David Ricks - Chairman, Chief Executive Officer Joshua Smiley - Senior Vice President, Chief Financial Officer Christi Shaw - President, Lilly Bio-Medicines Dr. Jan Lundberg - President, Lilly Research Labs Enrique Conterno - President, Lilly Diabetes, Lilly USA Jeff Simmons - President, Elanco Animal Health Dr. Sue Mahony - President, Lilly Oncology Phil Johnson - Investor Relations

Steve Scala - Cowen & Co. Andrew Baum - Citigroup Seamus Fernandez - Leerink John Boris - SunTrust Tim Anderson - Bernstein Jami Rubin - Goldman Sachs Chris Schott - JP Morgan David Risinger - Morgan Stanley Greg Gilbert - Deutsche Bank Umer Raffat - Evercore Mark Goodman - UBS Geoff Meecham - Barclays Jason Gerberry - Bank of America Vamil Divan - Credit Suisse Tony Butler - Guggenheim Partners Jeff Holford - Jefferies Alex Arfaei - BMO Capital

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2017 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Dave Ricks. Please go ahead, sir.

Good morning. Thank you for joining us for Eli Lilly and Company’s fourth quarter 2017 earnings call. I’m Dave Ricks, Lilly’s Chairman and CEO. Joining me on today’s call are Josh Smiley, our CFO; Dr. Jan Lundberg, President of Lilly Research Labs; Enrique Conterno, President of Lilly Diabetes and Lilly USA; Dr. Sue Mahony, President of Lilly Oncology; Christi Shaw, President of Lilly Bio-Medicines; and Jeff Simmons, President of our Elanco Animal Health business. We’re also joined by Kristina Wright, Chris Ogden, Kevin Hern and Phil Johnson of the IR team. During this 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 SEC. The information we provide about our products and pipeline is for the benefit of the investment community only. It is not intended to be promotional and it is not sufficient for prescribing decisions. We closed 2017 with another strong quarter, delivering 7% revenue growth, 20% operating income growth, and important pipeline progress. Worldwide revenue growth was once again driven by our new pharmaceutical products. In addition, we continue to expand our margins. Excluding the effect of FX on international inventories sold, gross margin as a percent of revenue increased by roughly 130 basis points, and total expense as a percent of revenue declined by over 340 basis points to 52.8%. We made progress advancing our pipeline. The FDA approved and we launched Taltz for active psoriatic arthritis in the U.S. The European Commission approved Taltz for active psoriatic arthritis in the EU, and the FDA accepted our submissions for galcanezumab for migraine prevention as well as the resubmission of baricitinib for rheumatoid arthritis. On the clinical front, we initiated a Phase III clinical program for baricitinib in atopic dermatitis. We announced that Cyramza did not show an overall survival benefit in first line gastric cancer, and we initiated clinical work on the connected diabetes ecosystem, including a trial to evaluate our automated insulin delivery system as well as development and clinical work on our connected insulin pen technology. In terms of capital deployment, we announced an 8% increase in the dividend, reflecting our confidence in the continued growth prospects of the company, and we repurchased $100 million of stock. We closed 2017 with strong momentum and we are well positioned to achieve our strategic deliverables in 2018 and beyond. Slide 5 contains more details on these events as well as other key events since our October earnings call. I would also note that our analysis of strategic alternatives for Elanco is proceeding well. We’re on track to communicate our decision on our Q2 earnings call in July. This quarter, we’ve included a few additional back-up slides on Elanco where you’ll see that recent product launches delivered $40 million of revenue in Q4 and $144 million for the year. We are proud that in January a leading industry publication announced that Galliprant, a first-in-class anti-inflammatory treatment for canine osteoarthritis pain was named 2017’s Best Companion Animal Product and Clynav, a DNA vaccine for Atlantic salmon took the top honors as the Best Food Animal Product. New product launch momentum continued as Elanco’s R&D organization achieved important milestones in January with Galliprant receiving EU marketing authorization and Credelio, which protects dogs against fleas and ticks, receiving approval in the United States as well as Canada. We continued to execute on our Elanco business model changes in Q4, including exploring options for the RBST business, exiting select U.S. distribution agreements, and taking steps to reduce our manufacturing footprint. Finally, the biggest news affecting Lilly since our last call was U.S. tax reform. We’re pleased that Congress and the administration enacted tax reform that places U.S.-based companies on a more level playing field with our foreign-based competitors. This reform will allow U.S. companies like Lilly to be more competitive in the global race for innovation. For U.S. headquartered multinational companies, this reform does come with an entry cost through the one-time repatriation toll tax, but it’s a net positive as it will enable us to access our global cash and will lower our 2018 effective tax rates. Now I’ll turn the call over to Josh to discuss the impact and implications of U.S. tax reform, review our Q4 and full-year results, and provide an update on our financial guidance for 2018.

Thanks Dave. On Slide 6, we outline the financial impact to Lilly, and as stated in our press release, we recognized an estimated charge of $1.9 billion in the fourth quarter related to U.S. tax reform. This charge is comprised of the toll tax assessed on overseas cash and earnings, which totaled approximately $3.6 billion, partially offset by the changes in deferred taxes resulting from the transition to a US. territorial pact system, including the re-measurement of deferred taxes from 35% to 21%. The other financial impact to Lilly is the effect on our ongoing tax rate. Based on our initial assessment, we expect U.S. tax reform to lower our 2018 effective tax rate by roughly 350 basis points from our prior guidance of approximately 21.5% to about 18%. The effective tax rate for 2018 reflects the benefits of the lower U.S. corporate income tax rate partially offset by other provisions of the new tax law. Our revised 2018 tax rate guidance is subject to change as we further interpret the new law and as subsequent regulations and guidance are issued. In total across both our U.S. and international operations, we estimate that we may now utilize more than $9 billion of cash and investments that won’t be required for day to day operations. Essentially all of this amount is held in U.S. dollars and we do not anticipate any issues in obtaining rapid access to these funds. We do not intend to hold this $9 billion in cash and investments for the long term. Over the course of 2018 and into 2019, we’ll deploy this cash thoughtfully across our capital allocation priorities. First, we’ll fund our existing marketed products and pipeline, including capital investments, in line with our current strategy. Next, we’ll invest in business development to bolster our future growth prospects, and then we’ll return cash to shareholders via increases to the dividend and share buybacks. While tax reform does provide ready access to additional funds, it does not alter our business development priorities. We’ll continue to look for opportunities to augment our pipeline and to bolster our commercial presence in core therapeutic areas of diabetes, oncology, immunology, neurodegeneration, and pain. This could come via in-licensing or acquisition. As we’ve stated previously, much of our efforts will be focused on clinical stage assets pre-proof of concept. Since the new tax legislation in the U.S. reduces our reliance on debt to fund U.S. cash needs, we will adjust our cash and debt levels going forward. In the near term, we’ll use roughly $2 billion of our repatriated cash to reduce our gross debt level. Finally, we expect to conduct some level of share repurchases under our existing authorization, which still has $2 billion remaining. Hopefully this gives you a better understanding of the impact of tax reform and how we intend to use our global cash. Now let’s move to our financial results. Slide 7 summarizes our presentation of GAAP results and non-GAAP measures, while Slide 8 provides a summary of our GAAP results. I’ll focus my comments on our non-GAAP adjusted measures to provide insights into the underlying trends in our business, so please refer to today’s press release for a detailed description of the year-on-year changes in our fourth quarter GAAP results. Looking at the non-GAAP measures on Slide 9, you’ll see the revenue increase of 7% that Dave mentioned earlier. Gross margin as a percent of revenue decreased to 76.5%. This decrease was primarily driven by the effect of foreign exchange rates on international inventories sold and product mix, partially offset by manufacturing efficiencies and higher realized prices. Excluding the effect of FX on international inventories sold, gross margin as a percent of revenue increased roughly 130 basis points. Total operating expense remained essentially flat with marketing, selling and administrative expense decreasing 1% and R&D expense increasing 2%. As a percent of revenue, total opex declined by over 340 basis points compared to Q4 2016. Other income and expense was income of $55 million this quarter compared to income of $15 million in last year’s quarter, due primarily to higher net gain on sales of investments. Our tax rate was 20.2%, an increase of 230 basis points compared with the same quarter last year driven primarily by a lower net discrete tax benefit this quarter compared to Q4 2016. At the bottom line, net income increased 19% and earnings per share increased 20%. We achieved significant earnings growth by delivering high single digit revenue growth while significantly reducing our opex ratio, creating positive leverage again this quarter Slide 10 details these same non-GAAP measures for the full year, while Slide 11 provides a reconciliation between reported and non-GAAP EPS. You’ll find additional details on these adjustments on Slides 25 and 26. Moving to Slide 12, let’s take a look at the effect of price rate and volume on revenue growth. The effect of foreign exchange was minimal this quarter. Excluding a slight tailwind from FX, our worldwide revenue growth on a performance basis was 6% and was primarily driven by volume growth of 4%. It’s worth noting that in our human pharma business, each major geography drove volume growth again this quarter. By geography, you’ll notice that U.S. pharma revenue increased 9% driven by both price and volume. Trulicity, Basaglar and Taltz were the main drivers of this growth, offset partially by the recent losses of exclusivity for Strattera, Effient and Axiron and a decline in volume for Cialis. U.S. price growth in the fourth quarter was favorably impacted by an adjustment for rebates and discounts primarily related to lower Medicaid utilization across the portfolio. For U.S. pharma, it’s also worth noting that when normalizing for the recent LOEs of Strattera, Effient and Axiron, revenue grew by approximately 20% driven by our new products. Moving to Europe, pharma revenue grew 9% excluding FX, driven entirely by volume, despite the loss of exclusivity for Cialis and headwinds on Alimta due to competitive pressures, pricing and generic erosion in certain countries. Excluding Cialis and Alimta, the rest of our European pharma revenue grew 22% on a performance basis, driven by our new product launch portfolio - Trulicity, Olumiant, Taltz, Jardiance and Lartruvo. In Japan, despite the entry of generic Zyprexa last June, pharma revenue increased 9% excluding FX, led by Cymbalta, Trulicity and Cyramza. Our pharma revenue in the rest of the world increased 5% on a performance basis this quarter, led by Trulicity, Humalog and Forteo. Turning to animal health, excluding the impact of FX, worldwide revenue decreased 7% driven by volume. Food animal revenue declined by 10% driven primarily by market access headwinds for Posilac and competitive pressures for Optiflex, while companion animal revenue was essentially flat. On a performance basis, excluding the BI U.S. vaccines acquisition, our animal health revenue decreased 11% with companion animal revenue down 15% driven primarily by a reduction in U.S distributor inventory levels as well as competitive pressures in parasiticides. Slide 13 outlines this same information for our full year results. Now I’ll take a look at the drivers of our worldwide volume growth on Slide 14. In total, our new products, comprised of Trulicity, Taltz, Basaglar, Lartruvo, Jardiance, Cyramza, Olumiant, Verzenio and Portrazza, were the engine of our worldwide volume growth. You can see that these products drove 12.1 percentage points of volume growth. The loss of exclusivity of Cymbalta, Strattera, Effient, Axiron, Zyprexa and Evista provided a drag of 540 basis points, while Cialis and animal health accounted for 170 and 120 basis points of volume decline respectively. Slide 15 provides a view of our new product uptake. In total, these brands generated over $1.4 billion in revenue this quarter and represented nearly 23% of our total worldwide revenue, up from 12% in Q4 2016. Moving on to Slide 16, as mentioned earlier, changes in foreign exchange rates had a minimal effect on our Q4 2017 revenue growth. Similarly, FX had no meaningful impact on our operating expense growth. FX did, however, have a large effect on cost of sales growth and consequently on operating income and EPS growth. For example, growth in non-GAAP EPS was 20%, including the effect of FX, while almost 32% in constant currency terms. This was largely consistent with the 29% growth for the full year 2017. Turning to our 2018 financial guidance on Slide 17, you will see that we’ve updated our guidance to reflect the estimated impact of U.S. tax reform. This affects our estimated GAAP and non-GAAP tax rates and earnings per share while all other line items remain unchanged. Our revised GAAP and non-GAAP 2018 tax rates are both approximately 18% while our revised GAAP EPS range is $4.39 to $4.49, and our revised non-GAAP EPS range is $4.81 to $4.91. I would note the estimated impact of U.S. tax reform on our tax rate and earnings per share guidance is subject to change as we further interpret the new tax law and as subsequent regulations and guidance are issued. Also, in recent weeks we’ve seen the dollar weaken substantially. If sustained, this weakness would increase the dollar value of our foreign revenue expenses, but due to the effect of FX on international inventories sold would likely have only a modest impact on EPS. I will monitor FX movements over the course of Q1 and, if appropriate, update our line item guidance on our April call. Now I’ll turn the call back over to Dave to review the pipeline and key future events.

Thanks Josh. Slide 18 shows select NMEs as of January 24. Movements since our last earnings call include the initiation of Phase II testing for our D1 potentiator for dementia and our N3pG monoclonal antibody for Alzheimer’s disease, both as monotherapy as well as in combination with an oral BACE inhibitor; Phase I starts for IDO1 inhibitor for cancer and IL33 for immunology, and for the automated insulin system I mentioned earlier, as well as the termination of one Phase I oncology molecule. Our select NILEX pipeline shown on Slide 19 reflects the initiation of the Phase III program for baricitinib in atopic dermatitis and also attrition for ramucirumab for first line gastric cancer and abemaciclib for squamous non-small cell lung cancer. Turning to Slide 20, you can see the considerable progress we made on the key events we had projected for 2017, while Slide 21 highlights our expected key events for 2018, which we covered on our 2018 guidance call in December. In addition to noting the approval of Taltz for psoriatic arthritis, you will see that we’ve added an event for the expected date of disclosure of the Keynote-189 study based on Merck’s recent press release announcing the positive results of the Phase III study for Alimta in combination with Keytruda. 2018 will be an important year with potential Phase III initiations and data readouts for several promising new molecules and line extensions, as well as we expect regulatory actions for galcanezumab, baricitinib and abemaciclib. Before we go to the Q&A session, let me briefly sum up the progress we made in 2017 and our priorities moving forward. In 2017, new products delivered nearly 20% of our total revenue, up from just 9% in 2016. Our growing portfolio of new medicines drove strong 8% top line growth for the full year. We achieved this result while maintaining relatively flat operating expenses, driving operating margin improvement of more than 450 basis points excluding FX. We are in the early stages of a growth period driven by revenue from our recently launched products. The potential of our pipeline remains strong with new medicines in development for immunology, oncology, diabetes, and neurodegeneration complemented by a deep late-stage pain portfolio as well as additional indications for many recently launched products. Moving into 2018, we remain focused on launching with excellence and replenishing our pipeline while continuing to deliver bottom line growth and operating margin improvement. This concludes our prepared remarks. Now I’ll turn the call over to Phil Johnson to moderate the Q&A session.

Great, thank you, Dave. We would like to take questions from as many callers as possible, so we do ask that you limit your questions to two, or to a single question with two parts. Operator, if you can please provide the instructions for the Q&A session, and we’re ready to get started.

[Operator instructions] We will go to Steve Scala with Cowen. Please go ahead.

Thank you so much. Two questions - do you anticipate an FDA ad comm for baricitinib by, say, midyear, and you can you give us reassurance that there is not any safety issue beyond DVT that will be a subject of discussion? That’s the first question. Second one is over the last, say, two to three decades, Lilly always had one to two big potential products in the pipeline that investors could focus on. This would appear less a dimension of Lilly today. You probably disagree, so please tell us what billion dollar-plus opportunities you have in the mid-stage pipeline, so not including lanabecestat, galcanezumab, tanezumab, or lasmiditan. Thanks so much.

Great Steve, thank you for the questions. So Christi, if you’ll take the question on whether or not we would expect an FDA ad comm. for baricitinib and if there are any additional safety issues beyond DVT that we think might be addressed should such an ad comm be held; and then maybe Dave and Jan, if you’d like to comment on mid-stage pipeline assets that you are excited about. Christi?

Sure, hi Steve. As we said before, we do expect the FDA to have an advisory committee, but the timing of that is up to the FDA and they’ll make that publicly known. We won’t be commenting on a date before they do. In terms of other safety, we really don’t anticipate other major safety questions and issues in regard to the ad comm. and the resubmission.

Great, thank you, Christi. Dave, Jan?

Jan, you want to start? Dr. Jan Lundberg: Okay, I can start. Let us first look at the two new Phase II programs that we see. Clearly we are dependent on more clinical data, but we already have some clinical data from Phase Ib in both the D1 potentiator for dementia, which is an interesting molecule that could enhance cognition but potentially also somnolence, and in Parkinson’s disease also motor function. The N3pG program is, as you probably remember, a plaque-removing antibody, and we have optimized the dosing regimen since it has some immunogenicity, and we are putting that now into larger Phase II trials. We are combining it also with an oral BACE inhibitor which we know then will shut off the production of amyloid beta. In fact, now in Alzheimer’s, we are trying to get positive data, if at all doable, in Phase II in hundreds of patients, not in thousands of patients in Phase III, and we are addressing early disease. We really want to have a more homogenous patient population, which has been one of the problems, and we are using our imaging tools both for amyloid and [indiscernible] to make that happen, and we are also trying then to hit the target in a maximal way by not only removing amyloid but stopping the production. The other agent I want to emphasize is a potential agent with more powerful body weight lowering effects than the current GLP-1, and that is the GIP GLP-1 co-agonist, and we have seen some interesting data on Phase I in healthy volunteers, so now we want to see them in a larger Phase II study how much can this actually reduce body weight and at the same time have a powerful blood glucose lowering effect. I also believe that our Il-23 molecule, mirikizumab has a variety of options for [indiscernible] indications, including then IBD, ulcerative colitis where we have potential to be first-in-class, but it’s also an interesting option for psoriasis and potentially other indications.

Do you have anything to add, or--?

I don’t. That’s exactly what I would have said.

Excellent, thank you. Operator, if we can go to the next caller, please.

Certainly. We’ll go to the line of Andrew Baum with Citi. Please go ahead.

Thank you. A couple of questions. First for, I guess, Enrique and Sue, since your ascension to CEO, Dave, we’ve been expecting an external move on oncology, given Levi joining the company. There has been small deals but nothing substantive. Were we wrong to assume that there was an intent to commit capital and balance sheet to accelerating your rebuild in oncology, particularly in IO, or if you could just share with us what are the barriers, be it valuation or other, which may have delayed such activity? That’s the first question. Second question for Enrique, we have expressed a fair degree of excitement on the commercial potential of the SGLT2 class, including Jardiance. Perhaps you could give us your perception of where the class could go and what are the barriers to overcome and what catalysts we should be attuned to, pending cardiovascular clinical trial data, diminishing safety concerns and other, in order to get us there? Thank you.

Andrew, thank you for the questions. Dave, if you’d like to comment on the external business development strategy for oncology franchise, and then Enrique, the question on the potential going forward for the SGLT2 class. Dave?

Sure. Well, I guess at a top level, Andrew, I would say your assumptions about our ambition to use balance sheet capacity as well as income statement capacity to grow our oncology business aren’t wrong. We very much plan to do that. We’re adding talent, as you noted, and are looking at many, many opportunities there. Of course, we’re bound by pricing and value, which is something we’re committed to make sure we’re not doing deals just to fill strategic holes in the pipeline but that make sense for our investors over the long term, and I think we also want to think carefully about our strategy in oncology, what can complement existing assets and add to what we’re doing, versus just de novo efforts to enter a space. So given the price points in oncology, we’re careful about our work, but I think it would be reasonable to expect a busy year in business development for oncology for Lilly. Whether those translate into deals, that’s a competitive process. We’ll work through that, but I don’t think directionally your assumptions are wrong.

Thanks Dave. Enrique?

Sure. So I continue to be quite bullish on Jardiance, and I think the frame should be much more Jardiance than the SGLT2 class. When we look at the SGLT2 class, we do see a number of headwinds, in particular because of the updated label for Invokana. That has been a headwind for the class, but we need to look at Jardiance’s growth and overall progression when we look at its use as a much better predictor for that to be a catalyst for the overall SGLT2 class. Clearly we are focused today on Type 2 diabetes, but we do have trials for heart failure and chronic [indiscernible] disease. When it comes to Type 2 diabetes, some of the challenges that we had have been some of those headwinds that I just referred to for what was the leader of the class. We do like the fact that there’s going to be increased promotion by having some additional competitors enter the class. I think that actually is going to be helpful to Jardiance. Finally, it’s just being able to make cardio protection a much higher priority for all physicians beyond A1C when they’re thinking about patients with Type 2 diabetes. So we are encouraged by the progress that we continue to see, but much more progress is needed.

Great, thanks Enrique. Operator, if we can go to the next caller, please.

Certainly. Next we’ll go to the line of Seamus Fernandez with Leerink. Please go ahead.

Thanks for the questions. So just a couple quick ones. First off, can you guys--I guess I’m a little confused by the capital allocation discussion, so I guess I’ll ask this one in two parts. You guys are reducing your debt to the tune of $2 billion and yet it would seem like--maybe you can just explain the capital allocation decision there and the need to reduce the debt, given your net cash position, so it’s a little bit confusing in that regard if you’re moving forward with other potential deal considerations. I’m just trying to get a sense of the discipline there. The second part of that same question is has the board already reviewed the capital allocation dynamics and decision points, or is that coming on a go-forward basis in the wake of tax reform so you can move on debt immediately, but other capital allocation decisions and priorities are under review? Thanks.

Great Seamus, thank you for the questions. On capital allocation, Josh, that one’s right up your alley.

Thanks Seamus. First as it relates to our overall position, we’re in a very slight net cash position right now, but as I mentioned in the comments we’re going to work that down over time, so we expect over time to be in a net debt position for sure. I think as it relates specifically to the $2 billion of--we have about $13.5 billion of debt, and to work that down by $2 billion is really to get at our target of 2.5 times EBITDA for our leverage ratio. Now, that just--the reason we do that, Seamus, is really just to give us the capacity to make investments when we see shareholder value opportunities, accretion opportunities ahead of us, so of course last year we raised--without the new tax reform legislation, we raised debt in the U.S. and actually increased it, so now all we’ll do here is try to get back to our 2.5 leverage ratio. Again, that’s not a long-term target, that’s just where we’d like to start. Then to your question about the board, we have--we’ve been very clear, I think, for the last few years about our capital allocation priorities, and as I mentioned, we have $9 billion of cash we now have free access to that we didn’t in the past, and we’ll work through that cash on a pretty methodical basis and you should expect to see investments in the business, expect to see business development as Dave mentioned, and you will see dividend increases and share buybacks over time.

Great, thanks Josh. Operator, next caller please.

Certainly, and we’ll go to the line of John Boris with SunTrust. Please go ahead.

Thanks for taking the questions. First question on diabetes - sequentially it seems as though there was a higher degree of discounting and rebating going on, so some noise there. Can you maybe just give us some insights into that? Then a question for you, Dave - I think Lilly has a self insurance model with some pretty high drug utilization. How do you anticipate, at least from your experience of having a self insurance model, how do you anticipate the administration is going to go about lowering drug pricing? It certainly seems as though there is a lot of value trapped within the system in discounts and rebates, but how would you go about unleashing some of that and getting it back into the hands of employer groups and, more importantly, into patients? Thanks.

John, thank you for the questions. Enrique, if you’ll comment on insights into what’s going on with diabetes rebating here in the U.S., and then Dave obviously can talk about some of the drug pricing dynamics and how that might be addressed going forward. Enrique?

So we continue to see pressure on pricing across all of our diabetes products. When we look at our Q4 results, I think there was pressure from a rebating perspective on the insulin portfolio, so both Humalog and Basaglar in particular. But we are being extremely disciplined and we like our overall prospects, and the axis that we basically have with all of our top brands, we believe that Trulicity for example is extremely well positioned for ’18 and so is Jardiance.

Thank you, Enrique. Dave?

Thanks John. I think you’re right to point out what’s the connection between Lilly’s actions as a provider of healthcare benefits to employees as well as our policy positions. We try to make them as similar as we can. Of course, we do self insure, we own the financial risk for our beneficiaries in our programs, and I think there’s two things that we do that, I think, stand out from the market. One is we have no bias in our health insurance programs for our employees toward medication, whereas you know in the general marketplace on average, patients pay four times out of pocket for medications and other health services, so we think that bias should go away, that you could actually make a good argument that medication should have a bias for them because of the efficiency of prescription drugs versus other parts of the healthcare system, but we’ve eliminated that. The other thing which is new for us is rebate pass-through. We’ve executed for our employee population a pass-through rebate program. We are calling for that through pharma and directly from the government, because CMS has a unique role as a market maker here in particular in the Part D program, so we would like to see rebate pass-through for Part D beneficiaries. As you know, the rebate levels probably across all of pharma are something like 30 to 40%. That could have an immediate and very positive impact on seniors who are struggling to cover their donut hole-exposed prescriptions, and we think this is a good idea that the administration should act on immediately. I would expect a busy year regulatory-wise in Washington as they look to introduce market mechanisms and lower costs at the pharmacy counter for patients, and we’re for both of those things, so we’ll partner closely with the administration to try to make positive progress in a pro-innovation way that actually affects patients’ pocketbooks.

Thanks Dave. Operator, we can go to the next caller.

Certainly. We’ll go to the line of Tim Anderson with Bernstein. Please go ahead.

Thank you, a couple of questions. An occasional bear case with Trulicity has been your Rewind cardiovascular outcomes trial and that it’s higher risk because it studies the healthier populations, so the bar to showing a benefit could in principle be higher. Can we play out the scenario whereby this trial does indeed fail to show a benefit in 2018, in your view, would that have a purely negative impact on the commercial future of Trulicity, either U.S. or Europe, and if not, why not? Then second question is on oral GLP-1 - your program and your initiatives are much earlier than Novo’s, who is the nearing the conclusion of multiple Phase III trials. I’m wondering why there is such a disparity in timelines - does Novo have a unique technology that Lilly’s had difficulty replicating, or what’s the reason exactly?

Great Tim, thank you for the questions. So for you, Enrique, on potential impacts should Rewind be negative, and then our efforts on the oral GLP-1 and the timing of those.

So clearly there are a number of cardiovascular trials that are reading out this year - Rewind, but also we have trials for linagliptin in Carolina and Carmelina that are reading out. Lilly has quite a bit of experience when it comes to designing cardiovascular trials in the diabetes space, so we feel good about how we designed the trial and we continue to be optimistic about our results. I really don’t want to speculate about what a negative trial would be - that’s clearly not where our case is, clearly. As we think about future diabetes therapies, having a cardiovascular outcome benefit is going to be increasingly important.

And on the oral GLP-1?

So we are highly interested in this space and working on pursuing oral GLP-1, and as we think about progressing to the clinical phase, I think the hurdle that we basically have is one of getting the right bio-availability for our product in order to make sure that we can make this commercially successful on a worldwide basis.

Great. Did you want to add anything, Jan? Dr. Jan Lundberg: Yes. If we look at high level, the oral [indiscernible] peptides is hindered by a lot of natural mechanists, and we assume that the Novo product only has 1 or 2% bio-availability, which means that you lose most of the substance. The dilemma also remains here about the need for having fasting and not eating for some time after you take this drug, because then you have food interactions, so it’s really a suboptimal oral agent. I think it would be so much better to have a more traditional small molecule for this receptor.

Thank you, Jan. Operator, if we can go to the next caller, please.

Certainly. We’ll go to the line of Jami Rubin with Goldman Sachs. Please go ahead.

Hi. Staying along the lines of Trulicity and potential changes to that market, obviously Ozempic will be launched very shortly if it hasn’t already. What sort of changes do you expect to Trulicity’s market share as a result of Ozempic, plus the fact that Victoza now has a CV claim as well? Then you touched upon your oral GLP-1, but obviously we know we’re going to see a lot of oral semaglutide trials read out in 2018, and while there are concerns about the food effects and nausea, if the oral sema data are successful and essentially replicate Phase II, what impact, if any, do you see oral sema having on your overall diabetes franchise, including GLP-1? Thanks very much.

Thanks for the questions, Jami. So back to you, Enrique, on Trulicity, the impact that you might expect from Ozempic and the Victoza CV label update, and then thoughts on the potential impact to our franchises if oral semaglutide is successful in Phase III.

So we continue to be very pleased with the performance of Trulicity. Trulicity had significant sequential quarter-on-quarter growth. Our market share for the last week is now over 40% for the first time, so we’ve seen continued gains in overall share, despite the fact that, yes, Victoza has an indication for a benefit when it comes to CV events. One of the big premises that we think about is really how underutilized the GLP-1 class is today. When we look at in the U.S. for example, GLP-1s are about 30% of the basal insulin utilization, so we think there is huge room for expansion and we believe that Trulicity is going to benefit from that. We are extremely well prepared for semaglutides launch. I feel good about the experience that we are providing patients. We believe that experience will be unmatched, so we do think that we will be able to compete very effectively. We don’t provide any type of share forecasts for any of our products.

And in terms of the oral semaglutide, how that may affect the dynamics within the various franchises that we have?

Yes, so first, I think it’s extremely important - I think you made some reference to this, that we look at the Phase III trials and what is going to be some of the [indiscernible] between efficacy, the side effect profile, and at the end of the day also how in real life is this product going to perform given that it may require some extreme adherence when it comes to fasting and water intake and so forth, so we need to see more data. Novo has explicitly expressed this desire to price this product comparable to injectable GLP-1, but it’s going to position the product very early in that treatment, continue to compete with some of the other orals, so we need to see how that is going to work given that today, SGLT2s and we look at the value proposition of a Jardiance, for example, which is going to be difficult for that product to match, so at the end of the day, how will payors view a much different price point for an oral GLP-1. So there is a lot of speculation and we need to see more data before we can provide a more educated sense of how that successful that product could be and the impact on the rest of the diabetes market.

Great, thanks Enrique. Operator, next caller please.

Certainly. We’ll go to the line of Chris Schott with JP Morgan. Please go ahead.

Great. Just two questions on Taltz, if I could. One, can you just elaborate a little bit more on the opportunity for Taltz in psoriatic arthritis? I think one of your competitors has highlighted this as maybe equal magnitude of opportunity to the original psoriasis label. I’m just curious how you’re thinking about that market as we look at the launch in ’18. The second question on Taltz is about the pricing dynamics in ’18. We’ve had a couple data points about this being a more competitive pricing environment than we’ve seen in the past, and just interested in your thoughts on how pricing is going to shake out for this market as we think about this year and longer term. Thanks very much.

Thank you, Chris. So Christi, if you can talk about the opportunity that we see in psoriatic arthritis and the pricing dynamics as we head into this year?

Absolutely. So we’re very excited about the launch of Taltz in psoriatic arthritis, already approved in Japan, approved in the U.S. in December, and January in Europe. A marker for the psoriatic arthritis opportunity would be to look at Cosentyx - less than 40% of the scripts for Cosentyx are actually in the dermatology office, so we believe this is a really large opportunity in addition to the ankylosing spondylitis, and we expect that our uptake will be very similar to Cosentyx in PSA as we were in psoriasis. That market, we think will be very large and we think we’re competitive. We’re the only IL-17 that has in our label structure data as well as patients who have not responded well to TNF, and so being very competitive, the rheumatologists like the data, and they also like the PASI 100 scores, so we do think that that will be a great market for us. Remember - we’re not going to the same customer, we’re going to an entirely new office in rheumatology. Then in terms of pricing with Taltz this year versus last year and how that relates to access, our access this year will be very similar to last year. From competitive dynamics, this is a marketplace where, unlike other areas, we actually have a lot of patients that continually turn over, and so as you see with the uptake of Taltz at launch and continuing, we don’t believe that that will be an issue for us to get access to patients.

Thanks Christ. Operator, we can go to the next caller.

Certainly. We’ll go to the line of David Risinger with Morgan Stanley. Please go ahead.

Thanks so much. I have three questions. The first is I’m hoping that you can frame the animal health revenue growth prospects in coming quarters. Obviously the business was down in the fourth quarter, you expect it to flatten out and then return to growth, but if you could help us with our modeling in the next quarter or two, that would be helpful. Also as part of that commentary, if you could just remind us what the top two to three new product revenue drivers are in animal health. The second question is could you comment on the timing of Phase II Alzheimer’s readouts with cognitive efficacy data, and then third, do you expect the tax rate to decline beyond 2018 as you optimize your tax structuring? Thank you.

Great Dave, thank you for the questions. So Jeff, we’ll go to you for animal health growth prospects on the coming quarters and some of the key new product drivers. Josh, I’m going to go to you next, if you don’t mind, for tax rate beyond 2018; and then Jan, if you’d like to comment on timing for some of the Phase II readouts in the Alzheimer’s space. Jeff?

Yes, a few things, David, kind of at a higher level on animal health. I would say that our Q4 results were consistent with our expectations we set. In guidance in December, we specifically said then that we expect 2018 revenues to be flat to slightly increasing versus 2017, and the other note I would make is fourth quarter revenue decreased 7% excluding FX, and this was driven by volume, but importantly we’re starting to see a return to price growth in the market and we increased 1% in the fourth quarter. So when you look to growth and look to modeling, I would say this - again, 2017 clean food and competition, we underestimated the impact of that. That’s what’s impacted and driven our results, and some competitive pressures in the companion animal market. So for 2018 specifically, we forecast revenue growth to be flat to slightly up, we expect 2018 to be a year of transition as we continue to evolve our product mix against headwinds, we see slightly negative growth in the first half of 2018 primarily from the continuing impact of clean food, however the second half of the year we expect our eight launches, and I’ll touch on those here, will drive top line growth. So within the portfolio we expect low to mid single digit growth in companion animals offset by low to single digit decline in food animals. As Dave noted, I think we will see Galliprant continue to grow. We’re seeing close to 30% quarter-on-quarter growth in the canine pain market, we’re up to 12% market share. We see that being a key growth driver. I would combine that with last year’s launch of Interceptor Plus and the share that we’ve taken from HeartGard would be another big driver for our business, and then we continue to see our companion animal parasiticide broader portfolio - Credelio, our first tick-flea launch, that is going on this quarter in all three major markets, Japan, Europe and the U.S., so Credelio would be the third. Then on the food animal side, we continue to see our vaccine portfolio that we acquired from Lohmann in salmonella, with vaccines being a key growth driver as well. So hopefully that gives you a little guidance on our food and companion animal business first half, second half of the year, and again I would emphasize flat to slightly growing in ’18.

Thanks Jeff. Josh?

On tax rate, first for 2018, as we mentioned we are estimating about 18%, which is about a 350 basis point improvement from the prior outlook. Like every other company that’s reported or will, I think of course we have to caveat that by saying that’s based on our interpretation and read today of the law. It’s very complex, we are still waiting for future guidance and regulations from the IRS, but based on that assessment, we think 18% is sustainable and we will certainly look through planning to take advantage of the incentives that are built into the law to bring that down over time. So a lot of work still to go there, but certainly assume a sustainable 18% and then opportunities to bring it down over time.

Great, thank you Josh. Jan? Dr. Jan Lundberg: In relation to dementia studies, and the symptomatic one is in Parkinson’s dementia, and that has a readout mid-2019. The N3pG program may take somewhat longer since there is an 18-month treatment there, so in about two years.

Great, thank you, Jan. Operator, we can go to the next caller, please.

Certainly. We’ll go to the line of Greg Gilbert with Deutsche Bank. Please go ahead.

Thank you. First in diabetes, lots of focus on GLP-1 obviously, but Enrique, was curious what you thought the impact might be, if any, when Merck enters with some combo products, or at least the combo of DPP4 and SGLT2, and what have you learned in the marketplace about the market’s willingness to use that kind of combo and what are you expecting from Merck, given that they haven’t launched something into this space in a while, and how that might affect you? Secondly, Dave, lots of guesswork around what you will buy, what you could buy, when it would happen - a bit hard for you to answer that, but what could you say about how the pace and focus of BD, how that has changed since you took over? Are there specific things you can point to, like changes in the team, changes in priority, changes in team focus, etc, short of predicting what you’re going to do next? Thanks.

Thank you, Greg. Enrique, if you can comment on the potential impact of another DPP4 SGLT2 combo coming in; and then Dave, any changes in our approach to BD since you’ve taken over as CEO. Enrique?

Very good. So as I mentioned, we view additional competitors coming into the SGLT2 class paradoxically as a positive because we believe that’s going to be an important catalyst for growth and it’s going to help the class, but also given Jardiance’s strong position, we will likely be the main beneficiary. Your question was specific to the combo of ertugliflozin with a DPP4. I can’t comment on Merck’s strategy, but when we look at current practices from physicians prescribing diabetes products, they prefer not to prescribe fixed dose combinations. We do have that experience with [indiscernible], so we view that as a long-term proposition for Merck. Now, we don’t know exactly what their strategy is, but clearly for that product first of all to be successful, they’re going to have to establish the benefit of ertugliflozin, so we are of course prepared. We have a number of competitors entering the diabetes space, but I feel very good in terms of where each one of our brands stands today in terms of the benefit that it provides.

Thank you, Enrique. Dave?

Yes, thanks Greg for the question, and of course we can’t comment on things that haven’t happened yet, but we do have ambition to step up our game in BD. In essence we’ve undertaken a series of things to investigate why have we done a bit less through time, where has that occurred in the pipeline space. I think we’ve been pretty clear through the last year about our ambition in the Phase I, Phase II, so pre-proof of concept earlier clinical assets is the main target, and that’s not just because we decided that, it’s because that’s where Lilly is relatively under-represented, and there’s a lot more to go after at price points which we think are attractive. We have done some specific things in the company. One public thing which people know about is the realignment of the business development function nested within our Lilly Research Labs, our R&D organization. I think that’s an important change, if not psychologically as we shift our attitude toward this becoming a core part of innovation in our company along with strengthening our own labs. We have also increased resources, both human and allocating balance sheet and income statement capacity for yet to be done deals, so that that’s not a friction as we look at bringing things in. The final thing I’ll say is we have core metrics now we’re looking at in terms of number of prospects we’re evaluating, so that we have enough substrate to then execute the right deals across. What hasn’t changed is the discipline we’re going to undertake to make sure these are not just strategic, quote-unquote, without the financial support, but they check all the boxes - they enhance our therapeutic strategies, they can produce--have a good shot at producing strong value for shareholders through time, and they fit what we know how to do so we can execute once we do bring them in.

Great, thank you Dave. Operator, next caller please.

Certainly. We’ll go to the line of Umer Raffat with Evercore. Please go ahead.

Hi guys, thanks so much for taking my questions. First, if I may, can you please give us some color into any DVT deaths seen with baricitinib, perhaps some visibility into how many and what happened? Secondly, I know you mentioned in passing, but would love to get your thoughts on real world usage of the carefully calibrated pre and post-dose fasting periods seen with oral sema and the specific water volumes, like how does that play out in a real-world setting based on all the diabetes experience you guys have and the concomitant meds? Then finally on NGF, my question is from a commercial setting, how do you seek to manage concomitant NSAID usage to mitigate the Type 2 RPO risk when concomitant NSAIDS are taken?

Great, thank you very much for the questions. Let me summarize. So I’m going to start out with Enrique, actually, with that second question on how we see some of the oral sema dosing potential issues playing out in the real world, and then Christi, the other two would be for you - any information we can share on things we’ve seen related to DVT deaths with baricitinib in our clinical trial program, and then how we intend to manage concomitant NSAID usage as we would go to market in the future with tanezumab. Enrique?

Yes, that is a question probably better for Novo than for us, but as a frame, anything that introduces complexity in the lives of people with diabetes has a number of headwinds, so we look to basically develop products that can be adhered simply, that offer a number of benefits, and that is our mantra about how we think about developing our products.

Great, thank you, Enrique. Christi?

Sure, so of note, there were two reported deaths for patients with events of pulmonary embolism in the clinical trial program. One death occurred in the baricitinib group after 523 days after the first dose, and one death occurred in the methotrexate group after 234 days of methotrexate treatment. Of note as we have resubmitted and disclosed more data on our resubmission to the FDA, one of the things that we looked at is the largest pool that we have of patients exposed to baricitinib, so all of our clinical trials and also the extension study, we found that in the 2 milligram, the incidence of DVT and PE were 0.5, and in the 4 milligrams it was 0.5 as well. Remember, that’s a background rate in RA of 0.3 to 0.8, so well within the background rate of RA, so that’s part of our resubmission package as well as the Phase II clinical trial in atopic derm, where we didn’t see any as well.

And then in terms of utilization of concomitant NSAIDS with tanezumab and how that’s being managed in the clinical trials and how we might envision that playing out upon commercialization?

We did exclude concomitant use of NSAIDS in our trial, chronic use, and we’ll see what the label looks like once the data comes out and once the FDA approves it and what the label looks like, and then we’ll be able to--in the future, be able to tell you how we’ll commercialize it.

Great, thank you, Christi. Operator, if we can go to the next caller.

Certainly. We’ll go to the line of Mark Goodman with UBS. Please go ahead.

Yes, good morning. Just a couple of product questions. Trajenta looked very strange in the fourth quarter here in the U.S. I was wondering if you could just give us a flavor for what happened there. Then second on Trulicity, obviously ramping up nicely in the U.S. I’m just curious if there was anything strange with respect to pricing or inventory in the quarter, or was that just a completely clean quarter relative to the previous four quarters, just so we can understand the ramp? Then you mentioned a little bit on Basaglar, but maybe you could also just talk to the past couple of quarters so we can really get a better understanding of what the underlying pricing is of this product, including all the rebates. Thank you.

Mark, thank you for the questions. Enrique, all for you, if you’d like to comment on some of the U.S. dynamics we’re seeing for Trajenta, Trulicity, and Basaglar.

Very good. So let me start with Trajenta. We did have an unfavorable impact due to our changes in estimates for rebates and discounts for the quarter in the case of Trajenta, roughly $10 million as it relates to Lilly revenue. You may recall that in Q3 of 2017, so last quarter, we actually had a favorable adjustment, so sequentially it does look like an anomaly. You asked about Basaglar. We do see very strong sequential growth for Basaglar - 24% TRX quarter-on-quarter. We do have high rebates. Part of this is basically channel accrual when it comes to--given the expected increased utilization in Part D starting January 1, and by the way we’ve seen excellent uptake. When we look at Basaglar today at the first few weeks, we’re now basically capturing about 25% of the new patients in the basal insulin class, so excited about the growth prospects. Then when we look at Trulicity, there was some buy-in, roughly about $25 million when it comes to inventories. Outside of that, we do see a lot of movement when it comes to gross to net and so forth, but what I would say when we look at our diabetes products is to look at them really more over time and try to get a complete picture by looking at rolling quarters. But we are once again excited about the sequential growth that Trulicity is having.

Great, thank you, Enrique. Operator, next caller.

Certainly. We’ll go to the line of Geoff Meecham with Barclays. Please go ahead.

Morning, thanks for the questions, guys. Dave, I know you’re still in the Elanco strategic review, but how does the tax policy or the new product launches change your view of its internal value, or is it still about its margin contribution? Then a couple of product questions, one for Forteo - good 4Q trends for a late cycle product. Just help us with some insight for 4Q and then going forward. Then on abemaciclib, how does a recent pricing action we saw with [indiscernible] in Europe impact either your opportunity or your investment there? Thank you.

Great. Jeff, thank you for the questions. So Dave, we’ll start with you on the question of some of the impacts of tax policy and some other factors on our Elanco decision-making process. Sue, if I can then go to you to talk about some of the recent announcements that were made on pricing for a competitor product in the CVK4-6 space in Europe, and then Christi on the Forteo question here in the U.S. Dave?

Yes, thanks for the question. On Elanco, more or less since we announced the strategic review in our [indiscernible], the basic assumptions and the way we’re conducting the analysis haven’t really changed. Of course, tax makes everything a little bit more valuable and that’s been contemporized in our thinking. Elanco, I think, there’s a two-part story. One is innovation on the top line, and I think we’ve commented on that this quarter. I think there’s been great progress, both in the introduction of new products as well as approvals recently. That’s a piece of this that we’re factoring in going forward as a growing company in animal health. Then the margin expansion is a significant opportunity for animal health and one the team is very focused on, so all those things are true. I think the analysis of course then must ask, what’s the most valuable path forward for Lilly shareholders - to hold, to spin, to partner in some other way, and that’s still ongoing. But more or less, the direction of those assumptions is the same as when we started this, and that’s good news as we continue to work through that project.

Great, thanks Dave. Sue? Dr. Sue Mahony: Yes, I can’t comment on Pfizer’s announcement. What I can say is we are ready for our launch in Europe. We submitted last year in Europe and in Japan and we are hopefully expecting approval in both those geographies later this year. We are prepared for launch and we’re prepared for appropriate access and reimbursement for patients where there is a considerable unmet need in Europe. Just an update on the U.S. - the uptake so far has been very promising. We feel really good about the performance to date, and that is based on the Monarch 1 and Monarch 2 populations - that’s about 30% of the patients available, and we are anticipating approval in the first half of this year based on the Monarch 3, so that’s the first line indication. Again, the performance looks good so far. We feel very confident in the U.S. performance as well as the opportunity in Europe and Japan.

Great, thank you, Sue. Christi?

Our U.S. sales of Forteo in Q4 grew 32% versus the Q3 of 13%, so thank you for the question because there was some unique dynamics in Q4. One was we benefited from the net price adjustment to rebates and discounts related to Medicaid, where most quarters the rebates and discounts lower the realized benefit from list price increases. The second thing was that in terms of the volume acceleration, we had wholesaler buy-ins that led to an increase in the volume for Q4.

Thank you, Christi. Operator, if we can go to the next caller, please.

The next question comes from the line of Jason Gerberry with Bank of America. Please go ahead.

Hi, good morning, and thanks for taking my questions. Just two for me. Firstly on Alimta, your thoughts or expectations if you were to lose the patent suit with the alternative salt form, the 505b2 generic. Just curious your thoughts on sort of what type of market share you think a low-cost alternative salt form could capture in the oncology setting. I don’t know if you have any analogs, but with the trial starting tomorrow, I was just curious your thoughts there. My second question on the diabetes front, obviously conversion of sulfonylurea to higher cost brands have been kind of value driver in the space more broadly, and just trying to get a little bit of sense for the Carolina study, if that study were positive, do you mainly see that as something that drives more conversion to DPP4 or do you see that as a broader catalyst, depending upon the cardiovascular profile for SUs, to other proprietary classes like SGLT2 or GLP-1? Thanks.

Great, thank you for the question. So Sue, if you can provide some thoughts on the potential impact if we were to lose the alternative salt form case starting soon, and then Enrique, your thoughts on if Carolina is positive, how that might affect both DPP4 and potentially SGLT2 utilization. Sue? Dr. Sue Mahony: Yes, with regards to the Alimta patent, as you said, we’ve got the alternate salt form hearing yet this week in the District Court of Indiana, and we feel really confident with regards to our case here and we believe that we can continue to defend this patent and feel very confident in our opportunity to do that. Clearly in a case that didn’t happen, we would look at revised guidance, but at this point in time we are continuing to drive Alimta performance with the Keynote 189 data being presented later this year. We think we have a great opportunity to really continue to consolidate Alimta as a standard of care in first line setting and to be the preferred chemo in combination with IO.

Thank you, Sue. Enrique?

SUs still represent about 20% of the overall oral diabetes market. As a class, as a share of the market, that is declining and has been declining over time. Clearly a positive Carolina trial would significantly accelerate that. My view is that most classes will basically benefit, it would not be limited to DPP4s and Trajenta in particular, but we would also see acceleration about the SGLT2s, in particular Jardiance, and the GLP-1 class.

Thanks Enrique. Operator, we’ll go to our next caller.

Certainly. We’ll go to the line of Vamil Divan with Credit Suisse. Please go ahead.

Thanks so much for taking my questions. I had a question about these new co-pay accumulator programs that we’re hearing about, some plans where the co-pay support manufacturers provide to the count towards the individual’s deductible. Just wondering if you could comment on what you’re seeing around this issue - is there anything you think Lilly or other pharma companies can do to offset the pressures, specifically wondering about specialty drugs like Taltz with that question? Second one on your CGRP, I’m just curious if you can share a little more in terms of the commercial presentation of that product in terms of the needle gauge, the device, some of the ways you’ll be trying to differentiate that product from some of your competitors in terms of how it’s delivered. Thanks.

Great Vamil, thank you very much for the questions. So Dave, if you can comment on the question on co-pay accumulators, and then Christi, whatever you can share - you might not be able to fully respond, but whatever you can share on some of the commercial presentation for CGRP, galcanezumab. Dave?

Yes, well co-pay accumulators, the idea that [indiscernible] get credited differently than in the past is actually not really a new idea. A lot of people are talking about it this year. There are in the back and forth between manufacturers and insurers ways to rebalance that. I think the overall concerning thing is the continued shift across consumers basically by implementing this program without rebate pass-through, which I think would be an important compensating measure. It just increases the exposure that patients have to their high deductible plans and that’s a bad idea, in our mind, so policy-wise we’re not for it. There are tactical ways through it, and you can rest assured we’re implementing those on products like Taltz and others. There will be a to-ing and fro-ing around these points through time and we’ll compete as we do. I think the bigger issue for the country is how do we make chronic medications patients need more affordable for them, and again we go back to the rebate pass-through issue. That increasing spread is a big issue for patients paying list price with a deductible plan.

Thank you, Dave. Christi?

Yes, we have a strong history obviously in the auto injector, and that will be our plan from a commercialization standpoint with galcanezumab.

Great, thank you. Operator, next caller, please.

Certainly. We’ll go to the line of Tony Butler with Guggenheim Partners. Please go ahead.

Yes, thanks very much. I wanted to stick with the CGRP if I may and simply ask, would you expect utilization to be principally for those who would be chronic users, a la an injection once per month, or do you think that in fact it would be a good many episodic users? That’s question one. Number two is also to the extent that baricitinib has been in Europe, principally Germany, I’m just curious if you have information on both the 2 and 4 milligram use; in other words, can you provide some ratio like 60/40, or some other permutation, as to the percentage of use by dose? Thanks very much.

Thanks Tony. So Christi, if you’ll comment on both these questions, the CGRP, where we expect use to be principally, if that’s going to be in chronic or also episodic, and then I’m not sure if you have a rabbit to pull out of the hat on the 2 and 4 milligram use in Germany or not? I don’t think we have that information in the IR group, so.

Okay, so we expect most of the usage to be in the preventive, obviously. There is about 4 to 5 million patients in the U.S. alone that are on preventative medicines, but we also estimate that about 15 million patients could be eligible because they have fallen off their preventative medicine for one reason or the other - efficacy or safety. So we do expect most of that use to be in chronic. The great thing about the Lilly platform is we’re also studying lasmiditan for acute use, and the third thing is galcanezumab also has a study in cluster headaches, so as you look at chronic, episodic, cluster, we expect use across those two agents in all three areas.

Thank you, Christi, and Tony, we’ll follow up on your question in utilization in Germany that we’re seeing between the 2 and the 4 milligram dose.

We can tell you that the majority is in 4 milligrams, we just can’t give you the split.

Okay. Operator, can we go to the next caller, please.

Certainly. We’ll go to the line of Jeff Holford with Jefferies. Please go ahead.

Hi, thanks for taking my questions. There seems to be a lot of focus on Elanco, I think some concerns that the trend there is maybe unsupportive of that business standing on its own at some point this year. So wondering if you can just give a bit of your thoughts on the longer term outlook - when does this business get more to industry growth rates on the top line, the kind of 5%-plus that we’re used to seeing globally for animal health, and maybe what kind of basis point opportunity you see on the margin in the midterm as the mix evolves and gets more efficient? Second, quick question on Taltz - what kind of impact are you seeing in the market really from Tremfya, and also on some of the Cosentyx price adjustments? I think Novartis were commenting they’re still being reasonably aggressive on price of that product through 2018. Thank you.

Thanks for the questions, Jeff. Our Jeff, can you comment please on Elanco trends that you see going forward and outlook for longer term growth, as well as margin expansion? Dave, feel free to comment if you like, and then Christi, if you’d like to comment on the impact from Tremfya and some of the pricing dynamics in the IO-17 class. Jeff?

Yes, as we’ve noted Jeff - good question. We’ve had really three priorities to our strategy as we go forward, and we are definitely keeping this in context as we go forward with the assessment, is one, accelerating innovation; two is changing our mix to higher growth and margin segments; and three, this margin expansion plan, those being the three. I think as Dave noted, we feel very good about our pipeline and launching products that we’re in the midst of right now. That will be what will return us to, we believe, higher quality growth and higher margins going forward. So as I’ve noted, it will flat to slightly growing in ’18, and we continue to see that increasing going forward. I think the margin expansion story is a significant one. There’s really a couple parts to that. One is just cost initiatives, and we’ve pulled most of the key levers that we see here in the near and medium term, as well as our footprint, so we have announced two things this year - continuing to look at right-sizing our footprint after the integration, so with the large Wood consolidation as well as Augusta, and I think the BST assessment will help. We hit a billion dollars in companion animals in 2017 for the first time, and I think just the example of the contrast of BST to companion animals is a demonstration of this mix change. So we have said very clearly on margins that we do see, as we said in December 15 at the investor conference, returning to 30% operating margins, albeit it will be taking a little bit longer given some of these forces, like clean food. But we do see a path to that margin expansion, so increasing as we go forward in the short and medium term.

Great, thanks Jeff. Christi?

So Tremfya has had a similar launch uptake as what we’ve seen with other biologics in the psoriasis space, and as we’ve said before, we believe that the newer agents--and what we’re seeing in the marketplace is newer agents are really increasing expectations of physicians, of patients to ensure--to really switch patients more quickly from older agents to the newer ones. In fact, the last two years the market growth has been 15%, unlike the years before where it was single digits, so we think that’s a good thing. Then on the Cosentyx price adjustment, we continue to look very closely at that. What we’ve seen and what we saw at launch was in spite of not having great access, because patients actually cycle off routinely, go from one agent to another, we haven’t had to utilize that piece, but we’ll continue to keep an eye on it and ensure that we continue to get access for patients who want PASI 100 clear skin scores.

Thank you, Christi. Operator, next caller please.

Certainly. We’ll go to the line of Alex Arfaei with BMO Capital. Please go ahead.

Good morning folks, thank you very much for taking the questions. Three, if I may. First, could you comment on the specific milestone achieved for your N3pG antibody in Alzheimer’s? Was there a specific efficacy or safety hurdle that was met? Second on Basaglar, when do you expect additional basal insulin bio-similars, and when should we expect interchangeability data for Basaglar? Is that something that you’re pursuing? Then third, a follow-up on your comments on rebate pass-through to the patients, which makes a lot of sense. We’re hearing similar comments from other pharma leaders. Since you seem to be involved in the policy discussions, what are your expectations of this actually happening, whether it’s in Part D or the commercial setting? Thank you very much.

Alex, thank you for the questions. Jan, if you’d like to comment on the specific milestone that was achieved for us to be now showing the N3pG in that Phase II column, Enrique on the additional competition, when that might come in from our understanding for Basaglar and for pursuing interchangeability and producing data for that, and then Dave on the likelihood of some of those rebate pass-throughs being enacted in either the government or commercial spaces. Jan? Dr. Jan Lundberg: Without being too specific on numbers here, I can say that the N3pG studies met our criteria for reducing the amyloid imaging signal in Alzheimer’s patients, and secondly we have a dose regimen that seems safe in spite of having some immunogenicity.

Thank you, Jan. Enrique?

Some of the additional entrants into the basal space are held up right now due to litigation. I think that is a question really for them and for Sanofi. As it relates to interchangeability, we think this will eventually happen. The right studies will need to be conducted, but I view this as years away. There’s nothing imminent.

Great, thank you. Dave?

On rebate pass-through, it’s good everyone is talking about it because it should happen. In fact, it already is happening in commercial plans. I know that because we’re executing in our plan, and I know other larger players are as well. It’s not happening in Part D - we’ve got the proposal on the table. CMS put out proposed regs for comment in the fall, and I think a number of senators and others have weighed in on that. There is a push and pull there between should we allow a modest increase in premiums in Part D to support the funding of rebate pass-through? We’re for that because, of course, not passing through the rebates subjects the very ill to the cost burden versus spreading that over a much larger base, and we think that’s what insurance is for and therefore we advocate for it. It’s difficult to speculate on the probability of that happening, but I can tell you there is strong unanimity amongst large manufacturers. It is a serious proposal being looked at on both the Hill and HHS, and to me it is one of the simplest levers to pull to actually change the cost at the pharmacy counter for drugs in America. I think the U.S. should do it, but that doesn’t mean it will happen, though. So we’ll have to stay close to that one and we’ll keep you updated.

Thank you, Dave. Operator, next caller, please.

Certainly. Our final question comes from the line of Steve Scale with Cowen. Please go ahead.

Thank you. Jeff, you mentioned a few times mix change in 2018. Can you be more specific, and do you see any risks or opportunities in food animal business related to either NAFTA or TPP? Secondly, baricitinib completed a Phase II SLE study in December. Can you provide any thoughts on what you saw? Thank you.

Steve, thank you for the questions. So Jeff, you can comment on the mix change for ’18 and opportunity that some of the trade agreements could have potentially on our food animal business, and then Christi for the baricitinib questions.

Thanks Steve. Just to note, I would say that we continue to be very intentional on starting back in our pipeline, is to really focus on these higher growth areas, and we’ve been very open, all of companion animals we see we can compete in the three major segments there, then vaccines, antibiotic alternatives, and nutritional health, these are the areas that we’re intentionally leaning in on from our pipeline all the way through. Then when I look at accelerating our mix, I guess I would note--I mean, what really drove primarily the decline in our food animal business in the U.S. this year was BST. We did see the clean food movement hit us at an accelerated rate, but we’ve got BST now representing less than 5% of our portfolio, so it gives you an idea of that change. That’s all I would speak to specifically, but we are looking at antibiotic alternatives, vaccines, nutritional health on the food side, and we see some nice growth going forward there. I don’t see anything on the trade side. Trade is critical - we all know that. We’ve built in our assumptions there is no trade agreements or changes that we see impacting any of our portfolio going forward.

Thank you, Jeff. Christi?

We’re very pleased with the Phase II data in lupus. We’ll be disclosing that data at a major medical meeting this year, and we’re evaluating options to actually start a Phase III by the end of 2018.

Great, thank you very much. That does exhaust the queue a few minutes early before the bottom of the hour here. Dave, if you’d like to go ahead and close the call?

Sure, thanks Phil, and thanks to all of you. We appreciate your participation in today’s earnings call and your interest in Eli Lilly and Company. In 2017, we generated strong revenue growth driven by our new human pharmaceutical products. We significantly improved margins, leading to even faster income growth. As we move into 2018, we expect to see continued growth of our new pharmaceutical products and significant additional margin expansion. We believe the Lilly stock remains a compelling investment given the strength of our product portfolio, our top and bottom line growth prospects over the balance of the decade. Today I’d also like to thank Chris Ogden - this will be his last earnings call in his current capacity, and really thank him for his considerable contributions over the last few years to the IR efforts. Please follow up with our IR team if you have any questions we didn’t address on today’s call. That concludes the call. Have a great day.

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