Eli Lilly & Co. (LLY)

Q2 2010 Earnings Call

July 22, 2010 9:00 am ET


Derica Rice - Chief Financial Officer, Executive Vice President of Global Services, Member of Operations Committee and Member of Policy & Strategy Committee

John Lechleiter - Chairman, Chief Executive Officer and President

Phil Johnson - ED of IR

Nick Lemen -

Seamus Fermande -

Ronika Pletcher - IR Department


John Boris - Citigroup Inc

David Risinger

Jay Olson

Steve Scala - Cowen and Company, LLC

Christopher Schott - JP Morgan Chase & Co

Marc Goodman - UBS Investment Bank

Robert Hazlett - BMO Capital Markets U.S.

Charles Butler - Barclays Capital



Ladies and gentlemen, thank you for standing by. Welcome to the Q2 earnings conference call. [Operator Instructions] I would now like to turn the conference over to Vice President of Investor Relations, Phil Johnson. Please go ahead.

Phil Johnson

Good morning, and thanks for joining us for Eli Lilly & Company's Second Quarter 2010 Earnings Conference Call. I'm Phil Johnson, Vice President of Investor Relations. Joining me this morning are John Lechleiter, our Chairman and CEO; Derica Rice, our Chief Financial Officer; and Ronika Pletcher; and Nick Lemen, for 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 10-K and 10-Q. The information we provide about our product and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions.

In the second quarter, we again generated strong financial results, including robust volume-driven revenue growth. We were able to leverage our high single-digit revenue growth into double-digit growth in operating income and earnings per share. In addition, we again generated strong operating cash flow. This strong financial performance has allowed us to raise our full-year 2010 EPS guidance in spite of the negative effect of recent pricing actions in Europe. Now since our last earnings call, we've continued to be active in business development, completing two more deals. We acquired Alnara Pharmaceuticals and their lead asset, liprotamase, which is under FDA review for the treatment of exocrine pancreatic insufficiency, and we entered into a development and exclusive license agreement from Marcadia Biotech's preclinical short-acting glucagon program.

We've also made progress on the regulatory front. The FDA confirmed that an advisory committee will be held on August 19 to discuss the chronic pain indication for Cymbalta. With our partner Amylin, we submitted our response to the FDA's complete response letter for Bydureon, and the agency assigned a new PDUFA date of October 2. And we received a positive final appraisal from NICE in the U.K. for the use of Alimta as a maintenance therapy for patients with non-squamous, non-small cell lung cancer.

In commercial news, we launched Livalo in the U.S. Livalo is the statin we licensed from Kowa last year. We also announced an agreement with Wal-Mart to make Humulin available in Wal-Mart pharmacies across the U.S. under the dual-branded name Humulin ReliOn, and as I alluded to earlier, a number of European governments announced measures to reduce their pharmaceutical expenditures. Let's briefly review the situation in Europe before discussing our Q2 results in detail.

While pricing and reimbursement systems vary by country in Europe, year-on-year average price decreases of 1% to 2% across the region have been commonplace for many years. We attempt to offset this by driving volume growth and achieving incremental productivity gains. Occasionally, acute budget issues in one particular country have prompted more substantial measures, like across-the-board price cuts. As you are aware, the economic downturn has caused budget pressures, which have forced a number of European countries to simultaneously introduce austerity measures to reduce public spending, including measures to reduce their pharmaceutical expenditures. Let's briefly look at some of the measures that have been passed.

The German government announced two temporary measures that will take effect on August 1 of this year. First, for products not subject to reference pricing, the rebate paid to the sick funds will be increased from 6% to 16%; second, prices will be reset back to their August 1, 2009, levels and held flat going forward. Both of these temporary measures will expire at the end of 2013. Not all of our German business is exposed to these actions. For example, some of our products are subject to reference pricing and Humalog rebates already exceed the new 16% mandatory rebate and will not be affected. In addition, a portion of our German demand for many of our products is satisfied through imports by wholesalers from other markets. We are not liable for German rebates on these sales.

In Spain, the government introduced a 7.5% rebate on public sector purchases of most branded products. Generics took an even bigger hit, 25%, while orphan drug prices were reduced by only 4%. These reductions will remain in place through the end of the year, with the government deciding later this year about 2011. In addition, measures leading to a more rapid decline in prices post-patent expiration were passed.

On May 1, the Greek government implemented a temporary price reduction of up to 27%. Lilly's average reduction was roughly 23%. The Greek legislation stipulates that this temporary price reduction will be in effect through August 31 of this year. By that time, we expect a temporary price reduction to be replaced by our referenced price system that pegs the Greek price to average of the three lowest prices in the EU. While still substantial, we would expect the impact to Lilly of the new reference pricing scheme to be roughly half that of the May 1 price cuts. In addition, this change should lead to a reduced financial exposure in countries that may reference their prices to the prices in Greece. We've also seen some pricing actions taken in smaller EU countries like Romania. In total, at current exchange rates, we estimate that the price cuts announced by these governments will reduce our European revenue by approximately $90 million in 2010 and approximately $150 million in 2011.

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