, actually, in 2010. You actually hit growth that gross margins were roughly 80%, operating margins just a tad over 29%, so what I’m really interested in is can we get back to that kind of profitability? And you’re going to say yes, I suspect, but more importantly, can you bracket a time frame because you’re trying to lower your cost base, and I understand that and I can understand the notion of growing revenues, but revenues seem to be growing at moderate rates, let’s say, and the notion of getting back to 29% ops is really one that--you know, I just wonder if that’s even remotely achievable today. Second and/or last question is around the U.S. glargine, if I may. Will there be a Markman in ’15 prior to the expiration or will there be any other litigation in ’15 in the U.S.? Thanks very much.

Phil Johnson: Thank you, Tony, and Happy New Year as well. Derica will take the first question and I’ll be happy to handle the second one.

Derica Rice: Sure. Tony, I and we feel very good about our prospects of both future growth and future margin expansion. Again, if you were to dissect really our commentary on today’s call, if you look at the 2% base business growth that I highlighted earlier, recall that that’s a combination of mid-to-high single digit revenue growth that’s being dampened by some of those headwinds. Now, some of those headwinds will not recur in 2016, such as the tail of the patent expirees, and hopefully we will not continue to see the persistence of the FX headwinds and some point that they will stabilize. So if you get back to that mid-to-high single-digit type growth, we should definitely be able to combine that with prudent expense management and leveraging our existing infrastructure to grow our bottom line even faster. We’ve stated on today’s call that we should get to the 50% OPEX ratio no later than 2018, by the end of that year, and we do expect that we will begin to increase our gross margin as a percent of revenue as well. That’s going to be really driven by as we begin to launch our basal insulin, we begin to take advantage of our new tech agenda that Enrique and the diabetes team, along with our manufacturing colleagues, have been able to implement, and that really, we see the benefit of that really starting in 2016. So I’m not prepared today to give you the absolute operating margin by 2018, at least here publicly, but we feel very good that you should see our ops margin, along with our margin expansion, increasing over this decade.

Phil Johnson: Great, thanks Derica. And just to be clear, Tony, he won’t give it to you privately, either.

Tony Butler: I was going to ask! Thanks for that clarification, Phil.

Phil Johnson: Tony, on litigation for our insulin glargine product here in the U.S., there was a Markman hearing in December and the next step in that process actually will for the trial, which is scheduled for the latter part of September in the District Court in Delaware.

Tony Butler: Thanks, Phil.

Phil Johnson: You’re welcome. Angela, next caller, please.

Operator: Our next question comes from the line of John Boris with SunTrust. Please go ahead.

John Boris: Thanks for taking the questions, and congratulations on navigating through a difficult YZ period and exiting that in what appears to be pretty good shape here. First question just has to do with the execution on the innovation-based strategy. For each of your business leaders, some pushback again on oncology, so for Sue Mahony, on Cyramza for example and differentiation relative to Avastin and access in global markets, most notably U.S., Europe, Japan, can maybe you just walk us through how you think the product is differentiated and what kind of access you’ll have for Cyramza? And in the case of Enrique for Trulicity and in the case of Dave Ricks for ixekizumab, on differentiation in access for those assets. Second question for John - obviously a headwind, the evolution of Affordable Care Act, can you maybe just discuss any implications for discounting in Medicare-Medicaid, and then also it would be appear with that innovation-based strategy that PDUFA 5 is working relatively well - 41 NMEs approved by the FDA. Can you maybe just articulate how and what kind of improvements might be made to the PDUFA 6 going forward to further accelerate that innovation-based strategy through the regulatory pathways?

Phil Johnson: Thank you, John. So if you wouldn’t mind going in order, Sue, we’ll have you talk about differentiation for Cyramza, Enrique for Trulicity, Dave for ixekizumab, and then we’ll go to John for the last couple questions on the evolution of ACA and potential improvements for PDUFA 6. Sue?

Susan Mahony: Yeah, thanks very much, John, for the question. You know, with regards to Cyramza, it targets specifically the VEGFR2 receptor, so it has a different mechanism of action to other antiangiogenics. I think the important thing, though, from a differentiation and access perspective is we are--Cyramza is the only agent approved in gastric cancer in the second line setting, and it is approved now in the U.S. as both monotherapy and as combination therapy, and in Europe at the end of last year got approval in combination therapy and for patients who aren’t eligible for the combination therapy to have monotherapy. So we believe that that is the differentiator, or key differentiator. We’re seeing really no access challenges in the U.S. with NCCN guidelines Category 1, and we’re anticipating that we will have a good launch across the globe and hopefully action in Japan as well this year. In lung cancer as well, we’re launching in the U.S. this year and we’re planning to submit in Europe at the beginning of this year. We have NCCN Category 2A status in lung cancer and we believe, given again Avastin isn’t approved in the second line setting and with an overall survival advantage in both the squamous and non-squamous setting in second line, we do see that there’s an opportunity here for Cyramza to help a lot of patients in lung cancer.

Phil Johnson: Great, thanks Sue. Enrique?

Enrique Conterno: Sure. When it comes to Trulicity, we do believe that we have a product that offers a unique bundle of benefits when we look at the efficacy, the once-weekly dosing, and the user-friendly profile of the product. As I shared earlier, our contracting discussions are going, I would describe them as going very well. Clearly we have to separate here commercial from Part D because when we are thinking about Part D, we’re really looking at 2016 but we are expecting that we’re going to get access in ’15 on a large basis for this product across a number of the commercial plans. I think it’s important to note that we are making the value of this product stand in our discussions, so we are not entering into a price war. What we’re trying to basically do is achieve access but not exclude other products while we achieve this access. So I am extremely pleased with the progress that we have made with Trulicity.

David Ricks: Thanks. John, as it relates to ixekizumab, obviously exciting times in the psoriasis market. It’s growing quickly, and I’d remind you that still a large majority of patients who have moderate to severe plaque psoriasis don’t receive biologics, so there’s a tremendous amount of growth within the class that’s possible. To your question on differentiation, I think there’s two tiers of this, first IL-17s against other established therapies, recognizing no one’s been treated commercially with an IL-17 yet, and I think there the differentiation for our class will be one of complete clearance and to what degree do practitioners and patients seek medicines that can provide a much higher probability of complete clearance of the plaque. Within the class, we also believe that’s an important criteria, and as we announced earlier in 2014, we’re impressed with ixekizumab’s ability to provide complete clearance to patients, and I think that will be a primary basis of winning both amongst other classes of medicines but also within the IL-17 class. Additionally, safety - obviously in immunotherapies it’s critical to establish long-term safety. We haven’t seen all the competitors in IL-17s full safety packages, but that’s something to watch carefully. We are impressed with ixekizumab’s safety profile so far. Finally, we need to provide the right go-to-market solution to make it easy for doctors and patients to take and have access to the medicines, as you point out, and although a new area for Lilly, we are planning to be fully competitive in that area and provide really best-in-class ease of use and product access. So that’s how we’ll go to market with ixekizumab.

Phil Johnson: Thank you, Dave. John?

John Lechleiter: John, Happy New Year. With respect to your first question, the Affordable Care Act, our estimate is that healthcare reform will in effect lower our 2015 revenue - this is obviously already baked in - by somewhere between $400 million and $450 million, and will add about $100 million to our operating expenses. Now, this is basically continuing along the lines of the structure that was put in place when the legislation was passed in 2010. We don’t anticipate a significant positive impact to our sales as a result of the expanded coverage provided, at least not in the near term. At a high level, additional sales from covering new lives are likely to be offset by a shift of currently covered lives from plans that have today more favorable access and pricing to plans with less favorable access and pricing. You can bet, though, as a company, as an industry, we are going to continue to call attention to the fact that the best healthcare plans for anyone covered under any type of plan is one that enables access to a broad array of medicines. Medicines are the most cost effective way of preventing disease and curing disease, and we want to make sure that as healthcare coverage continues to evolve, that this is a central tenet of that coverage. With respect to PDUFA 5 and PDUFA 6, I think we have every reason to be optimistic about the positive impact that PDUFA 5 is bringing and will continue to bring to the process of discovering and developing new medicines. I can tell you that work on PDUFA 6 is already underway. I think one thing you can expect to see in that is more of a focus on the development cycle; in other words, while a good measure of what we’ve looked at in past PDUFAs has to do with greater predictability, with reduced cycle times, with improving the process by which reviews are carried out, interactions with the sponsors, for example, we want to make sure that we’re thinking about that entire development process, which as all of us know, can be many, many years before you get to the point of filing. So I think that’s going to be something that we engage with the FDA in a thoughtful way, and I think it’s very consistent with a number of things we’re doing internally to try to substantially revise key timelines down the road.

Phil Johnson: Before the next question, just one other thing, John - I think it’s safe to say that enrolment in some of the exchanges may be a little bit lower than may have originally been anticipated and hoped for, I think even by the government. We have seen a larger number of people enrolled in Medicaid and a greater expansion there, and as you know, that’s a book of business that carries very high rebates from manufacturers. Angela, next caller, please.

Operator: Our next question comes from the line of Steve Scala with Cowen. Please go ahead.

Steve Scala: Thank you very much. A few questions. What does the long-term margin guidance for 2018 assume for Alimta generics in the U.S., EU or Japan, beyond the few smaller EU markets that you mentioned? And then two questions additionally on the long-term margin guidance. Why have you switched from guiding long-term margins for each SG&A and R&D to total operating expenses? I assume this is to retain flexibility, but why do you need that? And then lastly, the long-term margin guidance is to be delivered by the end of 2018. Does that mean it will be achieved for all of 2018, or perhaps only Q4 of ’18, so 2019 is the first year? Thank you.

Phil Johnson: Steve, thank you for the questions. We were fully prepared for the last one, so I know Derica is ready for you.

Derica Rice: Okay, hi Steve. In regards to the margin guidance, when we say by the end of 2018, we’re talking about for the full year, so it’s not the fourth quarter that you’d see then the full impact in ’19. In regards to the margin guidance itself, there is also--there is nothing to interpret behind the consolidation of the 50%. It was really just our way of trying to have a simple way of characterizing and talking about it in our call and saying that we expect to get to that goal in 2018 versus 2019, which was the prior guidance. When you look at how quickly we can go, I’m trying to come back to your first question--

Phil Johnson: The Alimta generic assumption.

Derica Rice: Sorry, on the Alimta generic assumption, we’ve assumed in our guidance that we will maintain Alimta in the U.S. and Europe and Japan throughout the ‘20s.

Steve Scala: Thank you.

Phil Johnson: Thanks, Steve. Angela, next caller, please.

Operator: Our next question comes from the line of Jami Rubin with Goldman Sachs. Please go ahead.

Jami Rubin: Thank you. Can you hear me okay, Phil?

Phil Johnson: Yeah, we can, Jami.

Jami Rubin: Thanks. Happy New Year. Just a couple questions. Maybe for you, Sue, John had mentioned that immuno-oncology is an important area for the company and looked to see internal and external investments in that field. Clearly, Lilly is behind some of your peers, who are in fact launching PD1 antibodies today as we speak, so can you talk about where you see opportunities for your program, where you see opportunities to differentiate some of the newer technologies that you think you can exploit vis-à-vis your peers? And then secondly, I was just curious to know if the accelerated market entry of PD1 antibodies has impacted your outlook for [indiscernible] and/or necitumumab, not necessarily this year but next year, going forward, particularly in the lung indications. Thanks.

Phil Johnson: Great, thank you, Jami. I think, Sue, those are both for you.

Susan Mahony: Yeah, thanks very much, Jami. I think as we’ve mentioned before, we are focused on immuno-oncology. We have three areas of focus that we believe are important as we look at our R&D strategy for oncology

Phil Johnson: Thanks, Sue.

Jami Rubin: Thank you very much.

Phil Johnson: You’re welcome. Take care, Jami. Angela, next caller, please.

Operator: Our next question comes from the line of Seamus Fernandez with Leerink. Please go ahead.

Seamus Fernandez: Thanks a lot. So just a couple of quick questions, first for Derica. Derica, the FX impact was a little bit less than what we might have forecasted. Can you just update us on the rates that you’re using, at least for the euro and the Japanese yen in terms of the $500 million impact year-on-year? The second question, just generally, Susan, how should we be modeling or thinking about the OUS timing for loss of Alimta? And I know that there’s another attempted generic launch that could be competitive with Alimta - I think it’s another salt formulation. Could you just update us on your thoughts to the market access there? Lastly on the pipeline, can you just walk us through, Jan, the value-added benefits of 3G3 given the move into Phase III, and then second, would you discuss how your Phase I A-beta antibody is different from solanezumab? And the reason that I ask is, is it particularly similar to the Biogen antibody, and would you be watching those data as a potential positive read-through for Lilly’s earlier antibody or as a competitive threat to sola? Thanks a mil.

Phil Johnson: Great, thanks Seamus. So Derica, obviously the first one for you; Sue, if you want to take the second, also feel free if you’d like to comment on 3G3, and then Jan, if you want to complement comments for 3G3 and then discuss the M3pG antibody. Derica?

Derica Rice: Seamus, we were assuming a euro of 1.25 and a yen at 1.12, so obviously you’ve seen even here in the last--beginning of this year, further movement downward in terms of the continuing strengthening of the dollar, so that creates a bit more of a headwind. Again, just a note that while you have the top line headwind, what’s offsetting a good portion of that is the cost of goods sold effect where you have the effect of the FX on inventories anticipated being sold during the period or during the course of 2015. That does not carry over into 2016, so it’s a non-recurring item.

Phil Johnson: And Derica, is it correct to think that it will be probably be the Q1 call in April when we’ll sort of do the next recast based on foreign exchange rates to update any changes at that point in time to our guidance?

Derica Rice: If they are in any material way, yes.

Phil Johnson: Okay, great. Sue?

Susan Mahony: Yeah, with regards to the Alimta patent in Europe, there are a couple of things going on in Europe. The compound patent expires at the end of December ’15. The method of use patent, or the vitamin B12 patent, as you know, we won from a validity perspective at the European Patent Office. We still have not got a date for the hearing of the appeal on that, and we’re all waiting to hear that. You mentioned about the salt form. There were a couple of hearings last year, one in Germany and one in the U.K. Both of those are being appealed, and those appeals are happening in March of this year, so we should find out more by March of this year. You know, we are continuing to feel very confident about the validity of our patent, and we believe that that’s enforceable; and should that be enforced, we would continue to have patent in Europe until June 2021. Now, we did mention today earlier, though, there are a number of smaller countries in Europe that do not have compound patent, and they’ve lost data exclusivity and that is impacting our sales in Europe for Alimta, but those are small countries that don’t have compound patents. With regards to 3G3, olaratumab, we are entering or beginning a Phase III study this year in soft tissue sarcoma based on Phase II data that we’ve seen in an ongoing study. We will be planning to present that data at a scientific meeting this year, and this actually is one of the molecules from the ImClone acquisition and we’re excited to be presenting the data at a meeting this year and to be starting Phase III studies.

Phil Johnson: Jan?

Jan Lundberg: Yeah, I can just add on 3G3 about the PTGFR receptor as a pathway, which is a tumorigenic pathway and it’s known that it’s up-regulated in certain sarcomas, like in rhabdomyosarcoma, and the expression of this receptor is associated with poor prognosis in these patients. This study has been done then on top of doxorubicin, which is the standard of care. In relation to the antibodies against A-beta, solanezumab is binding free A-beta, which is different than to M3pG which binds plaque-specific A-beta, and the M3pG is very well characterized to what it binds. As far as the Biogen molecule, that also seems to bind more to plaques, although it’s somewhat unclear exactly how it binds to the plaque.

Phil Johnson: Just to add on to one of Sue’s comments, to provide a little context for magnitude, in some of these smaller countries in Europe where we do not have the patent expiration, annualized sales are roughly in the $80 million range, if you’re looking to quantify what the impact could be as we lose exclusivity in those markets. Angela, next caller, please.

Operator: Our next question comes from the line of Gregg Gilbert with DB. Please go ahead.

Gregg Gilbert: Yeah, hi. I have a few - thank you. First, Derica, sorry if I missed this, but can you offer operating cash flow guidance for ’15, and can you comment on how sticky capex is up at this level over the next several years? For John, could you share with us how strong a role you think bus-dev will play over the next five years versus the prior five years, and what might the priorities be other than, say, animal health and immuno-oncology? Thanks.

Phil Johnson: Thanks for the questions, Gregg. Derica, we’ll go to you for the first two on cash flow and capex, and then John for the business development priorities.

Derica Rice: Happy New Year, Gregg. Regarding operating cash flow, we did not provide specific guidance, and what I can say is that all through the YZ period, we said that we would stay above the $4 billion threshold. I can confidently say here today that in 2015, I continue to expect to be well above $4 billion in operating cash flow. In regards to capex, as you may have seen in my commentary for the guidance call, we expect capex to be about $1.2 billion on our base business this year. We’ll add probably about another $100 million associated with the Novartis Animal Health acquisition, taking us to $1.3 billion. That’s pretty much in line with what you’ve seen from us historically over the last two or three years, so we haven’t really seen a significant change in our capex trend and therefore our ability to fund capex really is not compromised at all.

John Lechleiter: Hi Gregg. I think it’s generally safe to say that business development will be increasingly important for Lilly. You saw an announcement a few days ago about a recent promotion internally here, and behind that is a lot of work we did last year to really look at how we’re organized to do business development, how we approach business development. In concert, I would say with a strong internal research effort, I think what makes us an attractive partner and what enables us to hopefully have insights in terms of what kind of business development we want to do, is a strong internal research program staffed by world-class scientists and physicians, and we intend to maintain that. I think you can expect to see we’re going to become more active in earlier stage deals. I think if there is a later stage opportunity, it would be something that would help support our strategies and our designated therapeutic areas, or that would enhance our geographic presence. You should continue to expect that we’re not interested in doing large-scale M&A.

Gregg Gilbert: Thanks.

Phil Johnson: Thanks, John. Angela, next caller, please.

Operator: The next question comes from the line of Marc Goodman with UBS. Please go ahead.

Marc Goodman: Yes, good morning. First, just revenues seemed a little bit light. Obviously the FX is an issue, but just relative to where you think the Street was looking, if you can just maybe help us in any other areas, or do you just think it was all FX and that’s where everybody was missing? Second, John, you mentioned in Europe that you’re going to evolve into--I forgot the exact wording, but it sounded almost like you were going to scale back Europe a little bit more. Maybe you could just be a little clearer on what you’re trying to do in Europe - that would be helpful. And then third, one of the R&D programs, the CGRP for migraine, if you could just give us an update on that program and where we are and when we’re going to see data. Thanks.

Phil Johnson: Thanks, Marc. So Derica, if you’d like to handle the first question on revenues versus the Street. We’ll have Dave Ricks talk about some of the evolution of our operations in Europe, and then Dave, do you also want to handle the CGRP question?

Derica Rice: The third one was CGRP.

Phil Johnson: What was the question? Sorry, I missed it.

David Ricks: CGRP, migraine, any data this year.

Phil Johnson: Got you, thanks.

Derica Rice: So in regards to the revenue being light, as far as I can tell, Marc, it seems like it may be more FX-related, but to be honest, given that we don’t really know what’s in each of the individual models, it’s difficult for us to tell. Again, when we look at our own internal projections, we come back really looking at that base business of saying--you know, trying to drive that mid to high single digit prior to those dampening factors that I highlighted, and again reiterate that some of those dampening effects hopefully aren’t recurring items, such as the tail of the LOE or patent expirations. So therefore when we think about emerging in 2016 and ’17, you should see different growth prospects than what you’re seeing here in 2015 in terms of a much stronger profile.

Phil Johnson: Marc, real quick - this is Phil. So it did look like the one adjustment that was made pretty routinely by all the sell-side analysts was to add in Novartis Animal Health. Very few analysts seem to have adjusted for FX, and there was quite a bit of variability with I think maybe half incorporating and the other half not incorporating the change in amortization of intangibles. So focusing just on revenue, I do think it’s a true statement, like Derica said, that it looks like the difference in our revenue range and the consensus that was slightly above our revenue range would be due to FX not having been fully incorporated into consensus. Dave, for European operations?

David Ricks: Yeah, as we go forward in Europe, I think we have been on a journey and will continue to be on one to consolidate and rationalize costs where we can, recognizing that Europe is a big and profitable part of Lilly. But as John mentioned in his comments from a revenue perspective, we’ll experience relatively less growth than the rest of the geographies we operate in. We have 20 to 30% of the current revenue base which will experience patent expiry in the next several years. This will be replaced by new product launch revenue, starting in diabetes, oncology, immunology and then other areas, but not at a rate that would allow for substantial growth; therefore, we’re looking at consolidating back office operations, other cost-related measures to continue to make Europe a profitable and large part of Lilly. We’re confident we can do that. As it relates to CGRP antibody, we are conducting a Phase II study today as we speak, and we do expect to have the data in-house in 2015, although we have not made a statement about when we would make that publicly available. That is a gating item for Phase III initiation.

Phil Johnson: Great, thanks Dave. Marc, a little bit of color commentary again on magnitude of exposure for our European sales. As Dave mentioned, we’ve got pushing past 30% of our European revenue which is annualizing out in total in Europe for the human pharma business at about $4.1 billion. You’ve got Cymbalta, obviously, will have the impact for generic starting this year, Cialis starting late ’17. You’re looking at Cymbalta Europe sales that are roughly in that $675 million range, whereas Cialis is a little bit in excess of $600 million. Hopefully that’s helpful context. Then if we can go the next caller please, Angela?

Operator: The next question comes from the line of Vamil Divan with Credit Suisse. Please go ahead.

Vamil Divan: Yeah, thanks for taking the question. Happy New Year, guys. So a couple on the diabetes side - you mentioned some of the success you’ve had there in developing this broad portfolio of products. How important would you say the novel insulin is to your overall strategy? I think out of all the products that you’re developing, that’s the one we’ve been the most concerned about being a big success, just given some of the limited data we’ve seen publicly so far. Second one on diabetes around Jardiance - can you just share what you’d say your current expectations are for the CV outcome study as one of the data readouts you’ve highlighted as one of the key catalysts for ’15? I think there’s about 7,000 patients in that study. I’m just wondering if you think that’s large enough to show a CV benefit, or do you think it’s more likely that we’ll just see [indiscernible] there? And then one quick one, if I could, just on the dividend - you mentioned the increase that you announced last month, I think it was a 2% or so increase. Is that about the level of increases we should expect going forward, or could we see greater levels of increases as we get more certainty around your near and midterm opportunities? Thank you.

Phil Johnson: Great, thanks Vamil. So Enrique, we’ll go to you for the first two questions on the novel basal and on the Jardiance CV outcomes trial, and Derica, if you could please comment on the expectations going forward for the dividend.

Enrique Conterno: Sure. So as we build our portfolio, clearly we are now present when it comes to oral agents, now we have with Trulicity, once again GOP1, that we believe is best in class, and clearly very much at the foundation of our franchise is insulin, and we had a gap when it comes to basal insulin for quite some time. Both glargine and of course our innovative basal insulin fill this gap, so I would describe it as very important to our overall franchise. Let’s keep in mind that everything that we do when it comes to the basal insulin segment is incremental revenue for us, and it also strengthens our competitiveness when it comes to [indiscernible] insulin. As far as CV outcomes and Jardiance, we are--as we have shared, we expect to report out sometime in the middle of this year. I think the comments that we have made in the past were that we cannot--when we look at the different classes - DPP4s, SUT2s and GOP1s - given the data that we have seen available in some of those meta-analyses and adjudicated CV events from different Phase III trials, it was pretty clear to us that probably GOP1s had the best chance of achieving CV benefit, and DPP4s we basically were not as confident. I think so far when it comes to DPP4s, it has played out in the way that we certainly thought it would. I do believe that the SUT2 class, and in particular given that Jardiance is going to be the first to report, has a decent chance of showing a CV benefit, but we really have to wait for the data.

Phil Johnson: Thanks, Enrique. Derica?

Derica Rice: In regards to the dividend, as I stated earlier, we do expect to return to more regular increases in the dividend over time. Obviously as we look at that, we will look at the dividend in the context of total shareholder return, so I wouldn’t read too much into the 2% as a guide to what the future increases would be in terms of level. It’s something that we’ll consider on an annual basis as a part of our total TSR strategy.

[end of Q&A]:

Phil Johnson: Great, thanks Derica. We are at the bottom of the hour of what’s been a longer than normal call. We do appreciate your participation in the call today and certainly your interest in Eli Lilly and Company. The 2015 financials have been particularly complex due to the changes in foreign exchange that we’ve seen recently, the removal of amortization of intangibles, and the inclusion of Novartis Animal Health. We do hope that the information we’ve provided today has helped you to dissect and understand the drivers of our 2015 guidance. Alyssa, Brad and I will be available to answer addition questions you may have through the course of the day, the week, and obviously the future weeks. Finally, we do look forward to seeing many of you next week out in San Francisco and of providing details on our 2014 results on January 30. We hope you have a great day and a great 2015, and Angela, if you could now please provide the replay instructions before closing the call.

Operator: Ladies and gentlemen, this conference will be available for replay after 11