Eli Lilly & Co., Q3 2009 Earnings Call, Oct 21, 2009 - NYSE:LLY

NYSE:LLY

Ronika Pletcher provided updates on the company's pipeline, including the following points:

• She expressed disappointment about the losses of arzoxifene and dirucotide, noting that the decision not to submit arzoxifene for regulatory review was based on its clinical profile in light of currently available treatments, including the company's own Evista®. Dirucotide did not meet the primary objective of delaying disease progression in patients with secondary progressive multiple sclerosis in the Phase III MAESTRO-01 pivotal trial.

• Despite these setbacks, the company still maintains a robust pipeline in both quantity and quality, with 61 distinct new molecular entities (NMEs) in the clinical stage portfolio, including 23 compounds in Phase II and Phase III.

• The company continues to develop a robust biotech portfolio, with biotechnology representing over half of the late-stage Phase II and Phase III assets and over a third of the overall clinical portfolio.

• Since the last formal portfolio update during the second quarter earnings call, the company has initiated Phase II clinical trials for IL-1β, an antibody for the treatment of type 2 diabetes, and moved three more compounds into Phase I testing, two for diabetes and one for depression.

• The company terminated the development of eight other assets, two in Phase II and six in Phase I, emphasizing the importance of running the right experiments to enable early go/no-go decisions and knowing when to stop development.

• She highlighted select milestones between then and mid-2010, including potential FDA actions on Byetta® monotherapy and Zyprexa LAI® that year, and on exenatide once weekly and Cymbalta® for chronic pain in the first half of 2010. She also mentioned ongoing discussions with the FDA regarding ERBITUX® and the company's plans for resubmission of relevant applications.

• She concluded her remarks by noting the initiation of a number of Phase III trials in oncology and the planned standalone Phase III clinical trials on GLP Fc and diabetes early the following year.

During the Q3 2009 Earnings Call for Eli Lilly and Company, Phil Johnson made the following statements:

1. Introduction:

   • Good morning, and thanks for joining us for Eli Lilly and Co.'s Third Quarter 2009 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. Steve Paul; and Ronika Pletcher and Nick Lemen from Investor Relations.

2. Forward-Looking Statements:

   • During this conference call, we anticipate making projections and forward-looking statements based on our current expectation.
   • Our actual result could differ materially due to a number of factors, including those listed on Slide 3 and those outlined in our latest 10-K and 10-Q filed with the Securities and Exchange Commission.

3. Conference Call Information:

   • 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.
   • You can access the earnings press release, supporting materials, a live webcast, and Internet-based replay and a podcast of this conference call at www.lilly.com.
   • The supporting materials, the replay, and the podcast will be available on our website through November 20, 2009.

4. Closing Remarks:

   • Thanks for all your questions.

   • Ronika, Nick, and I will be available after the call to take additional questions that you may have.

   • Let me go ahead now and turn it over to John to close the call.

John C. Lechleiter, referred to as the Former Non-Executive Chairman, made several statements during the Q3 2009 Earnings Call:

1. Introduction to Changes:

   • He introduced the significant operational changes announced by the company, including a new corporate operating model and a series of initiatives designed to expedite the delivery of medicines to patients, increase value, and reduce costs.
   • Mentioned the voluntary exit program offered to select areas of the U.S. sales force to facilitate a new commercial approach in 2010.
   • Noted the agreement to sell Tippecanoe Laboratories manufacturing sites to an affiliate of Evonik Industries.

2. Regulatory News:

   • Announced the FDA approval of FORTEO® for the treatment of osteoporosis associated with sustained, systemic glucocorticoid therapy in men and women at high risk of fracture.
   • Mentioned the submission of Byetta® in Japan for the treatment of type 2 diabetes in adults.

3. Clinical Trial News:

   • Announced that the company will not submit arzoxifene for regulatory review due to its failure to meet key secondary efficacy and safety endpoints in the Phase III GENERATIONS trials.
   • Shared that the decision to not submit arzoxifene resulted in a charge to earnings of approximately $45 million in the third quarter, mostly booked in R&D expense.
   • Discussed the results of the MAESTRO-01 Phase III trial, which showed that dirucotide did not meet the primary endpoint of delaying disease progression in patients with secondary progressive multiple sclerosis, leading to the cessation of clinical trials.

4. Legal Updates:

   • Noted the upholding of the company's method-of-use patents on Evista® by the U.S. District Court for the Southern District of Indiana, which run through March 2014.
   • Mentioned the partial summary judgment motion invalidating the company's method-of-use patent on Gemzar®, set to expire in May 2013, and the intention to pursue an appeal.
   • Discussed the Canadian Federal Court ruling that Lilly's Canadian compound patent for Zyprexa® is invalid and the company's intention to appeal this decision.
   • Mentioned the settlement with the Attorneys General of West Virginia, Connecticut, South Carolina, and Idaho, resolving their Zyprexa-related claims, and the $125 million special pretax charge incurred in the third quarter.

5. Overview of Organizational Changes:

   • Emphasized that the key objective of the changes is to fulfill the strategy of creating value by accelerating the flow of innovative new medicines that provide improved outcomes for individual patients.
   • Clarified that the changes are primarily aimed at reducing the time it takes to get medicines to patients, establishing a clear line of sight to customers, and reducing the operating cost structure to free up resources for innovation.
   • Highlighted the reorganization of the development function within Lilly Research Laboratories to create a Development Center of Excellence, aiming to streamline the development of new medicines.
   • Explained the reorganization of global operations around five business units and the streamlining of corporate services and general and administrative functions.
   • Mentioned the aim to reduce the cost base by $1 billion and lower headcount to 35,000 by the end of 2011, excluding strategic sales force additions in high-growth emerging markets and Japan.

6. Research and Development (R&D) Changes:

   • Noted the significant improvement in productivity in research over the past few years, leading to an unprecedented number of Phase I starts.
   • Described the creation of the Development Center of Excellence (COE) to address the increasing complexity, slowness, and expense of drug development.
   • Explained that the COE will use a common operating system, common priorities, and a singular focus to streamline the development of new medicines.

7. Business Unit Reorganization:

   • Mentioned the organization of the Human Health business around four distinct business units: Oncology, Diabetes, Established Markets, and Emerging Markets.
   • Noted that each business unit will be responsible for creating a competitive, sustainable business and will partner with research to bring forward valuable innovative molecules for their customers.

8. Summary of Changes:

   • Stated that the Development Center of Excellence and the new business units will be in place on January 1, 2010, and that the streamlined functions will be in place by mid-next year.

9. Closing Remarks:

   • Summarized the strong financial performance of the company in the third quarter, including volume-driven revenue growth, operating income growth greater than revenue growth, robust EPS growth, and strong operating cash flow.

   • Reiterated the confidence in the financial performance providing the resources needed to strengthen the pipeline, drive future growth, deal with upcoming patent expirations, and respond to a challenging healthcare environment.

   • Emphasized the company's commitment to innovation and appropriate investment in R&D, making timely data-driven decisions to advance or terminate assets.

   • Looked forward to keeping stakeholders informed of the company's progress and invited them to the annual investment community update in December.

Nick Lemen provided several updates and details during the Q3 2009 earnings call. Here is a detailed list of his statements:

1. Humalog® Trends:

   • Noted an encouraging trend in the mealtime analog insulin market during Q3.
   • Mentioned that Humalog® had been losing share to NovoLog® for over a year, especially in the Primary Care Physician segment.
   • Highlighted that Humalog's new-to-brand share gains have been impressive in both the endocrinologist and primary care settings over the last three months.
   • Emphasized the strong sales performance of the Humalog® KwikPen™.

2. Effient™ Launch Update:

   • Provided an update on the launch of Effient™, a new treatment for the reduction of thrombotic cardiovascular events in patients with acute coronary syndromes undergoing percutaneous coronary intervention (PCI).
   • Stated that the company received FDA approval for Effient™ in mid-July and launched it in the U.S. in early August.
   • Mentioned that obtaining hospital formulary status is critical for the uptake of a hospital-based product like Effient™ and that gaining widespread hospital formulary status will take roughly six months.
   • Confirmed that the company is on track to achieve its hospital formulary goals.
   • Noted that payer access is meeting expectations of interim formulary status of Tier 3, unrestricted, and highlighted the tier 2, unrestricted access with Express Scripts in both commercial Managed Care and Medicare Part D as of October 1.
   • Provided an update on the European launch, stating that despite receiving regulatory approval in late February, the company is still early in the process of gaining pricing and reimbursement access at the individual country and hospital level.
   • Mentioned positive reimbursement and access decisions in several countries, including Argentina, Australia, Denmark, Greece, New Zealand, and Switzerland, and a recent recommendation for reimbursement in France, though pricing discussions are ongoing.

3. Semagacestat Trial Enrollment:

   • Updated that the IDENTITY 1 trial, the first of two Phase III trials of semagacestat for Alzheimer's disease, has completed enrollment.
   • Noted that the IDENTITY 2 trial has enrolled over half of its subjects to date, with about 1,100 subjects expected to be enrolled.
   • Expected the IDENTITY 2 study to report out in mid-2012, given that it is a 21-month study.

4. Semagacestat Safety Update:

   • Reassured listeners about the safety of semagacestat, noting that the compound is behaving well and is well-tolerated based on periodic safety updates.

**- Paul expressed disappointment regarding the loss of arzoxifene and dirucotide but emphasized the robust pipeline with 61 distinct NMEs, including 23 in Phase II and III.

• Biotechnology represents over half of late-stage Phase II and III assets and over a third of the overall clinical portfolio.

• The company initiated Phase II clinical trials for IL-1ß, an antibody for type 2 diabetes, and moved three compounds into Phase I testing.

• Eight assets were terminated, two in Phase II and six in Phase I, to refocus resources on more promising molecules.

• The Development Center of Excellence aims to streamline development with a new operating system called Critical Chain, tailored therapies, and Advanced Analytics.

• The Critical Chain methodology has been successfully applied to virtually every project, with plans to extend it to 100% of projects.

• Tailored therapies and stratification are crucial for the Oncology pipeline, as seen with Alimta's 47% sales increase.

• Advanced Analytics includes clinical trial simulation modeling and seamless design to prevent downtime between phases.

• The GLP-1 mechanism for treating diabetes is highly promising, with significant efficacy and safety data, despite minor heart rate increases.

• The company is confident about the safety of GLP-1 drugs and their potential as a standard of care for type 2 diabetes.

• IL-17 antibody, anti-BAFF, and selective IL-23 antibody are among the most exciting assets in the pipeline, with proof of concept established and multiple disease indications being pursued.

• The NERI program for depression is progressing, though the exact date for announcing data is not specified.**