Jan Lundberg - Executive Vice President of Science & Technology and President of Lilly Research Laboratories Derica Rice - Chief Financial Officer, Executive Vice President of Global Services, Member of Operations Committee and Member of Policy & Strategy Committee Phil Johnson - ED of IR Jeffrey Simmons - Senior Vice President and Head of Elanco Animal Health Business Unit Jill Thoren - Ronika Pletcher - IR Department

Catherine Arnold - Crédit Suisse AG John Boris - Citigroup Inc David Risinger Tim Anderson - Sanford C. Bernstein & Co., Inc. Jami Rubin - Goldman Sachs Group Inc. Steve Scala - Cowen and Company, LLC Christopher Schott - JP Morgan Chase & Co Seamus Fernandez - Leerink Swann LLC Gregory Gilbert - BofA Merrill Lynch Marc Goodman - UBS Investment Bank Robert Hazlett - BMO Capital Markets U.S.

Ladies and gentlemen, thank you for standing by. Welcome to the Eli Lilly & Co. Q1 earnings conference call. [Operator Instructions] I would now like to turn the conference over to Vice President of Investor Relations, Mr. Phil Johnson. Please go ahead.

Good morning, and thanks for joining us for Eli Lilly and Co.'s First Quarter 2011 Earnings Conference Call. I'm Phil Johnson, Vice President of Investor Relations. Joining me today are our Chief Financial officer, Derica Rice; our President of Lilly Research Laboratories, Dr. Jan Lundberg; our President of Elanco Animal Health, Jeff Simmons; and Ronika Pletcher; and Jill Thoren from Investor Relations. Today's Q1 earnings call coincides with our annual shareholder meeting. As a result, our CEO, John Lechleiter is not available to participate in today's call. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 3 and those outlined in our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions. Since the Q4 earnings call in late January, we've continued to bolster our operations through business development, to leverage our marketed products and to advance our pipeline. We announced our offer to acquire the Animal Health business of Janssen Pharmaceutica from Johnson & Johnson. This business is primarily European-focused, targeting disease segments in companion animals and livestock, with special emphasis on swine and poultry. Upon deal closing, which is expected by mid-year, we would obtain a portfolio of roughly 50 marketed Animal Health products. Here in the U.S., we began active promotion for Cymbalta for the management of chronic musculoskeletal pain and we launched Axiron, the first and only testosterone replacement therapy applied to the underarm. On the regulatory front, we submitted our response to the FDA's Complete Response Letter for the use of Erbitux in first-line head and neck cancer. We received a Complete Response Letter from the FDA for florbetapir, our PET imaging agent being studied for the detection of beta-amyloid plaque. We are working closely with the FDA to address their questions on the reader training program to ensure reader accuracy and consistency of interpretations of beta-amyloid plaque images. Late last week, we also received a Complete Response Letter from the FDA for liprotamase, a pancreatic enzyme replacement therapy, and we'll be working diligently to address the agency's questions. In Europe, we submitted our application for the use of Alimta induction treatment followed by Alimta maintenance treatment in advanced nonsquamous, non-small cell lung cancer. And also in Europe, we recently received the CHMP recommendation for approval of Bydureon for the treatment of type 2 diabetes. Based on this recommendation, we anticipate receiving EC approval by late June. On the clinical front, we disclosed positive top line results for the Phase II trial of the once-monthly formulation of exenatide. We plan to meet with the regulatory authorities to determine next steps for this program. We also disclosed top line results of the Phase III DURATION-6 trial comparing Bydureon to the highest approved dose of Victoza. Bydureon demonstrated a robust reduction in HbA1c from baseline. However, it did not meet the primary endpoint of noninferiority to Victoza 1.8 milligram in the reduction of HbA1c. Additional data from the trial is planned to be disclosed at a later date. And we began the first Phase III trial for our mGlu2/3 prodrug for schizophrenia. Lastly, on the legal front, Lilly received a favorable ruling on the Cymbalta patent challenge. Wockhardt voluntarily consented to entry of judgment in favor of Lilly on all pending issues, which the judge so ordered. The judge asked the remaining parties to indicate if they intend to proceed to trial and all nine defendants failed to indicate that they intend to proceed. As a result, we remain of the view that there will be no generic duloxetine product coming to market until the Cymbalta patent expires. However, a trial date remained on the court's docket for June of this year. A meeting with the court, Lilly and the defendants will be held later this month to determine next steps in this litigation. While not specific to Lilly, perhaps one of the most notable events since our last earnings call was the disaster in Japan caused by the March 11 earthquake and its aftermath. Because Japan is such a big part of our growth strategy, I'd like to provide you with some details. First and foremost, we were relieved that within hours we were able to account for the safety of all Lilly Japan employees. We're also proud of the support, both monetary and product donations that Lilly Japan, the Lilly Foundation and Eli Lilly & Co. have provided to help those affected by this strategy. From a business perspective, our Japanese affiliate headquarters and development center of excellence are located in Kobe, and we have a manufacturing plant in Seishin just outside of Kobe. These operations are approximately 500 miles southwest of the disaster zone. As a result, we had no damages or other issues at these sites. In terms of product supply, we've encountered no issues getting manufacturing products into or out of Japan. And we have not had and do not anticipate having any issue with the supply of raw materials, intermediate or finished product from our Japanese suppliers. Prior to the earthquake, we had robust inventory levels throughout our supply chain for materials sourced from Japan. In terms of domestic sales, we did receive what appeared to have been precautionary orders from customers totaling $30 million to $35 million in the quarter. We expect that this will wash out in future quarters. Our thoughts are with the Japanese people in what will surely be a long and difficult recovery. We'll continue to provide them our support, and we'll continue to ensure that Lilly products reach the patients who need them. Now with this background, Ronika will discuss our Q1 financial results and provide our pipeline update, and Derica will cover key events for the remainder of 2011 and our financial guidance for the year. Ronika?

Thanks, Phil. As we've done on our previous calls, we'll focus our comments on non-GAAP results, which we believe provide insights into our underlying trends in our business. This view excludes certain items such as restructuring charges, asset impairments and other special charges. I'll start on Slide 7 with a quick look at our Q1 income statement. On a non-GAAP basis, you can see that we generated solid revenue growth of 6% this quarter. Excluding Gemzar outside of Japan and the effect of U.S. health care reform, revenue would have grown 10%. Gross margin as a percentage of revenue increased slightly from 79.5% to 79.8%. Operating expenses defined as a sum of R&D and SG&A grew 10% this quarter. Drivers for the increase included: higher administrative expenses, driven by the pharmaceutical manufacturers fee associated with U.S. health care reform and higher litigation expenses; higher marketing and selling expenses driven by o U.S. investments primarily in the emerging markets; and higher R&D expense due primarily to increased late-stage clinical trials expenses. In addition, both SG&A and R&D expenses increased due to the BI [Boehringer Ingelheim] alliance. Excluding the effect of U.S. health care reform and the BI alliance, operating expenses would have grown 7%. Other income and deductions was a net expense this year compared to net income last year. You may remember that we had substantial income in Q1 2010 related to the recovery of damages from generic olanzapine marketers in Germany and from gains on the sales of securities acquired in the ImClone acquisition. Our tax rate was 20.9% this quarter, considerably lower than 27.3% from last year's Q1. Last year's Q1 rate included an $85.1 million charge related to the future taxation of the retiree drug subsidy and did not benefit from the R&D tax credit as it had lapsed. This year, we did benefit from the R&D tax credit, as well as from the resolution of certain IRS tax matters. At the bottom line, our non-GAAP EPS increased 5% to $1.24. As indicated, Lilly provided the 2011 guidance in January, we felt robust EPS growth in our business in Q1 excluding U.S. health care reform, the effect of the Gemzar patent exploration outside of Japan and investments related to the BI diabetes alliance. Excluding these items, EPS would have grown low double digits. Slide 8 shows our reported income statement while Slide 9 provides 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 Q1 revenue. As you can see on Slide 10, total revenue growth of 6% was driven by solid volume growth of 5% and foreign exchange contributing the remaining 1%. Price had no impact on the worldwide revenue growth. We continue to see strong volume growth from our three countercyclical growth engines: Japan, Elanco Animal Health and Emerging Markets. Volume growth in Japan was 34% driven by recent launches of Cymbalta and FORTEO, as well as continued strong growth of Alimta, Zyprexa, Gemzar and Humalog. In addition, roughly 1/4 quarter of the Q1 volume growth was attributable to precautionary buying Phil mentioned earlier; Elanco Animal Health volume growth of 25% in Q1 driven by the increased demand for food animal products globally, as well as by the launch of Trifexis in the U.S. and the acquisition of certain European Animal Health assets from Pfizer. Going forward, we expect Animal Health revenue growth to benefit from international launches of Comfortis. In addition, Elanco has a robust innovative pipeline and is poised to maintain double-digit growth in the coming years with launches expected in multiple products targeting high-value markets such as livestock immune enhancements, control of parasites in companion animals and pain control. We also built a substantial development capability in Animal Health vaccines, and as demonstrated by our recent offer to acquire Janssen's Animal Health business, we will continue to look externally for opportunities to drive growth in this business. Finally, you'll see strong 14% volume growth from our Human Pharma [Human Pharmaceuticals] products in the rest of the world lines. Emerging market countries represented about 3/4 of the sales in Q1, and as a group also registered 14% volume growth. In terms of products, growth in emerging market countries was driven by Alimta, Cymbalta, Humalog and Humulin. In terms of geographies, we saw robust growth across the host of geographies in Asia, Latin America and of course, China. Given the very small effect of foreign exchange on our results this quarter, we provided our summarized non-GAAP and reported income statements with and without the effect of foreign exchange in our supplementary slides. Now before I turn the call over to Derica, let me provide a brief update on our pipeline. On Slide 11, you'll find a view of our portfolio of new molecular entities in clinical development as of April 11, inclusive of changes since our January 27 earnings call. Our clinical stage portfolio now stands at 69 distinct NMEs including 31 compounds in Phase II and Phase III. Biotech molecules represent nearly half of our late-stage Phase II and Phase III assets in over 1/3 of our overall clinical portfolio. Advancing our pipeline remains our number one priority, as reflected by the arrows on Slide 11. Since our January update, we have began Phase III testing of mGlu2/3 for schizophrenia, bringing our total Phase III portfolio to nine NMEs. We continue to be on track to meet our goal of having 10 NMEs in Phase III by the end of the year. Other molecules that could begin Phase III in 2011 include our novel basal insulin analogs, our new insulin glargine product and our IL-17 antibody. We also advanced two molecules into Phase II and two into Phase I. Finally, both tasisulam and IL-1ß antibodies continued earlier stage development after we terminated clinical trials in their lead indications, and we terminated one molecule in Phase I development. With this current pipeline and our continued business development efforts, our goal is still to launch on average two molecular entities per year beginning in 2013 providing a foundation for future growth. Derica?

Thanks, Ronika. To set the stage for our financial guidance, let me briefly cover some of the key pipeline events for the remainder of the year. Having now received the CHMP recommendation for approval of Bydureon, we look forward to launching the product in Europe later this year. We have a number of other potential regulatory approvals this year including: linagliptin in the U.S., Europe and Japan; and here in the U.S., Cialis for BPH, Byetta in combination with basal insulin and Erbitux for first-line head and neck cancer. Expected regulatory submissions include: our response to the FDA Complete Response Letter for Bydureon; sBLA for Erbitux in first-line metastatic colorectal cancer and for first-line, non-small cell lung cancer; Byetta in combination with basal insulin in Europe; and our response to the FDA Complete Response Letter for Amyvid. Upcoming clinical trial data disclosures include initial results from the Phase III trial of Alimta induction treatment followed by Alimta maintenance treatment in advanced nonsquamous, non-small cell lung cancer at ASCO. At the EULAR meeting in London in May, we will present data on the two Phase II trials of our BAFF antibody and rheumatoid arthritis. And lastly, data from a study assessing the safety of Cialis when co-administered with alpha blockers will be presented in May at the American Association of Urology meeting in Washington. Just late last month, data from the clinical trial evaluating tadalafil in men with ED and with signs and symptoms of BPH was presented at the European Association of Urology. Finally, as mentioned earlier, Phase III trials could begin this year for our novel basal insulin analog and our new insulin glargine product and for our own anti-IL-17 antibody. In terms of our 2011 financial guidance. As you've seen in our press release, we still expect 2011 non-GAAP earnings per share of between $4.15 and $4.30. Our 2011 reported EPS guidance range of $3.86 to $4.01 reflects a $0.23 IPR&D charge from the BI alliance and the $0.06 restructuring charge. The business fundamentals underlying our guidance are essentially unchanged since our last update in January. However, a number of foreign currencies, in particular, the euro, have appreciated in recent months. As a result, we're updating our revenue growth and gross margin percent guidance. Assuming rates remain at current levels, we now expect 2011 revenue to grow in the low single digits. And we expect 2011 gross margin as a percent of revenue to decline by approximately 3 percentage point. Also, we're now estimating that the 2011 effective tax rate will be approximately 21% on a non-GAAP basis and approximately 20% on a reported basis. Both of these rates reflected benefit from the resolution of certain IRS audit matters. In addition, the reported tax rate for the full year reflects the tax benefit of the in-process R&D charge associated with the BI alliance. All other elements of our line item guidance remain unchanged. Now Slide 14 provides a reconciliation between reported and non-GAAP EPS for 2010 and the associated growth rates from these numbers to our revised 2011 guidance. Now in summary, so far, 2011 is playing out as anticipated. We're making progress advancing our pipeline, and we're delivering solid financial results. With the initiation of Phase III trials for mGlu2/3 for schizophrenia, we now have nine molecules in Phase III development, putting us on track to meet our goal of having 10 molecules in Phase III development by the end of this year, with more coming behind. Along with continued business development, this pipeline serves as the foundation of our growth post years YZ. During Q1, we also made progress on our productivity goals and are in tract to meet our 2011 headcount and expense containment goals. When we discussed our 2011 guidance in detail on the January call, I shared that we face a number of headwinds this year, as patent expirations will lower sales outside of Japan for first for Gemzar and later for Zyprexa. U.S. health care reform will exact a higher cost this year than it did in 2010, and we'll face some near-term dilution from our strategic diabetes alliance with Boehringer Ingelheim. I also shared that we expect to see continued strong performance in the rest of our business. We did see the negative impact in Q1 of these items, and we delivered strong growth in the rest of our business as promised. Excluding these items, on a non-GAAP basis, we posted revenue growth of 10%, operating expense growth of 7% and low double-digit EPS growth. We saw robust revenue growth from our three countercyclical growth engines with Japan growing 41%, Elanco growing 28% and Emerging Markets growing 15%. Moving forward, we will continue to focus on: delivering strong financial results, improving productivity to allow for appropriate investment in our patent-protected products and our pipeline, and on speeding the next generation of Lilly molecules to market to provide growth post years YZ. This concludes our prepared remarks. And now we open the call for the Q&A session. Operator, first caller please?

[Operator Instructions] And our first question today comes from the line of Jami Rubin from Goldman Sachs. Jami Rubin - Goldman Sachs Group Inc.: Thank you. Derica, a question for you on Bydureon and congratulations getting CHMP approval. But I'm wondering if you could share us sort of generally how you're thinking about pricing relative to Victoza in light of the DURATION-6 results. And then also included in the recommendation for approval was a pharmacovigilance program and I'm wondering if you can elaborate on that. And just lastly, just to switch gears here on the gross margin, the delta in the gross margin, the delta in terms of your new guidance for the full year reflect a $0.17 hit, and I'm wondering if that is all related to foreign currency or is there cushion related to Zyprexa going generic. Thanks.

Sure. Jami, I'll take the Bydureon pricing question and the question also in terms of the gross margin. Jan, you may want to deal with the pharmacovigilance question. As it relates to Bydureon pricing, clearly at this stage, we're not in a position to disclose what our pricing strategy would be behind this brand before we've even launched it. But what I can say is we still feel very confident in the commercial prospects for Bydureon given the label that we would anticipate. As it relates to your gross margin question, regarding FX, it is all attributable to FX rate and in terms of our revised guidance of minus 2 percentage points to minus 3 percentage points decline.

In relation to risk management for Bydureon, of course, we have safety very high on the agenda, and we know that there are certain special issues that have been discussed in the past. But in general, we have our safety surveillance that we need and particularly looking for if there are increase in pancreatitis, thyroid tumors, et cetera.

A couple of quick things as well, in terms of additional details on the potential label coming out of Europe and specific details on the pharmacovigilance plan, those are things we'll need to wait comment on until the EC provides its formal approval of the CHMP recommendation, which we expect to come hopefully in late June. And then in terms of pricing, do keep in mind that the DURATION-6 trial was against the 1.8 milligram dose of Victoza. Rough numbers in many of the European markets, it would appear that the 1.2 was launched at roughly parity to Byetta, which means that the 1.8 would be the substantial premium. So as we enter those discussions with pricing authorities in Europe, we'll be looking at the full raft of DURATION trials where we have very strong data against insulin glargine, against ACTOS, against Januvia and against Byetta, all of which have a price that's out in the marketplace. And then as you're mentioning, Jami, we'll also have the DURATION-6 data against the 1.8 milligram dose of Victoza that we'll enter into those discussions as well. So again, as Derica said, a very strong overall package.

Our next question comes from the line of Tim Anderson with Sanford Bernstein. Tim Anderson - Sanford C. Bernstein & Co., Inc.: Thank you. On the 2011 guidance, is that likely to be impacted by the pending purchase of the Animal Health products? And more generally, what is the landscape looking like for Lilly in terms of additional acquisitions either in the Animal Health or other areas that might provide you with a greater level of diversification? And then on solanezumab, can you narrow down the timing of when we'll likely see results and also where you are with the interim looks and whether you'll announce one of those -- well, once those interim looks have been completed?

Okay, great. Maybe Derica, you can comment on the '11 guidance and how that might be impacted by the Janssen acquisition. And maybe you and Jeff can comment respectively on the general and then Animal Health acquisition landscape. And then Jan and Ronika, maybe the solanezumab update would be great.

Tim, this is Derica. Our 2011 guidance does fully take into account the acquisition of the Janssen Animal Health asset, both top line, as well as bottom line. In regards to this development, we continue to be active in this space. But I think we've been also very clear about our intent. We're not in the market for large-scale M&A, but we are looking for opportunities to continue to enhance our business both from the standpoint of either finding molecules that complement our development pipeline portfolio or finding those product opportunities that we can bring in that bring sales and cash with it. And then, that's clearly what we also saw as we looked at the Janssen acquisition in terms of Animal Health, a way of bolstering our Animal Health business with Jeff can respond to further.

Yes, Tim, I would say we've made four acquisitions in four years, Lilly has, and it's all playing around this countercyclical growth engine that was made in the comments. We will continue to be opportunistic. But it really has to drive three things: one is growth; strategically, it has to drive growth; diversity; and bring capability. And I would say all four acquisitions in the past have done that. That's what we'll continue to look for as we go forward. Although the organic growth that we see over the next two or three years in Animal Health is going to be significant with six new launches this year and more launches to come in 2012.

In relation to solanezuma, our A-beta antibody then to stop progression of Alzheimer's disease, we would have an interim analysis this year in relation to utility and safety. The final data from the two Phase III trials are expected mid-2012. And then we will disclose the data at an appropriate event.

One of the thing I'd add, Tim, you see we had, in an effort to give you guys some more exposure to -- of operational heads of our various areas of the company, Enrique, on the call last quarter, Jeff this quarter. We'll likely have Jacques Tapiero, Head of our Emerging Markets area on next quarter. That is an area in Emerging Markets countries where on your question of M&A probably for the last 24 months or so, we've seen pricing very high frankly, and more likely you'll see things that are of the collaboration and licensing in the short term until those trends reverse in the Emerging Markets properties.

Our next question comes from the line of Greg Gilbert with Merrill Lynch. Gregory Gilbert - BofA Merrill Lynch: Thank you. Three quick ones. First, Derica, were there any wholesaler or retailer inventory level changes of note that affected sales in the quarter in the U.S.? Secondly, can you talk about what you needed to see on your GLP-1 to move it into Phase III? What was the bar there? With any specifics you care to share? And thirdly, more strategically, should we view the Avid acquisition as a sign of things to come for Lilly or more as a one-off that will take you some time to assess before you really answer that question for yourselves?

We'll have Derica take your first and third questions, Greg. Then we'll go ahead and handle the GLP question you asked as well.

Greg, we actually had -- we saw two types of activities that relates to wholesalers stocking and destocking in the first quarter. In the U.S., we did see a level of destocking on the part of wholesalers. And as best as we can tell, even at the retail level as well in the first quarter. So that destocking served to dampen our revenue growth in the U.S. in Q1. At the same time, given the disaster that we all witnessed in Japan, we saw a buy-in on the part of wholesalers or distributors there in the case of emergency. And that buy-in Japan was probably in the range of around $30 million to $35 million in the quarter. So it was -- of the 41% of Japan growth that we saw in the quarter, about 25% of that was related to this buy-in. As it relates to your third question around the Avid acquisition -- just a reminder to everyone, when we did the Avid acquisition, it was solely based upon the prospect of that compound itself. And our thesis behind that is that we saw an interesting therapeutic that could complement our portfolio. Clearly as that plays out, it gives us an opportunity to ponder other alternatives. But for right now, we're planning and progressing as though it's around Avid itself.

Now regarding to your second question, Greg. You mentioned GLP moving into Phase III, we actually moved GLP into Phase III quite a while ago. I think you may have meant to say mGlu2/3, in which we moved into Phase III in this past quarter. If that is your question, I'm going to actually turn the call over to Jan to give some more clarity. But we actually presented some 6-month safety study data at the beginning of April at the ICOSR meeting, the International Congress for Schizophrenia Research, which discharged some of the risk. But again, I'll turn it over to Jan to answer further.

Thank you. The whole schizophrenia area is in desperate need of some new agents than in addition to the currently used typical antipsychotics. So we are very interested in our mGlu2/3 agonist as an optional treatment for these patients. The study mentioned discharged the risk in relation to seizures as we see it in relation then to standard of care. It's known that patients with schizophrenia do have an increased risk of seizures, but our agents did not seem to have any more effects than standard of care. And we should remember there are some potential clear advantages with our mGlu2/3 agent, less risk for extrapyramidal symptoms and also it has a much better metabolic profile in relation then to a typical antipsychotics, even with a potential weight loss, not the weight gain.

Thanks, Jan. And lastly, Greg, on the U.S. piece just to put some numbers around what Derica had mentioned, each year we typically would end within the guidelines we have with the wholesaler, at the higher end of the days on hand, the wholesalers, the end of the calendar year, and we typically come down in Q1. That was the case both in 2010 and in 2011. However, the decline was a bit steeper in 2011 and that would have trimmed about 1 percentage point off of the U.S. growth rate.

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

Thanks very much. I have a couple of questions. First, I missed the beginning [ph] of the question about whether the guidance already assumes the inclusion of the Animal Health business later this year, so that's my first question. Second, with respect to solanezumab, I think that Jan mentioned that there is a futility analysis this year. Could you please comment on whether that's in the first half such that you'll be able to comment on at your June 30 analyst meeting or not until the second half? And then third, with respect to your long-term earnings outlook, Derica, do you expect to communicate that at the June 30 analyst meeting or prior to the meeting on a separate call? Thank you.

Okay. David, I'll take your first and third questions. This is Derica. As I stated earlier, our guidance for 2011 does fully contemplate the Animal Health transaction. In regards to the long-term guidance or construct that we put out there in December of '09, David, I would see ourselves coming back to that at our June analyst meeting. I don't anticipate us giving any more color on that prior to our June meeting.

Jan?

In relation to the timing of the futility analysis, we have decided not to comment exactly when this happened during this year. But what I can say is that the safety profile so far in these trials look better than for semagacestat, and they're actually less patients that have stopped the trial because of safety issues.

Our next question comes from the line of Steve Scala with Cowen. Steve Scala - Cowen and Company, LLC: Thank you. I have two questions again on solanezumab. How is futility defined in these trials since that 12 months one might not expect the material cognitive decline in any patient group? And if that is the case, is that a risk for these trials? And then second, when in 2013 might you file GLP Fc? Might it be a first half event or might it be a second half event? Thank you.

Jan?

Well, I think I have said what I want to say about solanezumab, but we now need to wait for the data.

With regards to GLP FC, we have provided no specifics with regard to timing on filing. We have initiated all four award studies. So we're pleased with the progress there, but no additional information on timing.

We do have a question from the line of John Boris with Citi. John Boris - Citigroup Inc: Thanks for taking the questions. First question for Derica, on the Animal Health business from Janssen. Can you just give us some color on the size of that business especially in light of it being incorporated in your guidance. Second question on China in particular and your diabetes franchise there. I think the New England Journal of Medicine cited there's about 92 million diabetics there and your market share relative to your competition is a little bit lower than your competition? What are you going to remedy that potentially going forward? And then one question for Jan, within the 2013 time period, aside from GLP-1 Fc, what are the other one or two assets that might be positioned for launch at that time?

Okay. Firstly, John I think we're going to have Jeff comment on your first question on the Animal Health and size of the Janssen business. And then maybe Derica on the China diabetes question. And then on to Jan.

Yes, so we have Janssen is represented in the Vetnosis, the actual independent animal health data that's tracked by this company. It represents $200 million this past year, $170 million the year before. I would note though that outside of the U.S., which is about $25 million, their distributor sales. So it represents a little bit level that's higher than what really Janssen and we will recognize. So that number is a little bit high. And then the actual margins would be very much average for the industry in Animal Health.

Okay. John, in regards to China, as I stated -- well, actually there was a ton of interview this morning. Our China business grew 23% in the first quarter. And if you look at the diabetes opportunity, while today, we are clearly have a smaller share of market position versus our competition, we have taken decisive actions to improve our competitive position going forward. We've recently commissioned a new diabetes research facility and operation there. In addition to that, we are actually -- we commissioned also building a second manufacturing facility in China, which will be diabetes-related as well. And then thirdly, we've more than doubled the size of our commercial footprint. So we believe that we are -- positioned ourselves to take advantage of this significant opportunity in that marketplace. And we see ourselves with the opportunity to gain share. And part of the learning for that is also with what we've seen here in the U.S. So even in a market where you could say it's fairly saturated, in the U.S., we've seen a significant uptick in our diabetes share of market both on a NRx and a TRx if you look at the last year.

Jan?

Yes, well, over my years, I've learned to speculate on timing for launch dates, it's one of the most difficult things we have. And we should also remember that the two NME launches per year from 2013 should potentially come both from internal and in-licensing or acquisitions. So those are three options. There are some programs with the right data that could deliver ahead of time. Potentially solanezumab could be one of them.

We do have a question from Bert Hazlett from BMO Capital Markets. Robert Hazlett - BMO Capital Markets U.S.: Thanks. I have one question on Japan and another on the pipeline. First on Japan, you did have some buy-in but there do seem to be some products that are growing fairly robustly I guess Cymbalta, Alimta, Evista and Strattera. Could you discuss your expectations for growth and the potential kind of countercyclical nature in terms of additional product launches that would be coming down the road there? And then secondly, in terms of the pipeline for Jan, I see you're moving the IL-17 program forward in rheumatoid arthritis. But my count is this will be at least the third program in RA. You have the orals JAK1/JAK2. You'll have the anti-BAFF antibody NRA and now the IL-17. Could you talk about its positioning in RA and vis-à-vis the BAFF antibody in particular? Thank you very much.

Bert, this is Ronika. With regards to Japan and launches, you might remember earlier in the decade, we had mentioned -- last decade, we had mentioned that our goal was to launch a lot of the products we had not yet launched in Japan that had already been launched in the U.S. And those include several that you mentioned Alimta and Strattera, which launched in 2009, as well as Cymbalta, FORTEO, Byetta that also launched in Japan in 2010. Also keep in mind, part of the countercyclical nature of Japan includes the fact that we have Zyprexa in Japan through 2015. So products that could also be launched in the near term in Japan include our partnership with BI, specifically, linagliptin. It's a potential launch in Japan in 2011 or approval, I should say, in 2011. So those are the highlights with regards to Japan. Jan?

Yes, we are very excited about our opportunities in rheumatoid arthritis and the autoimmune area in general. Having these three agents, it's actually an opportunity, not a problem. First of all, the oral JAK1/JAK2 inhibitor partnered with Incyte could be I think a very competitive agent in relation to Pfizer's recent Phase III agent which have received so much attention, tofacitinib, with a positive recent data. We are currently exploring them, the JAK1/JAK2 component Phase IIb in relation to dose safety and efficacy. Oral agents will be placed earlier most likely than in the treatment of rheumatoid arthritis, competing with methotrexate as a key initial agent. Our two biologicals, the anti-BAFF and IL-17 represents very novel agents with new mechanist to influence then the immune system; the BAFF against that B-cells and the IL-17 more as an inflammatory cytokine that is released. And both of these agents have positive Phase II data in rheumatoid arthritis, and they will be positioned then in patients that actually are failing to TNF. And we know that there is substantial proportion of patients, up to 50%, that don't respond well enough to TNF blockers. And even if you then can switch to another TNF agent, the efficacy goes away with time. So we see both the BAFF and the IL-17 as potential new treatment options in actually quite a large patient population that have been failing TNF agents.

Bert, this is Derica. Just to expound a little bit more on your question regarding Japan. If you recognize last year Japan crossed the $1.5 billion mark, so we surpassed the $1.5 billion. That's a business that we believe we can double the size of that business over the next four to five years. And you look at, as Ronika said, you got brands like Cymbalta, Zyprexa through '15 and Alimta, but you're also seeing the impact of the recent launch of FORTEO as well as the continued growth around Alimta, Humalog and Gemzar. So that gives you some idea of what we're expecting in terms of that countercyclical growth engine we've been talking about along with Emerging Markets, as well as Elanco that's helping to mute the impact of patent expirations like Gemzar in Q1 and later Zyprexa this year. And I'll still remind everyone that we -- top line grew 6%, 5% volume and that includes the impact of the generic erosion for Gemzar in the quarter.

And the generic erosion for Gemzar shaved about 3 percentage points nearly off of the worldwide growth rate for the quarter as well. So it's a pretty significant impact.

We have a question from the line of Seamus Fernandez with Leerink Swann. Seamus Fernandez - Leerink Swann LLC: Thanks very much. So just a couple of quick pipeline questions. Can you just update us on linagliptin and whether or not Lilly expects to -- that panel to be fielded for the product prior to approval? It looks like there won't a panel on this drug. And maybe just give us your reasons specifically for that. Second, you've moved a CETP inhibitor forward, I believe or have a CETP inhibitor in Phase II in atherosclerosis. Can you just update us on your thoughts with regard to that mechanism and what you believe is necessary to move that product into Phase III safely? And then the last question is actually, can you just update us on the status of necitumumab? I believe one of the studies there was actually placed on clinical hold, so just looking for an update there.

Jan?

Okay. In relation to our DPP-4 inhibitor in linagliptin together with Boehringer, that was filed last year and we have no further comment, I think, on dates or potential advisory boards, et cetera. We see this agent as a very promising oral anti-diabetic compound that complements our offering to patients, making Lilly very broad, if not the broadest offering in the whole therapeutic area of diabetes across major pharma. We are quite enthusiastic about our CETP inhibitor, which now are in Phase II trials, in combination with statins. We based this on our Phase I data but also actually as a class the competitor molecules both from Merck and Roche, as you know are moving ahead with Phase III trials. We feel we have a competitive agent based on what we have seen so far, what area is then to avoid the problems that Pfizer had with the torcetrapib, mainly the increasing blood pressure. We have not seen this for our compound, and we are enthusiastically moving it forward, I think, we can say currently. Necitumumab, we are still pursuing this squamous non-small cell lung cancer indication in Phase III.

Our next question comes from the line of Catherine Arnold from Credit Suisse. Catherine Arnold - Crédit Suisse AG: A couple of questions. One, I wanted to ask you about your U.S. price increase if it had not been for health care reform impacts. And then I wanted more specifics, you guys have given numbers about the effect of the overall reform, but I wasn't clear if whether what you said included doughnut hole, or how you're going to be recording those? Is this going to be as those discounts are demanded of you? Are you sort of accruing an expectation across four quarters? And then on solanezumab, I wanted to just ask one more question that hasn't been asked yet, which is as far as when the pre-specified analysis is done at the end of the trial, is there going to be severity of disease stratification in that pre-specified analysis in addition I would presume to carrier and non-carrier.

Okay. Derica you want to handle the first two and then Jan the last one solanezumab?

Sure. Catherine, this is Derica. I think you're aware of what the dollar impact of health care reform as it relates to revenue growth was in the first quarter, it was about $90 million. If you look at our guidance for the year, both for the revenue piece, which was, we believe, the health care reform impact will be in the range of $400 million to $500 million, that includes the impact of -- the anticipated impact of the doughnut hole. And then as you recall, the pharmaceutical excise fee will then impact us in the administrative OpEx line. And that's being to the tune of about $150 million to $200 million for the year.

Jan?

Right. I appreciate your interest in solanezumab. It certainly could be a tremendous agent for patients with Alzheimer. The primary endpoint here is clearly reducing the disease progression, and we will look at mutation status as a secondary opportunity.

A couple of additional comments maybe, Catherine, the $90 million impact of U.S. health care reform on revenue this quarter, if you're looking at the impact on the growth rate, do recall that we had said approximately $60 million was the impact to revenue in Q1 of 2010. I think if you look in the Q, you'll actually find it was $62.4 million was the number. So it turned about 1 percentage point off of the U.S. revenue growth rate and about 0.5 percentage point off of our worldwide growth rate for the quarter. And then in terms of the doughnut hole, I think there may be different practices at the various companies. You may want to check on this. But essentially for the doughnut hole, we've done our best to try to model. We think will actually be occurring. In other words, the charge that we would have recognized in Q1 would assume that a whole host of people would not yet have hit the doughnut hole during this quarter. And if you look at the approximately $90 million for the year and compare it to $400 million to $500 million for the full year, you'll see that assumes a bump-up in Q2 through 4 compared to Q1. That bump-up is due to the higher expected charge that we'll be recognizing for the doughnut hole, as more seniors and Medicare hit that part of the benefit from U.S. health care reform.

Our next question comes from the line of Marc Goodman with UBS. Marc Goodman - UBS Investment Bank: Yes, Derica, can you give us a little more flavor on what's going on, on the restructuring? How much has been done so far? Where's the impact and how much more there is? And as you've gotten in there to cut cost, does it -- are you finding more areas to cut? And just give us a little more detail on that. And then the other question was, what was the key product that was ordered so much of in Japan? Was it Zyprexa? Or was it all the products?

Okay. Mark, this is Derica. In regards to update our restructuring, as it relates to our $1 billion cost savings goal, we are very much on track to achieve that. In fact, I anticipate that we're going to exceed that goal, okay, for the year. And in addition to that, on the headcount front, we've talked about reducing our headcount excluding strategic acquisitions and strategic investments by about 5,500. We're about 75% of our way to that goal as well. So both of those we anticipate meeting by the end of the year, if not exceeding. As it relates to other additional insights, I think that we have instruments and tools like Six Sigma that we've been utilizing since 2004, where as we approach the end of the year of 2011, that's not going to be the end of our efforts to drive further efficiency gains throughout our business. We know that our patent challenges don't go away at the end of '11. So I think there'll be further opportunities. How much? I'm not prepared to define that for you guys here today. But recognize, we believe that we will have the capacity to make the investments necessary in our pipeline, as well as sustaining the dividend. And that was all predicated on us to achieve this year.

Jill?

In terms of the sales, products ordered in Japan. The sales were actually increased across the board driven by Cymbalta, FORTEO and Alimta.

We have a question from the line of Chris Schott with JPMorgan. Christopher Schott - JP Morgan Chase & Co: Great. Thanks very much. My first question was on the quarterly progression of gross margins. I know we can get a lot of variability quarter-to-quarter in your gross margins. So I was just looking for a little bit more clarity on the progressions here. I guess, based on your new guidance, it looks like you have an average somewhere between 77%, 78% for the remainder of this year. I guess is there any one quarter that's going to be seeing a disproportionate hit from FX? And then also, just going -- it's an earlier question, are you anticipating a meaningful drop in fourth quarter gross margins as the generic Zyprexa impact ramps? Second question just was -- can you also just, with the mGlu, walk through the timeline and the scope of that Phase III program? And in that answer, would you also touch on any incremental data that might be requested by the FDA to address some of the basic earlier seizure data points the products saw that might be included in that Phase III program? Thanks.

Okay, Chris, I'll go ahead and try -- let me start with the mGlu2/3 first. We don't have with us the specific timing for the trial. The one thing I would highlight is Ronika had mentioned, the presentation earlier this year of the 6-month safety data. We'll have probably late this year, at the best maybe early next year, the opportunity to present the 12-month safety data from that trial. So that will sort of be the next major data readout that I would point you to for mGlu2/3. And then in terms of the gross margin percent dynamics. With the strengthening of foreign currencies here in the first quarter particularly of the euro, we would expect for the full year, we would have a substantial additional cost booked to cost of sales from this FX impact on international inventories sold. If you recall, there were some pretty different dynamics last year, quarter-by-quarter. Probably the best thing I can do is point you to Slide 17 in the supplemental portion of our slide deck for today, where at the bottom you'll see for each discreet quarter how much FX affected gross margin in those particular quarters for the year. At a high level, we had a modest benefit to cost of sales booked Q2 last year, a significant benefit to cost of sales booked in Q3, so at current rates, you have a very unfavorable compare to the Q3 number. And then actually we've flipped then to having a modest addition booked to cost of sales in the fourth quarter. Hope that helps.

And you had a question about Zyprexa and its impact on gross margin. So yes, when we lose Zyprexa and as we go throughout the year but more profoundly in the fourth quarter, when we lose the U.S., it will also have a detrimental or negative impact on our gross margin.

We do have a final question from the line of Damien Conover with the Morningstar.

Thanks for taking the question. Just wanted to follow up on your comment of the acquired products coming into the Animal Health division being coming in at industry average margins. Could you just remind us what those margins are? And also, how Lilly's margins in the Animal Health business stacks up to the industry average?

Great. Jeff?

Sure. Yes, so industry average is, if you look at kind of at a higher level what you have is usually in Animal Health lower SG&A, so lower sales and admin cost, higher manufacturing cost. So we're slightly off from the bottom line. So the industry average is somewhere on the margin line between 20% and 25%. So Janssen's on the lower end of that range, and we would be in that range as well. When you step back and look at the business though, I think why we're quite excited about going forward: First, Janssen does give us more of a global footprint, gives us more capability inside of Europe, as well as we've got a hundred pending registrations of different products across all the countries internationally. So it was a very European business we're going to take global. And then at kind of a macro level, how we're going to continue to see margin improvement and above industry growth rates in Elanco is just looking at the three big areas: in Animal Health, where there's higher margin; companion animals, we're at about 10%, the industry is at 40%; Europe, we're at about 10%, 11% exactly, and the industry is about 30%; and vaccines we're very small with our Pfizer acquisition and the industry is at about 25%. So we see tremendous upside at higher-margin areas in these three segments. So that's what gives us some -- a lot of optimism and growth as we go forward the next three to five years in Animal Health.

Great. Thanks. Having exhausted the callers on the line, I'll go ahead and turn it over to Derica to close our call for today.

Thanks, Phil. I first want to say thanks to all of you for joining us today. We very much appreciate your interest in our company. And we hope that you found the information we shared today about our products and our pipeline to be very helpful. Once again, just so far this year, in 2011, it's playing out as we anticipated. We're clearly making progress in advancing our pipeline, standing at nine Phase III molecule versus our goal of 10 by the end of this year. I think our solid financial results is evident. And we continue to see the countercyclical growth areas performing as we had anticipated as well as I talked about Japan, Animal Health and our Emerging Markets. These are the things that's going to allow us to be able to weather the impact of the patent erosions of products like Gemzar and Strattera going forward. So hopefully, you found this to be insightful. We look forward to seeing many of you at our investor meeting in New York City on June 30 and to our continued interaction throughout the year. Our IR team will be available to answer any questions that you guys may have at the conclusion of this call. I hope everyone has a great day. Take care.

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