Phil Johnson - VP of IR Derica Rice - EVP, Global Services & CFO John Lechleiter - Chairman, President & CEO Enrique Conterno - SVP & President, Diabetes Ronika Pletcher - IR Nick Lemen - IR

Bert Hazlett - BMO Capital Markets Tim Anderson - Sanford Bernstein John Boris - Citi Investment Steve Scala - Cowen Seamus Fernandez - Leerink Swann Catherine Arnold - Credit Suisse Tony Butler - Barclay Capital Chris Schott - JPMorgan Marc Goodman - UBS Jami Rubin - Goldman Sachs Barbara Ryan - Deutsche Bank

Ladies and gentlemen good morning, thank you for standing by and welcome to the Eli Lilly & Company quarter three earnings conference call. At this time all lines are in a listen-only mode. Later there will be an opportunity for your questions and comments and instructions will be given at that time. (Operator Instructions) And as a reminder, today's conference is being recorded. This time I would like to turn the conference over to our host Vice President of Investor Relations, Mr. Phil Johnson. Please go ahead.

Good morning. Welcome to Eli Lilly & Company's third quarter 2010 earnings conference call. I am Phil Johnson, Vice President of Investor Relations. Joining me this morning are John Lechleiter, our Chairman and CEO; Derica Rice, our Chief Financial Officer; Enrique Conterno, President of our Diabetes business; and Ronika Pletcher and Nick Lemen from Investor Relations. During the 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. Let's start with the key headlines for the quarter. On the operating front we again delivered robust financial results, delivering EPS of $1.18 on a reported basis and $1.21 on a non-GAAP basis. Excluding the impact of foreign exchange we continue to see positive leverage within revenue and total costs. Our ongoing cost containment and productivity efforts allowed us to leverage 3% performance growth in revenue and a 7% performance growth in operating income. On the revenue line we saw strong performance growth in international markets for our Human Pharmaceuticals business and globally for Animal Health business. As Derica will discuss later, revenue growth in our US Human Pharmaceutical business was negatively affected by wholesaler buying patents, while the impact of foreign exchange on revenue turned negative for the first time this year. Based on continued solid natural performance and a lower estimate for the cost of US health care reform in 2010 we're raising out EPS guidance for the full year. On the legal front, the US Court of Appeals for the Federal Circuit or CAFC upheld the Michigan District court ruling that our method-of-use patents for Gemzar is invalid. The US District Court in New Jersey ruled that the method of use pattern for Strattera is invalid. The CAFC will hear our appeal of this ruling in early December. The CAFC upheld the Indiana District Court ruling that have listed a method-of-use patents are valid and the US Court of Appeals for the Second Circuit ruled that a class should not have been certified in a pending third-party payor suit on Zyprexa. The courts further ruled that the plaintiffs overpricing claim should not go forward. Later in the call Nick will provide a more detailed update on these and other patent challenges. In clinical and regulatory news, the FDA issued a complete response letter for BYDUREON requesting a thorough QT study and submission of the DURATION-5 study results. Pending discussions with the FDA, our goal is to reply to the complete response letter by the end of 2011. An independent data monitoring committee for the Protege trial with teplizumab recently met and concluded the primary efficacy endpoint, a composite patients total daily insulin usage and HbA1c level at 12 months was not met. Administration of study drug has been completed and patients will followed for safety information. Lilly and MacroGenics have decided to suspend enrolment in dozing in two other ongoing clinical trials. The company's are currently evaluating next step. And we hope that development of Semagacestat, our gamma secretase inhibitor that was being studied in Phase 3 trials to treat patients with mild to moderate Alzheimer's disease. Finally the FDA Anesthetic and Life Support Drugs Advisory Committee voted eight to six in favor of expanding the pain indications for Cymbalta to a broader population to be further defined by the FDA. Now I will turn the call over to Derica to discuss our Q3 financial results and our 2010 guidance in more detail. Derica?

Thanks Phil. Consistent with prior calls, I'll focus my comments on our non-GAAP results, which we believe provides insights into the underlying trends in our business. This here excludes certain items such as restructuring charges, asset impairments and other special charges. Now let's start on slide seven with a quick look at our Q3 non-GAAP income statement. At the top-line, we generated revenue growth of 2% in the third quarter. This includes a negative impact of more than 1% from US health care reform and European pricing actions at in total reduce Q3 revenue by roughly $65 million. This 2% growth is slower than what we've seen in the first half of the year, primarily due to wholesale of buying patents in the US and movements in foreign exchange. I will provide more details in a moment where we review the price/rate/volume analysis. Gross margin as a percent of revenue again came in at over 82%, an increase of 1.4 percentage points from Q3 2009. This increase was driven by manufacturing productivity improvement and by the favorable impact of price increases. This quarter's operating expenses which we defined as the sum of R&D and SG&A grew by 3%, slightly more than the 2% revenue growth. Operating expense growth was driven by a charge of approximately $80 million that was booked to R&D expense, as a result of the termination of development of Semagacestat. R&D expense grew 9% in the quarter due to a large part to this charge. Marketing, selling and administrative expenses on the other hand were flat compared to last year, driven by lower administrative expenses and our ongoing cost containment efforts. Now as a result of the improvement in the gross margin percent, we were able to leverage 2% revenue growth into 4% operating income growth. Now moving down the income statement, you will see that other income improved by $45 million due largely to an insurance recovery and lower net interest expense. In addition, our tax rate increased by 3.5 percentage points due to the expiration of the R&D tax credit this year, as well as the benefit realized in last year's quarter related to a cumulative adjustment in the forecasted effective tax rate for the full year of 2009 and to the resolution of the company's 2001 to 2004 tax audit. Now as a consequence of this higher tax rate, growth in net income and EPS lagged that scene in revenue and in operating income specifically net income and earnings per share grew 2% and 1% respectively. Now slide 8 shows our reported income statement, while slide 9 provides a reconciliation between reported and non-GAAP EPS. Additional details about our reported earnings are available in today's earnings press release. Now, let's look at how foreign exchange affected our Q3 results, and we'll start with revenue. At the bottom of slide 10, you'll see the 2% revenue growth I mentioned earlier. Now this growth is driven by a favorable price impact of 3%, which was partially offset by negative effect from foreign exchange of 1%, while volume growth was essentially flat. So in performance terms, excluding the effect of foreign exchange revenue grew 3% in the quarter. Clearly the overall growth rate of revenue is below what we've seen in both Q1 and Q2 earlier this year. The biggest changes are in exchange rate and volume. In terms of rate, Q3 is the first quarter this year that FX has had a negative effect on revenue. The primary drivers of this reversal are the weakening of the Euro versus last year, and a number of other international currencies only partially offset by a stronger Yen. In terms of volume, the biggest changes in the US where we went from having low single-digit volume increases in Q1 and in Q2, to a 6% volume decrease this quarter. Now of that 6% decrease, 4 percentage points of this decrease were driven by changes in wholesaler inventory levels, which increased in Q3 last year, while they were decreasing in Q3 of this year. Now these fluctuations were within normal contractual limit. We continue to see robust volume growth in our animal health business which was up 13%, and in Japan where volume was up 18%. We also registered volume growth of between 15% and 21% in a number of other international markets, including China, Mexico, Australia, Korea and Turkey. In total, our emerging markets business posted 14% volume growth in the third quarter. Now slide 11 shows the year-on-year growth of select line items of our non-GAAP income statement, both with and without the effect of changes in foreign currency rate. The numbers in the first column are the same as you saw in the last column of slide 7. I will focus my comments on the second column of numbers which strips out the effect of foreign exchange rate. First, you will see a 3% growth in revenue. Below that you will see that the cost of sales actually declined 7% driven by our continued efforts to improve productivity and reduce costs. In total operating expenses grew slightly faster than revenue showing growth of 4%. Operating expense growth rising above that of revenue is due to the R&D charge incurred for the termination of the development of Semagacestat. In total, we held the growth in our total expenses being manufacturing, SG&A and R&D below the revenue growth rate which allowed us to leverage 3% performance growth in revenue and to 7% performance growth in operating income. Again EPS growth of 5% in performance terms was negatively affected by the increase in the effective tax rate. And finally as shown in the last column you will see similar leverage in our year-to-date results excluding the effect of FX. Now for your information on slide 12, we provided the year-on-year growth of direct line items of our reported income statement. Once again both with and without the effect of foreign exchange rates. Now let me wrap up my comments with our 2010 financial guidance. As Phil mentioned earlier our continued strong financial performance including prudent management of expenses and a lower estimate of the 2010 revenue impact of US healthcare reform has positioned us to raise our previously issued 2010 earnings per share guidance. We are moving up from a range of $4.50 to $4.65 to a new range of $4.65 to $4.75 on a non-GAAP basis. Now this corresponds to a range of $4.55 to $4.65 on a reported basis. In terms of line item guidance, we now expect total revenue to grow in the mid-single digits, this guidance contemplates the potential introduction of generic gemcitabine in mid November and it assumes no generic atomoxetine and incorporates the revised 2010 cost estimate for US healthcare reform. As we outlined in our press release we now anticipate that US healthcare reform will reduce our 2010 revenue by between $225 million to $275 million. Gross margin as a percent of revenue for the year is still expected to be flat to increasing and we continue to expect improvement excluding the effect of FX on international inventory sold. Marketing, selling and administrative expenses are still projected to grow in the low single-digit. And growth in research and development expenses is still expected to be in the low double-digit. Our forecast for other income has changed slightly to a net reduction of between 0 and $50 million. The effective tax rate for the full year is still expected to be approximately 23%. This includes the $85 million tax charge booked earlier this year related to US health care reforms. And the future taxation of the retiree drug subsidy. And it assumes that the extension of the R&D tax credit is retroactive to January 1 of 2010. If this credit is not extended our tax rate for the full year would be roughly 1 percentage point higher. Finally through the continued efforts of our engineering group to deliver needed capital projects more efficiently. We now expect capital expenditures for the year to total approximately $700 million. Also please note that we are in the process of evaluating whether or not the news on BYDUREON and teplizumab will result in any charge to the fourth quarter earnings. Our guidance does not explicatively include any such charges. On slide 14 we provide a reconciliation between the reported and non-GAAP EPS for 2009 and for our revised 2010 guidance. On an additional note, we will issue our 2011 guidance including updated estimates of the impact of US healthcare reforms and European pricing measures on our Q4 earnings call in late January of 2011. Also we intend to update you on our medium term 2014 outlook and our net investment community meetings which we anticipate holding at the end of June of next year. Now let me turn the call over to Nick, who will share our quarterly pipeline update as well as additional details on US pattern challenges and an overview of our Japanese business. Nick?

Thanks Derica. Slide 15 demonstrates changes in our pipeline since our July 20 earnings call as of October 18. Our clinical stage portfolio stands at 68 distinct enemies including 28 compounds in Phase 2 and Phase 3. We remain focused on developing a robust biotic portfolio and biotic molecule now represent over half of our Phase 2 and Phase 3 assets and over 40% of our overall clinical portfolio. Advancing our pipeline remains our number one priority, since our last formal portfolio update we have advanced three assets into Phase 1, two oncology compound and one for nephropathy, promoted two assets into Phase 2 IMC-18F1 for cancer and a second asset for osteoporosis. And we begin Phase 3 trials of NERI IV as a adjunctive therapy to either accessorize and patients with major depressive disorder based on the results of two positive Phase 2 studies. Data from our Phase 2 augmentation trials will be presented in November at the international forum on mood and anxiety disorders in Vienna. In addition data from our Phase 2 monotherapy trial will be presented in December at the ACNP meeting in Miami. As shown at the bottom of the slide we also terminated the development of one Phase 1 asset and two Phase 2 assets. And as mentioned earlier dosing will be suspended in Phase 3 trials for Teplizumab for Type 1 diabetes and we terminated Semagacestat from our Phase 3 pipeline. While the loss of Semagacestat was a disappoint in our Alzheimer's program, we are encouraged by the progress of our antibody solanezumab. This month the first Phase 3 clinical trial for solanezumab compeleted enrollments while the second study is over 80% enrolled. Assuming this trend continues we would anticipate completing the two 18-month studies in 2012. Also, while not currently shown in the Phase III, by early 2011 we will begin Phase III trials of our BAFF antibody for rheumatoid arthritis and for lupus. As mentioned earlier, the last three months have been busy from a legal perspective. I'll take the next few moments to provide some more details on the recent patent decisions and to highlight two upcoming cases. As you know, protection of intellectual property is critical to our business and it is the nature of our business that our patents will be challenged by generic manufacturers. Over the past three months, the US Court of Appeals for the Federal Circuit upheld the prior ruling by the US district court for the Eastern district of Michigan that Gemzar's method-of-use patent is invalid. We have requested a rehearing at the CAFC and are waiting to hear if that request will be granted. If the rehearing is denied or is unsuccessful, we will lose market exclusivity for Gemzar in the US as early as November 15, 2010 when the compound patent and its extensions expire. The US district court for the district of New Jersey ruled that the method-of-use patents for Strattera is invalid. The patents have been set to expire in May of 2017. We appealed this decision and the CAFC has scheduled a hearing on December 9, 2010. In addition, we're pleased that the CAFC granted an injunction that prevents the launch of generic versions of atomoxetine until a ruling is rendered. The CAFC also affirmed a prior ruling by the US district court for the Southern of Indiana that the company's method-of-use patents for Evista are valid. These patents provide protection for Evista in the US through March of 2014. The period for requesting an appeal has passed, however Teva can file a petition to the Supreme Court for review. In the months to come, we have two other patent challenges that will go to trial. Unlike the three cases I just discussed which involves method-of-use patents, these cases involve compound patents. First, three generic manufacturers have challenged the compound patent for Alimta. These cases have been consolidated and will be heard at the US District Court for the District of Delaware starting on November 8, 2010. We expect to prevail in this litigation and maintain US exclusivity at least through July 2016. Second, nine generic manufacturers have challenged the compound patent for Cymbalta. Lawsuits against all but one of these challengers have been stayed pending the outcome against the lone remaining challenger. The trial was currently scheduled to be heard at the US District Court for the Southern District of Indiana starting on June 6, 2011. We also expect to prevail in this litigation and maintain US exclusivity for Cymbalta until June 2013 or December 2013 if we are successful in securing the six months pediatric extension. Again, we are confident of the validity of our patents that will continue to take every reasonable step to protect our intellectual property rights. Successfully defending valid patents is critical to Lilly and to all innovation based pharmaceutical companies as it provides the underpinning for investment and research and development to discover and bring the market new therapies that improved patient outcomes. In past quarters we've provided informational updates on specific marketed products, compounds and developments or business development deals to help you better understand the story behind our quarterly numbers. This time around, we'd like to highlight our Japanese human pharmaceutical business. Along with emerging markets and animal health, Japan will provide substantial counter-cyclical growth as we experience patent explorations in the US and Europe on products like Zyprexa, Gemzar, Cymbalta and Evista. You may wonder what's going to drive significant growth of moving products during this period in Japan and establish in mature market. Historically, we've launched our products in Japan well after we've launched them in US and Europe where we have made great progress in accelerating development of our pipeline molecules to allow for more approximate launches in the US, Europe and Japan in the future. We are still working through this historical launch gap. As a result, we have a significant opportunity for growth over the next several years. In 2009, we generated pharmaceutical sales of nearly $1.2 billion in Japan, representing growth of 28% over 2008 and making it the second largest market for Lilly behind United States. Growth continues to be very strong in 2010 with September year-to-date performance growth of 26%. As measured by IMS, we are far and away the fastest growing major pharmaceutical company in this important market growing at 29% versus market growth of only 1% for August year-to-date. This has allowed Lilly Japan to move up in ranking from number 23 to number 19 in the last two months. Zyprexa is our biggest seller in the Japanese market, with over $300 million in sales and 8% performance growth year-to-date. This is an important opportunity for Lilly and one that should be bolstered by additional indications as we hope to receive approval for an indication in bipolar mania soon and we expect to submit an application for bipolar depression by year-end. It is important to note that while we loose the patent in Zyprexa in the US and Europe next year, we maintain exclusivity in Japan until December 2015. This should help drive what we hope to be a significant tail of Zyprexa sales post first 2011. Alimta has demonstrated very impressive growth since its approval for non-small cell lung cancer in Q2 of last year. With the best share of market uptick in first by a nonsquamous non-small cell lung cancer of any market in the world. This growth has made it our second best selling product in Japan with Alimta and Gemzar, which had breast cancer added to its label earlier this year, our oncology presence continues to grow impressively in the Japanese market. With our partners Shionogi, we are very pleased with the uptick for Cymbalta for major depressive disorder since our launch in Q2 of this year. In addition, our application for diabetic peripheral neuropathic pain indication is currently under regulatory review. Our insulin products continue to grow at double the market growth with Humalog mix showing strong share of market gains, picking up nine share points over the last two years. The momentum in Japan is continued recently including approvals for Strattera for ADHD in children last year and for FORTEO for osteoporosis in Q3 allowing the affiliate to launch the product in October 1 after having attainted a first time exemption from the 14-day prescription rule in Japan. In addition, we hope to receive approvals soon for BYETTA BID for Type 2 diabetes. Hopefully this provides you with some valuable insights for our Japanese business. We are confident our ability to continue on a strong growth trajectory in Japan and we expect Japan to contribute meaningfully to our corporate results in the coming years. This concludes our prepared remarks. And now we will open the call for the Q&A session. Operator, first caller please.

(Operator Instructions) And our first question today comes from the line of Bert Hazlett representing BMO Capital Markets. Please go ahead. Bert Hazlett - BMO Capital Markets: Regarding BYDUREON in the US, could you remind us of the timing actually of the European registration application there and whether events in recent days in the US are expected to affect that? And secondly have those events with BYDUREON, do you expect them to have any effect on the GLP-Fc program? Thank you

First I like to make a couple of comments given the events with BYDUREON. We are of course very disappointed with the recent FDA action. I think importantly there are over 24 million patients with diabetes in the US along with Type 2 diabetes and six of ten patients are not achieving today glycemic control. BYDUREON continues to be, can be a very important option for many of this patients and we will work with the FDA to try to get this product to market. Now as it relates to Europe, we've submitted in Q1 of 2010 and we expect an action by the European Agency in the first half of 2011. We do not comment on the current status in our discussions with the regulatory agencies. We will not comment today on GLP-Fc. All of our eyes are today on BYDUREON trying to get above the market.

Next we'll go to Tim Anderson with Sanford Bernstein. Please go ahead. Tim Anderson - Sanford Bernstein: A big picture question on strategy going forward for John. Lilly has been describing BYDUREON as its most important late-stage pipeline product. We had a delay recently; that comes on top of some other pipeline setbacks and some other negative news like some of the patent losses. I think that prevailing consensus among investors as they had given some of the big expirations that lay ahead of some point where we will likely have to do a larger acquisition that's on the gap. So John I'm wondering what you can share on this? Are all options on the table at this point and can you reconfirm what you said before which is that any business development that you do do won't jeopardize the dividend? And in as much as Lilly benchmarks against its peers in terms of strategy, is Lilly leaning more towards a Bristol-Myers type of approach, meaning a pure-play branded pharma company or like that company head down the path of diversification more like a GlaxoSmithKline or some of the other players?

Thanks Tim for the question. First of all let me just comment, we are maintaining our commitment to our dividend, to paying our dividend at at least its current level. The recent events that you sight do not change our fundamental strategy, at the core of which is progression of molecules through our pipeline. We have still our eyes set on having at least 10 molecules in Phase 3 development at/or around the time that we lose our Zyprexa patent here in the US in late 2011. I think our fundamental strategy remains intact. We're not interested in large scale combinations. I think there are many other opportunities that I think we could consider along the lines of several that we've done already this year most recently, the Alnara acquisition, the acquisition of the Pfizer Wyeth divested animal health assets in Europe. As far as diversification goes, we like our animal health business. You saw us report 12% revenue growth for the quarter for Elanco. It's an area where we've shown a willingness to invest externally as well as to develop our companion animal business organically, and we're going to continue to focus on that. As far as diversification goes, I think we are considering as of one of diversification are enhanced and increased focus on biotechnology, you heard today. I think 40% of our pipeline assets are biotech molecules and I think there is an element of geographic diversification here as well. When you can grow like we are growing in Japan, the second largest Pharma market in the world, I think that presents a nice offset. We have only about 10% of our sales today and what we classify as the emerging markets we see a tremendous opportunity to grow and expand largely with our existing product portfolio in the years ahead. So I think that remains our focus and not withstanding the setbacks, we are confident that we can execute on that strategy.

Our next question comes from the line of John Boris with Citi Investment. Please go ahead. John Boris - Citi Investment: Just piggy banking on Tim's question, there has been a fair amount of additional consolidation on the animal health side of the business John and if you just give maybe some thoughts on how you think the Elanco business is strategically positioned. Is there something that you want to hold on to and build on or potentially divest going forward or potentially uses a source of funds? And then a second question, your work program which has four ongoing Phase III clinicals, I think is some of the earlier data, there had been some statistically significant increases in blood pressure heart rate. Can you just help us understand what the implications of that are for your ongoing program especially in light of what happened with BYDUREON? Is there any read through there and will you need to do a similar type of study in naïve patients with your own program that's being done with BYDUREON, and what is the timing for the completion of the first award trial?

We will have John handle your first question on the consolidation of Animal Health and we were looking to take that part of our business and Nick will handle your question on the reward trial.

John, we are obviously watching the activity on the animal health space very carefully. This is a business that we are quite committed and we want to stay in the animal health business, we are going to have to ask to double food production globally in the next 40 years or so. We think there is a lot of opportunity there for a company like Elanco with our product mix. At the same time we are watching the space and as some of the big players get bigger, we are going to have to consider thoughtfully what that means for us and maybe ensure that we are able to compete effectively, so we are eyes open there, we think it's a good opportunity for the growth, for the company.

In terms of the GLP-1 fc John, the award trials as well as our Phase II, III seamless adapter trial for GLP-1 fc those will start to report out in the 2012 timeframe, so we will look for that then. In terms of the cardiovascular profile, we are currently conducting a Phase II trial measuring blood pressure and heart rate. There has been a lot of discussion about this asset with regards to that profile. It's important for us to note there have been no serious cardiovascular events as observed in any of our Phase I or Phase II studies with this asset, but we are running this additional state to better understand the hemodynamic profile of GLP-1 fc, and we will learn more from that study. In terms of other studies, excluding the cardiovascular profile, we haven't discussed that at this point in time.

Next we will go to Steve Scala's line with Cowen. Steve Scala - Cowen: My apologies if you have already covered these topics, but on the second quarter call the company said that Zyprexa and Cymbalta had benefited from a gross-to-net true up, did that benefit continue in Q3 or did it reverse, and either direction can you please quantify the impact? And secondly on Semagacestat, I think the company said back in August that it needed to review follow-up phase III data to determine whether the gamma secretase inhibitor pathway was still a viable approach. Has that review occurred and if so what is the conclusion? Thank you.

Sure, Derica, do you want to handle the first quarter and I will handle the second one.

In your regards to your question around gross-to-net true ups, we really didn't have any significant movement in the third quarter other than the one true up we had in terms of the healthcare reform impact which we highlighted in call tech. And so if you are looking at healthcare reform, the true effect and the underline effect in the third quarter was about $65 million. We did have a reversal of an accrual of about $40 million associated with the timing of the 340b expansion and when that would take effect. We had been assuming that it will be effective retroactive back to January 1st of this year, and in fact it is only going to taking effect as the hospitals themselves take on that declaration. So, that was the cause of $40 million reversal.

And for Semagacestat, at the time we had made the announcement about the utility analysis have been performed and the results of that analysis, we have said we would go ahead and continue to monitor patients. We will continue to take a number of biomarker measurements, probably for another six to nine months. At the end of the time we are hopeful that that information can give us a little more insight into the deterioration and cognition that we saw on other things to figure out what may have been causing that. However, we do not have any active clinical programs in gamma secretase inhibition for Alzheimer's disease, nor do we have any short-term plans to do that. We will waiting until we get these results to see what they might tell us to inform any future decisions in that area.

Our next question comes from Seamus Fernandez with Leerink Swann, please go ahead Seamus Fernandez - Leerink Swann: So actually just had a quick follow-up on the healthcare reform estimate being reduced by I think roughly $175 million, you had mentioned that 340B and the timing of the hospitals actually coming into the program. Can you just explain what percentage 340B actually represented of the total either change or of the total program, I'm sorry the total estimate, the original estimate was I think $350 million to $400 million this year. And then also managed Medicaid I think some of the managed Medicaid programs actually were rolling in perhaps a little bit slower than anticipated. Where there any changes to policy estimates in terms of the managed Medicaid impact or there are really no changes there and that's where Medicaid rebid is where you are expecting the delta?

First of all when we provided our healthcare reform estimated impact on revenue, we gave the aggregate impact we've never provided the line item detail there and so we are probably not going to do that today either. What I can say is the majority of the impact in terms of our revised estimate that we provided on the call is driven by the change in assumption of the effective date of the 340B expansion. As we are today to the managed Medicaid and what we are seeing there, there is really no change.

It is slightly slow I think Seamus as you mentioned another contributor to the reduction and just to be clear the reduction in our accounting of 125 basically from the prior estimate which was 350 to 400 and now it's 225 to 275. The other thing is an impact really more on the accounting side of things. It's now appearing that the excise tax on the industry is likely to be showing up as SG&A and operating expense as opposed to offset to revenue. So in our prior assumption we assumed we would be offset to revenue that would have meant a certain sales that we would have made in this year would have eventually been sales, the government would have been purchasing if you will, next year. So we had estimated some accruals for the fourth quarter, but at this point with the change and the treatment of the excise tax are no longer going to be occurring.

Let's move on to Catherine Arnold with Credit Suisse. Please go ahead. Catherine Arnold - Credit Suisse: I actually have a request and a question at the same time. I was wondering if on the request side, I wondered if you would consider making available the DURATION-1 data on QT. A lot of investors as you know would love to see that they help to mention the risk or [relative] for BYDUREON. So that's my request that you'll put out there and can react to. My other questions are on BYDUREON, which I'd like to ask for your directional comments on how you think growth in the GLP-1 category is going to change next year relative to if BYDUREON would have launched, and relative to what we've seen in the market this year. And then lastly, could you just comment on what the EU filing has requested? Not new, but just what was underlying in the filing for Europe and BYDUREON in terms of QT. Is there anything that they have requested that's different from what the US has requested? Thanks.

Let me start with the question in the growth of the GLP category. We continue to believe that this category will experience significant growth. Now clearly BYDUREON is a key catalyst to the growth of the category. So when we look at some of the growth rates clearly they are going to be delayed versus what would have been had BYDUREON been approved at this time. In terms of Europe and Asia that's something that as I mentioned we'd prefer not to comment at this stage. We are in discussions with the European regulatory agencies and as I said we expect an action by EMA in the first-half of 2011. We will take into consideration your request regarding DURATION-1 and QTc. I will remind and I believe this was mentioned in the analyst conference call but we conducted ECGs a steady-state drug might [sanitize] their concentration in 148 patients, 56 of those patients had mild and 10 had moderate renal impairment and we found no clinically meaningful effect on QT, QTc intervals over a wide range of (inaudible) concentrations.

Next we'll go to Tony Butler's line from Barclays Capital. Please go ahead. Tony Butler - Barclay Capital: Good morning and thank you. Derica while I recognized that you will not be providing an update on the 2014 guidance until middle of the next year. But I ask more of the previous assumptions though inclusive of both revenue and expenses for Semagacestat and for BYDUREON. And then second John, back to strategy once again well I noticed there maybe a number of difficult hurdles to think about with respect to total headcount at Lilly while I recognized there has been some reduction. Is there some additional thought, some very sensitive thoughts to even a much more or much greater change in the overall headcount or reduction going forward? Thank you.

As I stated earlier, when you think about really between now and 2014 and what we put out even in terms of that construct, its really going to be driven by the trends of our currently marketed portfolio as well as our ongoing cost containment efforts. Those are the two biggest drivers in terms of us achieving our regional 2014 estimate. In regards to Semagacestat and BYDUREON, BYDUREON was in those estimate and Semagacestat to a much more smaller effect.

Tony with respect to headcount, as you know we made an announcement last September, September 2009 saying that it was intension to reduce our headcount by 5,500 by the end of 2011 from a base at that time at 40,500 excluding additions in fast growing emerging markets in Japan and obviously also including small numbers of employees associated with certain acquisitions that we made since that time. Now if you go back and do apples-and-apples and you say how far along are we towards a 5,500 we are at about 2,700 today. So one can say we are sort of half way through the process of eliminating the 5,500 positions that we described in September of 2009. With respect to any further plans on headcount reduction, we have no such plans at the moment. Obviously we work in a business and in an industry that’s undergoing a tremendous amount of change. We will continue to navigate through these waters and do at any point in time what we think is the appropriate thing for the business. But right now our focus is resolutely on advancing our pipeline, taking advantage growth opportunities we have that we described earlier in the phone call today.

We'll go to Chris Schott's line, JPMorgan please go ahead. Chris Schott - JPMorgan: First, with the timing of BYDUREON and GLP-Fc now moving closer to one another. Can you just elaborate a little bit on how much you'd handle the potential approval of both those assets with obviously your internally developed program clearly having better economics for Lilly? Second question was on Pfizer's Biocon deal and just inching your thoughts on what implications that might have for increased insulin competition in both the emerging markets and maybe longer-term in the established markets over time. And then finally you highlighted Zyprexa in Japan is contributing to a significant hail for the Zyprexa franchise post the EU and US patent expirations. Just (inaudible) in the magnitude of that business you are anticipating as we look out to 20/13, 20/14, it's a $5 billion franchise today and you hope to have that north of $1 billion longer term or just any thoughts on how large that residual business could be would be great. Thanks.

Thanks Chris. We'll have Enrique on your first two questions and Derrick and Nick probably on your last one.

Very good, the Biocon Pfizer deal, to keep things into perspective, Bicon today basically sales when it comes to insulin portfolio its about 1% of what Eli Lilly sells has today. Clearly Pfizer with that significant commercialization power to them as they commercialize in a number of different countries. We do believe though as we look at insulin that delivering devices are a critical capacity that only a few players actually possess. And its not just the current delivery devices, but improved delivery devices and the innovation that we continue to work on. So clearly something that we will watch, but we feel very confident in our ability to be extremely effective with our insulin portfolio. As I shared before I’m not going to comment on GLP-Fc. When we look at BYDUREON, what we have shared is that we expect to have a submission at the end of 2011 and this projection is based on a range of possibility when we look at our range of protocols that we plan to discuss with the agency. Clearly this is a conservative estimate and one that we want to make sure that we are meeting. That would mean basically that we will be a looking at a six months plus to resubmission and a potential launch in the first half of 2012.

Chris, in regards to Zyprexa and (inaudible) first of all, in Japan September year-to-date Zyprexa is about $300 million, so if you said on a run rate you would think that’s for the full year be at least $400 million. If you look at the rest of the world, okay we're about $175 million in terms of what we call rest of world emerging market and remember in those markets, we basically have all your loss in many of those markets, patent protection for Zyprexa. So this gives you some idea what the magnitude of the tail could. Let me also remind you that in Japan while we are on a run rate of at least 400 million per annum currently we still anticipate additional growth because we have additional indication that are expected to come online. Now, I gave you that in terms of where we stand today because I'll let you do your own math because we typically have not provided future projections in terms of revenue projections by product.

We'll go to Marc Goodman's line with UBS. Your line is open. Marc Goodman -: Yes, two questions. One is can you comment on the healthcare reform in 2011, a stuff that is there since things seem to be changing there? And then, second of all can you comment on the two new products that have entered Phase 2, the osteoporosis drug and IMC-18F1?

Yes, two questions. One is can you comment on the healthcare reform in 2011, a stuff that is there since things seem to be changing there? And then, second of all can you comment on the two new products that have entered Phase 2, the osteoporosis drug and IMC-18F1?

In regards to the healthcare reform for 2011, we will look to update those estimates to the streets on our Q4 earnings call in January.

And then as far as the pipeline assets go, first thing we mentioned is still blinded, so we won't have the ability to tell you about mechanism until we're at a point to unblind that asset and talk more fully about it. 18-F1 is essentially in terms of mechanism, one that has a (inaudible) target. This looks like both the different one on cancer cells as well as the vascular structure as far as where it interacts. That's probably about the most detail I've got at this point in time. If you want to follow-up after the call, or if you have additional questions Marc, I'm happy to take those. Next caller please.

Next we go to the line of Jami Rubin with Goldman Sachs. Please go ahead. Jami Rubin - Goldman Sachs: John, just a couple of questions for you. Maybe you could share with us you your views on what you see as a change in the fundamental communications between the industry and the FDA? Because clearly Lilly has been subjected now to what seems to be several communications breakdowns, both you know with Effient and the multiple complete response letters, the pain indication for Cymbalta and now BYDUREON as my understanding is the first complete response letter do not include any request for QTc as you said. So just your view on that, what's changed, and your outlook for communications going for the agency? And secondly, I appreciate that companies continue commitment to the $2 billion annual dividend but based on our numbers just with the patent expirations and the setbacks in the pipeline which would have helped to still that somewhat, we are reflecting about a $4-5 billion hit on the revenue line between 2010 to 2015 and that's before Alimta goes the way in 2016. It seems that the only way to really offset that and maintain your annual $2 billion dividend is by announcing a much more significant headcount reduction or cost reduction program and/or what are we missing in terms of the top line? What are the products that give you confidence to drive the company sort of the next period 2015 and beyond? So again sorry for the long wind and those are my questions so I want to take advantage of your being on the call this morning. Thanks.

Okay Jamie, I'm going to tackle your first question and then Derica is going to address your second question. Well I think there is no doubt that FDA is scrutinizing drug applications like never before. I think this has been a tougher journey for many companies in the industry. As FDA I think tries to strike what it pleads to be the right balance between making new medicines available and ensuring safety. I think the three examples you cite; I think you talked about Effient and Cymbalta and BYDUREON. They were all reviewed and looked at by different divisions within the FDA. There is a sort of a different storyline there for each one of these, I think as Enrique said earlier, we are committed to meeting the request that FDA is made around BYDUREON and hopefully getting this work done in a time that enables us to resubmit at the end of 2011. We were pleased with the outcome of the advisory committee for Cymbalta in August and we continue to work with the agency towards what we hope will be an approval for a new indication for Cymbalta in the area of product pane. Derica?

Let me try to take us back to a previous discussion when we are presenting at the 2014 construct in December of last year, you know we said at that time that we anticipate 2014 being the trough period for Eli Lilly in terms of scheme of patent expirations. And even at that time we still anticipated being able to both fund or finance the operations of our business including progress in the pipeline, as well as maintaining our dividend. And that was in what we consider to be the trough period. To your point about what I think, meaning in the market maybe missing about Lilly, everyone obviously is focused on the certainty of the patents that we will lose, I think some of the growth opportunities that's not registering maybe in the investors line these days, are one, I will come back to those, I've touched a comment earlier. We've called that we do not lose the patent for as I touched in Japan until the end of 2015. So we still anticipate growth there. In most of the market outside of the US for Zyprexa, we have already lost in the major markets much of the plan for protection there. So, I think there is more of a tail to Zyprexa and people are giving it credit for. Secondly, if you look at markets like Japan, we expected to double the size of that business over the next three to five years. If you look at the business Elanco which John touched on earlier, we also expect to double in the next three to five years. And then thirdly, if you look at our emerging market which grew 14% this quarter, we expect to double the size of that business as well. So yes, why we maybe losing revenue associated Zyprexa in the US as well as Cymbalta and Evista in the US, as well as the markets outside the US and some other business segments that we anticipate growing very robustly during that same period.

Operator, just one last question and then I will turn it over to John for the close.

Okay. Your final question today comes from the line of Barbara Ryan with Deutsche Bank. Please go ahead. Barbara Ryan - Deutsche Bank: I'm sorry to beat a dead horse and thanks for taking my question. It's sort of related to what others have said. And I think we can all appreciate that R&D is like the blood of the industry and your dedication to pursuing an improvement in R&D productivity. I think that probably a lot of your competitors would say that they are doing this same thing, but in the context of an environment that seems to be fought with increased risks. They are doing a lot of other things to sort of smooth that risk for their shareholders and I think that is given the recent performance from the pipeline of Lilly sort of one of the frustrations. So what are you learning through this process and needing the guidance for 2014 going out to June sort of implies that you are going to be going fast to drawing board. I think that with the benefit of time site certainly we could look at BYDUREON and say maybe you took some shortcuts in the line extension strategy versus a new drug application strategy, and certainly with prasugrel, you got the product approved onto the market, but certainly it isn't commercially probably doing what you had hoped. So, can you just sort of talk to us about what we should be expecting. You are going to be looking at over the next six months and specifically what kind of changes if any you maybe making in R&D.

Barbara this is Derica, I'll take the first dive at it and if anyone else has any thing you want to add to feel free to join in. but I guess I'm not as negative as maybe some of your commentary may indicate in terms of the outlook of our business. I wan to remind the investment community once again, we still anticipate 2014 being a trough. And as I indicated earlier what gets us between today and 2014 the driver to that is primarily our ongoing trends of our currently marketed products as well as our cost containment effort. The portfolio the pipeline will be more indicative of what our growth prospectus looks like coming out of 2014 and I think that hands us to back to what John stated earlier that today we are sitting on approximately 68 molecules in clinical phase development. We anticipate having at least 10 molecules in Phase 3 development by the end of 2011 which we believe puts us in proximity to be able to again to launch products as we are coming out of the wising period. And then we turn into growth, when we think about our strategy there are some I guess to your point about how do you mitigate risk or how do you dampen the saw tooth nature of the business that we are in. I think there is a couple of factors one is the Elanco animal health business. It softens that. Secondly, we have some parts of our geographical business that's kind of cyclical to what you are seeing in the vize. And then thirdly, if you come back to just our biotech presence, the fact that roughly half of our portfolio is in biotech, little bit more than 40% half of our Phase 2 Phase 3 portfolio is biotech. So when I think about our fundamental business strategy I think its still intact, and yes we will continue to use our balance sheet and this is development opportunity to bridge gaps that maybe there, or to take advantage of emerging opportunities. But I feel very confident about what we are pursuing in terms of our strategy.

Barbara, the only comment I'll make is first of all Effient is off to a slower start than we had hoped for, but we continue to see good progress with Effient. We're certainly not giving up on that very important product. And I will also take exception with your comment about shortcutting the pathway for BYDUREON, there is no shortcutting in drug development. BYDUREON is supported by a very extensive group of studies and a very solid database that includes five years of marketing experience with the active ingredient in the form of BYETTA. John, want to close the session please.

Yes, I'd like to close out now. I want to thank everybody again for taking time this morning for this update on Eli Lilly & Co. We appreciate your continued interest in Lilly. Clearly, this is a challenging time for the company and the industry, but it's also we believe a time as I said earlier on the call a great opportunity. We continue to believe that our innovation-based strategy while not without risk will provide the greatest value to our shareholders and to society. Clearly, we're not sitting here passively reacting to events as they occur, but we're acting with focus and purpose to achieve our goals to overcome upcoming patent losses and to return to growth. The consistent operational performance we've shared with you throughout this year are signs of progress and provide the wherewithal for us to meet our challenges. To date we've generated strong financial results with robust volume driven sales growth, continued leverage driven by cost containment and productivity efforts and strong operating cash flow. Thanks to the strong financial performance we've raised; our full year 2010 EPS guidance for the third time this year. We're seeing strong growth in our animal health business in emerging markets and in Japan as Nick commented. We were the fastest growing pharma company. Obviously the strong financial performance is the fuel for our innovation strategy and because we know the setbacks are part of our business, we've been working hard to increase our shops on goal. We now have 68 assets in human testing, 28 in Phases II and III including many with tremendous potential. Among them we have Phase III trials ongoing for 1121B, this is the ImClone molecule in breast and gastric cancer. We recently started another Phase III study in hepatocellular cancer would be starting more in the near future and we completed enrollment in our first Phase III trial for Solanezumab and the second is more than 80% enrolled. Furthermore a major part of our recent restructuring was aimed at accelerating our pipeline flow and I am encouraged by what I am seeing. We've moved nearly 4 in to Phase III and we expect to begin Phase III trials by about any body for RA and lupus in early 2011. This molecule is the first of an emerging autoimmune portfolio that includes our IL-17 antibody and the [Jack-1/2] with our partners from inside. We also advanced three more assets into Phase I and two into Phase II this quarter. We are going to continue to focus on speeding innovation to patients and we remain on track to have at least 10 molecules in Phase III by the end of 2011 with more coming behind. We continue to bolster our near to medium term top line and earnings with targeted in licensing and acquisition. And we are prudently reducing our headcount and managing our expenses to enable us to invest in the pipeline and provide a robust return of cash to shareholders with the dividend. As always, we'll keep you informed of our progress. Thank you again for you interest in Lilly.

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation and for using the AT&T executive teleconference. You may now disconnect.