Eli Lilly and Company

Ladies and gentlemen, thank you for standing by. Welcome to the Lillie Q1 earnings conference call. At this time, all participants are in a listen-only mode. Later we will have an opportunity for questions and answers with instructions given at that time as well as now. If you have a question, please press 1 then 0 on your touch-tone phone. You'll hear an indication that you've been placed in queue and you may remove yourself from the queue by repeating the 1 then 0 command. We ask you to wait approximately 2 minutes before you begin pressing those buttons. Please pick up your handset and make sure your phone is unmuted before you press any buttons. As a reminder, your conference call today is being recorded. I'll now turn the conference call over to your host, Vice President of Investor Relations, Kevin Hearn. Go ahead, please.

Good morning. Thank you for joining us for Eli Lillie and Company's Q1 2020 earnings call. I'm Kevin Hearn, Vice President of Investor Relations. Joining me on today's call are Dave Ricks, Lillie's Chairman and CEO, Josh Smiley, Chief Financial Officer, Dr. Dan Skibronski, Chief Scientific Officer, Ann White, President of Lillie Oncology, Patrick Janssen, President of Lillie Biomedicines, and Mike Mason, President of Lillie Diabetes. We're also joined by Sarah Smith and Mike Sippar of the Investor Relations team. In addition, I would like to welcome Anat Hakim, who recently joined Lillie as Senior Vice President and General Counsel. Anat joins Lillie with a wealth of experience in the healthcare industry and more broadly across the legal profession. Her prior experiences include General Counsel at WellCare Health Plans, Associate General Counsel at Abbott, as well as working for a number of years at Foley & Lardner in Latham, Milwaukee. And finally, we have a few comments from our participants. 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 the extent and duration of the effects of the COVID-19 pandemic, as well as other factors listed on slide three and those outlined in our latest forms 10-K, 10-Q, and any 8-Ks 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. As we transition to our prepared remarks, a reminder that our commentary will focus on non-GAAP financial measures, which exclude the financial contribution from Alanco during 2019, and present earnings per share as though the full disposition via the exchange offer was complete on January 1, 2019. Now, I'll turn the call over to Dave for some opening comments.

Thanks, Kevin. Well, these are challenging times for all of us as the COVID-19 pandemic has affected the way we live, the way we conduct business, and most importantly, the health and wellness of millions of people. Like all of you, we're hopeful that the decisions to implement social distancing will be effective to curb the spread of COVID-19 as our industry works urgently to enhance testing and speed therapies to market to treat and then prevent the virus. Today's call will have a different structure than normal. Before we discuss our Q1 results, we'll describe the impact of COVID-19 and the pandemic in general is having on our business and the actions we've taken to respond to the resulting global crisis. Our Q1 results were driven by very strong fundamentals, with additional benefit from increased inventory across the supply chain, including at the patient level. This is as a result of the COVID-19 pandemic. Despite that near-term benefit, the COVID-19 pandemic is likely to have a negative impact on our business in the future. We expect headwinds later in 2020 and potentially beyond, such as destocking as supply chains normalize from the recent demand surge, decreases in new prescriptions as a result of fewer patients visiting physicians' offices, potential changes in segment mix in the U.S. due to rising unemployment, and pricing pressures resulting from the fifth most-discorded on government-funded healthcare systems around the world. While we do not yet know the extent and duration of these impacts, like everyone around the world, we're hopeful that the massive mobilization of scientific and technical resources occurring across this industry and in collaboration with government and academic labs will yield multiple effective therapies in the coming months and an effective vaccine in calendar 21. While it's difficult to predict the specifics of how the world manages through this pandemic, it seems clear our industry will play a leading role. In the midst of the outbreak and in its aftermath, it seems equally clear that investing in research and development to address and then conquer human disease has never been more important, and this is likely to remain true for some time. As we've navigated the crisis, we've acted with speed and agility, focusing on the needs of patients, our employees, and the communities we serve and operate in. I'll provide a summary of our response, then Dan will describe our ongoing efforts to develop for COVID-19 and Josh will walk through potential financial impacts of our outlook going forward. Slide four summarizes our strategic approach and actions to date. As you can see, we focused on five areas, maintaining a safe supply of and access to our medicines, reducing the strain on the medical system, developing a treatment for the virus, keeping our employees safe, and supporting our communities. To ensure that 40 million plus patients we serve have access to their medicines early in the outbreak, we took a number of steps to maintain the supply of medicines around the world. To limit their exposure to the virus, we reduced personnel at our manufacturing sites to the bare minimum, required to operate our facilities and enhance already robust precautionary measures for safety and cleanliness. The majority of our supply chain is multi-sourced, and for materials we supply from one source, we keep sufficient inventory on hand to avoid disruptions. Even with increased demand and customer stocking, we have sufficient inventory and production capacity for all our products. This includes all forms of insulin, and we don't currently anticipate any issues meeting patient needs through the remainder of the pandemic. Our manufacturing sites in the U.S., Europe, and China have remained operational through this crisis. We're proud of the extraordinary efforts of our manufacturing colleagues who have worked diligently to supply our medicines to patients around the world who depend on them. In addition to the numerous programs currently available through the Lilly Diabetes Solutions Center, we announced the introduction of the insulin value program. This allows patients with commercial insurance or without insurance to limit their monthly -of-pocket expenses for insulin to $35 per prescription. Of note, the Solutions Center has seen a significant increase in daily calls since this new benefit was announced. Patient affordability continues to be a top priority, and we remain committed to helping people access the medicines they need. We've also made a number of decisions which reduce the strain on the medical system. These include pausing new clinical starts and enrollment for most ongoing programs, suspending our in-person customer visits to physicians, repurposing our labs to conduct diagnostic testing here in Indiana for COVID-19, and creating a drive-through testing facility for healthcare workers and first responders in the Indianapolis area. We took these actions because they are the right thing to do during these challenging times and to do our part to combat the spread of COVID-19. Dan will give a more complete pipeline update later, but I would like to highlight that we do not expect significant changes to the timelines for our ongoing late-stage studies, except for the previously announced delays for the GI indications of our IL-23 antibody, Neurochizumab. In terms of addressing the significant unmet need of treating COVID-19, we've acted upon several opportunities which we hope will result in a treatment option. These include partnering with Abselera to develop potential antibody therapies which we expect will enter the clinic this summer. Participating in the National Institute of Allergy and Infectious Disease adaptive COVID-19 treatment trial with our JAK inhibitor, Baracidinib. Initiating a phase two clinical trial with an antibody targeting Angiopoidin 2 to explore its potential use in reducing the progression of acute respiratory distress syndrome related to COVID-19. The need for new medicines is urgent, and we've mobilized our development team at a record pace. Keeping our employees safe and healthy and our company running smoothly is of course also a top priority. We've implemented remote work practices, added health and wellness benefits, and provided additional compensation for those essential employees routinely coming to our sites such as those in manufacturing. We've also created opportunities for employees to volunteer during work hours to support our medical system, including helping staff or drive through testing facility. To date, Lilly has tested nearly 30,000 people for COVID-19, which represents over a third of all tests conducted in the state of Indiana. While absorbing all associated expenses, we are building on this capacity by developing serological antibody tests that will be critical in the next phase of the pandemic. In addition, we've been supporting our local communities by funding or contributing to public health awareness campaigns, as well as providing assistance and deploying available resources to fight the pandemic. I would also note our appreciation for the high level of responsiveness and cooperation from the FDA and other government agencies in the U.S. and abroad as we partner together to fight COVID-19 and to minimize the negative impact to drug development timelines for our other innovative medicines. Across the biopharmaceutical industry, we're working around the clock, collectively driving forward to address the acute medical need created by the COVID-19 pandemic. And to further elaborate on that, I'll turn the call over now to Dan to provide more details on the ongoing efforts to treat COVID-19 and a regular pipeline update.

Thanks, Dave. I'm proud to highlight the ongoing efforts we have to combat COVID-19. As Dave mentioned earlier, we're moving at an unprecedented pace as part of an industry-wide effort to develop a treatment for COVID-19. As a scientist and as a physician, I'm incredibly impressed and thankful for the ways our teams at Lilly are working to make an impact against this new disease. We've demonstrated how nimble a large organization can be when truly focused and united behind an important cause. Slide 5 provides an overview of the three active therapeutic programs we are pursuing. First is baricitinib. This is our JAK inhibitor in collaboration with Insight. We have recently announced it is part of the National Institute of Allergy and Infectious Disease Adaptive COVID-19 Treatment Trial. Based on the known anti-inflammatory activity of baricitinib, recent data on preclinical studies, and case reports from investigator-sponsored clinical trials, we believe baricitinib could have potential to dampen the cytokine storm that occurs when hospitalized COVID-19 patients are fighting to combat the inflammation in their lungs, which often leads to requiring a ventilator. While we're cautiously optimistic about the potential of baricitinib to help treat patients with COVID-19, it's important to also note the approved rheumatoid arthritis indication includes warnings about the risk for developing serious infection. The baricitinib arm of this study begins this month in the U.S. with planned expansion to Europe and Asia, and results are expected in the next two months. Next, we started a Phase II trial with a monoclonal antibody against angiopoietin II, or ANG2, in pneumonia patients hospitalized with COVID-19 who are at a higher risk of progressing to acute respiratory distress syndrome, or ARDS. The ANG2 level in plasma is strongly correlated with ARDS risk and severity based on multiple studies in humans. Our trial will test whether inhibiting the effects of ANG2 with a monoclonal antibody can reduce the progression to ARDS or the need for mechanical ventilation. This trial has already begun enrolling patients at centers across the United States. We expect results from this trial in the coming months. Our third and potentially most significant program is part of our previously announced collaboration with Abselera, where we are pursuing antibody therapies for the potential treatment and prevention of COVID-19. Our scientists have been working together with Abselera, NIH, and academic partners to characterize virus-neutralizing antibodies obtained from one of the first U.S. patients who recovered from the virus. The most advanced antibody in this program shows potent neutralization of live virus and has now entered GMP manufacturing. We plan to submit an IND to the FDA by the end of May to allow a start of clinical testing in patients. The pace at which we've advanced these potential treatments has been possible through the tireless efforts of our research and development colleagues in partnership with a number of private and government partners. The need for treatment options to battle COVID-19 is staggering, and we are leveraging our financial resources and our very significant scientific capabilities to rapidly pursue solutions. The challenges facing our society and our economy are great, and the pharmaceutical industry is rising to the challenge. I'll now provide a brief pipeline update. Slide 6 shows select pipeline opportunities as of April 20th. Movements since our last earnings call includes the approval of LUMGEV in the EU and Japan, the U.S. approval of TALTS for pediatric psoriasis, the previously mentioned COVID-19 trial initiations for baricitinib and ANGE2, one program advancing to phase 1, the attrition of an early phase project, and the removal of amphagoflossin for type 1 diabetes based on a complete response letter from the FDA. Moving to slide 7, we provide an update on our 2020 key events that have occurred during the quarter. In addition to the previously mentioned approvals, we also announced the first of two phase 3 trials that imirchizumab and psoriasis met its primary endpoint. The submission of tenezumab in Europe for moderate to severe osteoarthritis pain in collaboration with Pfizer. The DIAN-TU trial for solanezumab, which did not meet its primary endpoint. And galpinezumab received a negative opinion from the CHMP for cluster headache in Europe. Before I close the R&D update, I'd like to emphasize that in addition to our ongoing efforts to combat COVID-19, we remain committed to advancing important new medicines across our entire portfolio. Although we announced our pause to new trial starts and enrollment in most programs, we remain committed to discovering and developing new treatments for the patients we serve. With the exception of imirchizumab for GI indications, our late stage portfolio remains on track to deliver important clinical trial data in line with our previously communicated timelines. Of note, the Terzepatide Surpass program in type 2 diabetes is fully enrolled, and we expect to share the first phase 3 trial results later this year. These are challenging times around the world, but I'm encouraged by the unprecedented response of the scientific community and the pharmaceutical industry to rapidly develop potential new treatments and vaccines for COVID-19 and to sustain advancements across all diseases. Now I'll turn the call over to Josh to discuss the impact of COVID-19 on our Q1 financial performance and our outlook going forward.

Thank you, Dan, and good morning, everyone. As Dave shared earlier, we are confident that our business fundamentals are strong and that we're well positioned to navigate the obstacles ahead. However, there undoubtedly will be a near-term impact for our industry and our company, though the length and magnitude of the effects are uncertain. So I'll spend a few minutes discussing the financial impact of COVID-19 on our Q1 performance and providing a framework for how we are thinking about this potential impact going forward before then providing a more detailed review of our financial results. We began 2020 with positive momentum and observed robust prescription trends in January and February. As COVID-19 spread throughout the world and economic activity slowed significantly in many cities and regions, we observed the following changes in behaviors that affected our business. Patients refilled existing prescriptions earlier than normal or bought a larger supply to ensure that they didn't run out. Wholesalers and retailers increased the level of inventory on hand to ensure adequate supply. Reduced hospital visits resulted in a preference for medicines that do not require administration in a physician's office or at a hospital. Patients abandoned fewer prescriptions at the pharmacy counter. Mail order utilization increased, which typically has a larger number of units for prescription than those filled at retail pharmacies. And new therapy starts slow as patients largely avoided hospitals and clinics unless they were seeking treatment for COVID-19. We estimate the net impact of these trends resulted in increased patient and channel stocking, which increased worldwide sales by roughly $250 million in Q1, with approximately $200 million of that impact in the U.S. We think the majority of the U.S. impact occurred in our diabetes portfolio and notable products where we believe increased stocking impacted our Q1 U.S. results include insulin by approximately $70 to $80 million, trulicity by approximately $30 to $40 million, and TALS by approximately $20 to $25 million. While we expect much of this stocking to reverse in future quarters as the excess supply in the channel and in patients' medicine cabinets is consumed, the timing and ultimate levels are uncertain. We continue to closely monitor these factors and will utilize our quarterly earnings calls to provide updates to our alpha. Slide 8 lists a number of factors we are monitoring that may impact our financial performance. While reduced new therapy starts had a negligible impact during Q1, this impact could grow in future periods as fewer new starts translate into fewer total prescriptions. In the U.S. we are starting to see an impact as IQVIA reported new to brain prescriptions across the industry declined by 42% for the week ending April 10th versus -COVID-19 averages. For our portfolio we anticipate this impact to be more pronounced for our immunology and pain products and less so for oncology and diabetes. However, we expect this impact to be temporary as patients will return to seeing their doctors as social distancing restrictions are lifted. Over the midterm the significant increase in unemployment we are seeing could be a headwind. Increased unemployment may result in a shift of patients from commercial insurance to lower net price government insurance in the U.S. or to being uninsured. We're monitoring this dynamic closely and while it could create headwinds in the near term this effect should lessen when the global economy eventually strengthens. Given the significant benefits our products provide to 40 million patients around the world we remain confident in our long term outlook for revenue growth and margin expansion. In terms of managing capital our balance sheets and liquidity are strong and we have investment grade ratings from both Moody's and S&P. We're confident in our ability to generate substantial operating cash flow and have not seen an impact to our ability to access capital markets including commercial paper at reasonable rates. Financial strength is a valuable asset during this period and we intend to maintain our credit ratings while using our balance sheet capacity to invest in the business and pursue business development opportunities that enhance our future growth prospects. Our products provide more details on our 2020 outlook shortly but in summary we do expect the impact on our financial results through the remainder of the year and potentially into 2021 but the underlying strength and momentum in our business is strong. While combating the COVID-19 pandemic is a top priority we remain focused on executing our strategy of developing new medicines for patients. We exited 2019 with very strong momentum in revenue growth and margin expansion driven by the uptake of our newer products. On slide nine you will see that momentum continued in Q1 2020 as we delivered strong underlying business performance augmented by the estimated COVID-19 related buying patterns from patients and customers I just described. Revenue growth accelerated in Q1 increasing 15% versus Q1 2019 or 16% in constant currency. This strong performance was driven by volume which contributed 22 percentage points of growth. Net of the estimated COVID-19 impact revenue growth was 11% for the quarter in constant currency. Our newer medicines continue to be the driver of this growth representing more than half of our revenue in the quarter. We made good progress in Q1 on our productivity agenda as operating income grew 32% versus last year. Our non-GAAP operating margin improved by 390 basis points to .1% as revenue growth outpaced operating expenses. The estimated impact of COVID-19 buying patterns in the quarter also had a positive impact on our non-GAAP operating margin. But as we discussed during our 2020 financial guidance call we expect our 2020 operating margin to build throughout the year to achieve our 2020 target for the full year of 31%. We've announced multiple pipeline milestones since our Q4 2019 earnings call including approval of Lume, Jevin, Europe and Japan and new indications for both Trulicity and Talt in the U.S. During Q1 we returned approximately $1.2 billion to shareholders via share repurchases and the dividend. As previously announced we increased the dividend by 15% for 2020. At this point we do not expect to make additional share repurchases in the near term in order to maintain a cushion of liquidity and capacity for investment and continued dividend growth. Finally, we closed the acquisition of Demura, a company focused on developing new therapies for chronic skin conditions enhancing our phase 3 pipeline with the addition of Lebrachism app which is complementary to our dermatology business. Slide 10 includes a summary of key events since our last earnings call. Moving to slide 11, our non-GAAP financial performance in Q1 was robust even when adjusting for the COVID-19 impact described earlier. In addition to strong top line performance, growth margin as a percent of revenue was stable versus Q1 2019 at approximately 80% as favorable product mix and greater manufacturing efficiencies were partially offset by price and increased costs associated with COVID-19. Moving down the P&L, operating expenses grew slower than revenue at 7% versus last year's quarter. Marketing, selling and administrative expenses increased modestly by 2% as cost containment and productivity measures offset investments in key growth products. Travel restrictions and the suspension of in-person customer interactions late in a quarter did result in lower travel and meeting expenses. However, it was offset by a higher U.S. branded prescription drug manufacturing fee that we recognize in Q1. R&D expenses grew 13% reflecting higher development expenses for late stage assets that increased throughout 2019. Our pause on clinical trial starts had limited impact in Q1. Operating income increased 32% compared to Q1 2019 as sales growth outpaced expense growth resulting in operating income as a percent of revenue of .1% for the quarter. We begin 2020 with good momentum executing our strategy and are on track to achieve our 2020 full year operating margin target of 31%. Other income expense was income of $89 million this quarter compared to income of $86 million in Q1 2019. In both quarters, this was driven by investment gains on public equity. Mark to market gains in Q1 2020 were primarily generated by prior equity investments in companies that are now pursuing vaccines for COVID-19. As we regularly highlight, this line item can be volatile as public market valuations fluctuate. Our tax rate was 13.6%, an increase of 70 basis points compared with the same quarter last year, driven primarily by the mix of earnings in higher tax jurisdictions partially offset by an increase in net discrete tax benefits. So at the bottom line, earnings per share increased 32%. On slide 12, we quantify the effect of price, rate, and volume on revenue growth. As mentioned earlier, worldwide revenue grew 16% in constant currency during Q1, driven by strong volume growth of 22%, which we estimate at 17% net of the impact of COVID-19 buy-in patterns. This was partially offset by price for an exchange had a modest negative impact on revenue growth this quarter. Price declined 3% net of the price impact from the inclusion of Taibet and Olympia in government sponsored programs in China. U.S. revenue grew 15% compared to the first quarter of 2019. Volume growth of 19% was led by Trulicity, Umalog, Tulsa, Olympia, Verzenio, MGALITY, and Bezoguar. As I mentioned earlier, we saw stocking at the wholesale and patient level due to COVID-19 that contributed approximately $200 million of revenue this quarter. While the situation remains fluid, we do expect this impact to largely reverse over the course of 2020. Pricing was a 4% drag on U.S. revenue growth this quarter in line with our 2020 guidance. This was driven primarily by growth in lower price segments, primarily driven by our diabetes products, which was partially offset by changes to estimates for rebates and discounts for calls and reduced utilization of patient assistance programs for MGALITY due to increased commercial reimbursing. We have strong commercial and Medicare Part D access across the portfolio and that remains intact throughout Q1. Moving to EOR, revenue grew 21% in constant currency, driven by 24% volume growth, partially offset by the negative effect of foreign exchange and price. Volume growth was led by Trulicity, Olympia, Tulsa, and Verzenio, and also benefited from the divestiture of a legacy product in Spain. We estimate total international results were impacted by approximately $50 million of stocking due to the impact of COVID-19 in Q1, and a significant majority of this occurred in Europe. However, the underlying trends are very strong as our newer products have continued to scale. In Japan, revenue grew 8% in constant currency, driven by volume growth, somewhat offset by a modest pricing headwind due to government mandated price decreases that went into effect in 2019. Verzenio, Saramza, Trulicity, Allumia, and Olympia were the key contributors to growth, partially offset by increased competition for Porteo and the impact of generic Stracera. In China, revenue grew 30% in constant currency, driven by 93% volume growth, partially offset by pricing confessions associated with the inclusion of Tyvat and Olympia in government sponsored programs. We're very pleased with the significant volume increases we saw for these products and our ability to increase access for patients to these important cancer medicines. Outside of Tyvat and Olympia, our business in China saw a meaningful decline in new patient start during Q1 as the COVID-19 spread peaked during March. As the situation appears to be moving toward more stability, we are cautiously encouraged that new patient initiation and in-person customer interactions have begun to resume. Revenue in the rest of the world increased 14% in constant currency, driven by increased volume from our key growth drivers. Trulicity, Guardian, in collaboration with Beringer Ingelheim, Tulps, Cialis, and Saramza drove growth in Q1. As shown on slide 13, our key growth products continue to drive impressive worldwide volume growth. These new medicines delivered nearly 20 percentage points of growth this quarter, while also benefiting from the increased stocking that I described earlier. Slide 14 highlights the contributions of our key growth products. In total, these grants generated nearly $3 billion in revenue this quarter, making up 51% of total revenue. On slide 15, we provide an update on capital allocation. In Q1 2020, we invested $2.4 billion to drive our future growth through a combination of business development, capital expenditures, and after-tax investment in R&D. In addition, we returned approximately $1.2 billion to shareholders via dividends and share repurchases. We remain well capitalized and close Q1 with approximately $4 billion of cash and investments and the ability to access debt markets at attractive rates. Moving to slide 16, you'll find our updated 2020 financial guidance. This is based on our best estimates at this time as we are balancing transparency and insight into the current view of our business with the uncertainty surrounding the extent and duration of the impact of the COVID-19 pandemic. Key assumptions supporting our updated guidance include The Q1 stocking benefit largely reverses over the course of 2020. The near-term reduction in new patient prescriptions peaks in the second quarter in the U.S. and much of Europe. Healthcare activity returns to more normal levels in the second half of this year as doctors resume seeing new patients. Price headwinds from the increased utilization of patient affordability programs and changes in segment mix due to increased U.S. unemployment. Enrollment in existing studies as well as the initiation of new clinical trials resumes mid-year. Near-term spending on travel, in-person customer interactions and direct consumer advertising decreases. Investments in digital promotion and support increase. We do believe the reduction in new patient starts will be temporary but will impact our 2020 performance. The potential impact from increased unemployment will likely be more muted in the near-term but the impact could be more pronounced in 2021, depending on the shape of an economic recovery and the U.S. government programs to stimulate employment. While the extended duration of impact from COVID-19 drives the most uncertainty in our outlook, the positive underlying momentum in Q1 in our business, augmented by the estimated additional revenue benefits from COVID-19 related buying patterns, gives us confidence that the potential downside for the remainder of the year is accommodated within our previously communicated revenue range. While there are scenarios that could cause revenue to fall outside either end of our range, we believe the revenue range accommodates most of the uncertainty we see today. In addition to the impact of unemployment and the pace of economic recovery described earlier, the main variables we will monitor are the impact on new prescription trends during social distancing periods and the timing of resumption of -COVID-19 healthcare activities. While we currently anticipate the most pronounced impact on new prescriptions to occur in Q2, the headwinds are likely to show up in Q3 and Q4 as inventory levels normalize and the impact of fewer new prescriptions compounds. Moving down the income statement, we are confirming our prior expectations for gross margin as the percent of revenue to be roughly 81% on a non-GAAP basis and 79% on a GAAP basis. We do anticipate higher manufacturing costs associated with the extraordinary measures we are taking to keep our manufacturing workers safe and to keep medicines flowing to patients around the world. We expect this to be offset though by benefits from higher manufacturing volume. We are maintaining our range for marketing, selling and administrative expenses as savings from reduced travel and decreased promotion are anticipated to be offset by investments in digital capabilities and increased marketing expenses in the second half of the year for cheaper growth products. Our range for research and development expenses is also unchanged as savings from the policy and costs to clinical trial activities are offset by our investments to pursue therapeutic treatments for COVID-19 as Dan described earlier. Therefore, there is no change to our non-GAAP operating income as the percent of revenue guidance is 31%. We are updating the range of other income and expense to 0 to $150 million of expense reflecting Q1 gains in our equity portfolio. Obviously this number had some volatility going forward and we will update accordingly. Turning to taxes, there is no change to our GAAP and non-GAAP effective tax rate guidance of approximately 15%. Earnings per share is now expected to be in the range of $6.70 to $6.90 on a non-GAAP basis. Our GAAP EPS is expected to be in the range of $6.20 to $6.40. We are increasing the range to reflect the uncertainty of the impact to our business for the remainder of the year. Our performance in the first quarter, net of COVID-19 benefit, highlights the strength of our underlying business fundamentals and as Dave mentioned in his introduction, we remain confident in the long-term outlook for our business. So Dave, I'll turn it back to you for closing remarks. Thanks, Josh.

The COVID-19 global pandemic has impacted us all in unforeseen ways. Although near-term challenges exist, we do remain confident in our long-term outlook for the company and the strength of our fundamentals. Times of great crisis can bring out the best in people and in companies. And Lilly will continue to rise to that challenge. While a great deal of uncertainty remains, there are a few certainties to which I would draw your attention. First, the collective spirit, expertise and commitment of my Lilly colleagues around the world is inspiring. Despite challenging circumstances and disrupted work routines, they have rallied to fulfill our mission of discovering and supplying medicines that make life better for people around the world. They are exceptional. Second, speed and agility continue to be critical to the success of our business. We've moved swiftly, pivoting our focus to join the fight against the COVID-19 pandemic by leveraging our deep scientific capabilities and expertise on both the testing and therapeutic fronts. And lastly, I've never been more certain of the importance of a healthy and vibrant biopharmaceutical industry. While it will take time to exit the current situation, we will recover. And the pharmaceutical industry will be the primary catalyst, developing new treatments and a vaccine to combat COVID-19, allowing people across the world to return to living their lives more normally and enabling economic activity to grow. It's clear we are a vital part of any long-term solution for fighting this or any future pandemic. This concludes our prepared remarks and now I'll turn the call over to Kevin to moderate the Q&A session.

Thanks, Dave. We'd like to take questions from as many callers as possible, so we ask that you limit your questions to two per caller. Alan, please provide the instructions for the Q&A session and then we're ready for the first caller.

Absolutely, ladies and gentlemen. As a reminder, if you have questions, press 1 then 0 on your touchtone phone. You'll hear an indication you've been placed in queue and you may remove yourself from the queue by pressing the 1 then 0 command again. If you're on a speakerphone, please pick up your handset and make certain that your phone is unmuted before you press any buttons. Our first question will come from the line of Terence Flynn with Goldman Sachs. Go ahead.

Hi, thanks for taking the question. Maybe first, I was just wondering, Josh, if you could expand on how the environment changes your approach to capital allocation. I know you mentioned maybe less share repurchases in the near term, but on the BD M&A side, do you actually think there could be an increasing number of opportunities and does it change how you think about size? Then the second I had was just where you stand with regulatory interactions and launch prep for self-procatenib. Just wondering if COVID changes at all your -to-market strategy. Thank you.

Thanks, Terence. We'll go to Josh for the first one and then Ann for the question on self-procatenib. Hi, Terence. Thanks. On capital allocation, we really are sticking to our strategy and as we've outlined, we do see external innovation or business development as a key component of our long-term growth strategy. We're really focused on, continue to focus on our key opportunities in our therapeutic areas where we can bring in first or best in class type of assets into the pipeline. We're continuing, I think that work continues. I haven't seen anything slow down as a function of not being able to travel or work from home types of activities. Certainly there are smaller biotech companies that may have different views in terms of their cash runway or to the extent that that helps to engender more discussions, we'll take advantage of that. I don't think it changes anything in terms of how we think about size. Our business is strong, as I mentioned, and we don't see benefits in large scale types of acquisitions. So we'll continue to focus on the things that we are focused on. I think for as long as we're in these kind of social distancing restrictions, I don't see that as impacting our ability to transact. Thanks Josh. Ann?

Yes, Karen. Thanks for the question on sulfur catenib. So I'm pleased to share that there's been no delay in the regulatory timeline for sulfur catenib. And the FDA has been extremely collaborative and responsive in working through these challenges time. So we just thank them for the speed and the commitment they've had. They've continued to progress the application. And as you know, we submitted in December. It's currently under priority review, so we expect to have regulatory action by the PEDUFA date in Q3. Regarding your questions on launch, it is interesting times, obviously. And as a company, as Dave shared, we continue to prioritize combating the spread of coronavirus. And we recognize that this is also the case for health care professionals. And we're incredibly aware of the load that they're carrying at this time and need to express our appreciation for all of their efforts on behalf of their patients. So with that, we also, though, recognize that sulfur catenib has shown striking efficacy and really a very favorable safety profile in treating lung and thyroid cancers with ret fusions or ret mutations. And so we think it still is very important that patients and physicians are aware that there's a new medicine available and the first to specifically target ret alterations. So what we're doing with launch activities, they will look different, but we're committed to making sure that patients who are good candidates for sulfur catenib have access. So assuming that in-person interactions are still on hold when we launch, we're going to focus initially on making sure that we inform customers of the approval and the key efficacy and safety data via email and other digital channels that we have. We're also going to make sure that we're quick to engage in virtual product details when the customer requests those and give them more information. And then when appropriate, we're also going to make sure that we leverage virtual -to-peer programs to provide thought leaders the opportunity to share the data with their colleagues. And in addition, of course, we'll be sharing the data through a top-tier journal publication as well as in upcoming medical meetings. So we'll make sure that the goal here is to make sure that physicians and patients are aware and informed that we have now an incredible new medicine that's specifically targeted for RET. And it's just an incredible partnership with Loxo and Lillie teams. If you think about it, this medicine started phase one, first patient dose in May of 2017, and we're looking at approval here in 2020. So it's remarkable. And our thanks really goes to the FDA for the speed at which they're moving through the review.

Thanks, Ann, Terrence. Thanks for your questions. Next caller, please.

Our next question will come from the line. One moment, please. I'm having some equipment difficulty, and I seem to have lost my cue. So just give me one moment, please. Ladies and gentlemen, we seem to have lost the cue for the -and-answer session. We ask that you please repress 1 then 0 at this time if you were in cue. Just one moment, please. One moment, please, ladies and gentlemen. We are having some technical difficulties. We are restarting the -and-answer session. If you would repress 1 then 0 at this time. My apologies to everyone on the conference call. We will move next to the line of Chris Schott with JPMorgan. Go ahead, please.

Great. Thanks very much and appreciate all the call out on the call today. Just my two questions. First on disruption to near-term prescription. You mentioned diabetes is an area less impacted relative to areas like pain and immunology. But I do have a specific question on trolicity. I guess when I think about that product and the GLP-1 category in general, we've been seeing very healthy growth here. We've seen significant new patient starts. Is this a product and a market maybe more broadly that you anticipate could see a slowdown as we go through 2Q as the impact of some of the reduced physician visits start to build? And then my second question was on pair mix-over time. Can you just help us frame the magnitude of impact you could see to net price in the US from adverse pair mix as we look out over, you know, say the next year or so? I guess specifically, is this something that could cause price to meaningfully deviate from this low single-digit price erosion we're seeing? So could that become more like a -to-high single-digit erosion? Or are you thinking about a more modest impact than that? Thanks very much.

Thanks, Chris. Next we'll go to Mike Mason for the question on Trulicity, then Josh the question on pair mix.

Okay. On Trulicity, you know, it's difficult to predict long-term impact of the COVID-19 crisis given the uncertainty on the length and the impact on economy and patient visits. And also it's unclear how patients who live with diabetes who are at greater risk for complications from COVID-19, will that change the compliance they have with the medication and increase that? But what I can tell you is little over a month into the crisis that the GLP market and Trulicity TRX volume remains strong. It's currently at 30 percent, and so we haven't seen the impact at the TRX level yet. We have seen an impact on NTS and NBRX volume kind of post-COVID, both for Trulicity and the GLP market. Josh has shared that the overall pharma market has seen a decline of 42 percent in NBRX. What we're seeing in the GLP market is a 30 percent decline for NBRX. Now we haven't seen that manifest itself in the TRX volume yet. If you take a look at the NBRX and for Trulicity, it's only 5.6 percent of the TRX rate, which is a relatively low turnover for the marketplace. So we think that Trulicity relative to other products, other therapeutic areas, will have kind of a slower impact from the COVID situation. But again, it's hard to predict as we have uncertainty on the length, the impact of the economy and patient visits. What we can say is that we're very confident in Trulicity's strong fundamentals. We saw 32 percent volume growth in Q1 and 40 percent revenue growth in Q1. So we're very confident in the very strong fundamentals of Trulicity. So Chris, thanks for your question.

Thanks, Mike. Josh? Thanks, Chris. On your question on what could happen to net price going forward given what we're seeing in the U.S. with the economy. I think it's too early to make too many predictions. There's a lot to still see. And as you highlighted in your question, we've already assumed that we're going to see negative net prices in the U.S. between now and 2025. That's already in our current guidance. I would see whatever happens here is probably a moderate impact on that. I think we'll have to keep in mind first for Lilly's portfolio were spread across multiple payer segments. Certainly, in general, a move from a well-insured commercial patient to Medicaid is a net negative. But many of the commercial patients, my assumption, who are losing in the first wave, losing employment, they may not be in great commercial plans to begin with. There are exchanges and other things. So there's a lot to still see what happens here. Our view is we'll ensure that the patients who are losing insurance have access to our medications and programs. We, as Dave mentioned, announced the $35 change to our diabetes program. So we're looking at everything we can do to ensure that people can stay on our medications and have access to them and believe that some of these impacts will be temporary. And then we'll have a much better sense by the end of the year on what 2021 looks like. But I'd say overall, our expectation is this continues to trend and that price declines, but not a fundamental change to how we're thinking about the business. Thanks, Josh. Chris, thanks for your questions. Next caller,

please. We will move next to the line of Andrew Baum with Citi. Go ahead.

Thank you. Same topic. You have a high exposure relative to your peers in the commercial book. For your full-year guidance, could you help us on what kind of U.S. unemployment rates you're assuming as well as some magnitude of the volume loss and potential Medicaid expansion and anything you can say about the risk to 2021? And then separately on alluvian baricitinib for COVID-19, I'm just trying to understand which patient population you're targeting. The literature talks to both a potential antiviral effect as well as an anti-inflammatory effect, which would suggest potentially two different patient populations, the earlier-than respiratory distress. Where are you going here with a clinical trial? Many thanks.

Thanks, Andrew. We'll go to Josh for the first question and then Dan on the very 19 and COVID. Thank you, Andrew. I think as it relates to 2020, our sales guidance range on the – I described sort of the factors we're looking at. And I'd say if we're on the lower end of that sales range, we do include in our thinking there some incremental impact from pricing. Again, I think it's probably be pretty muted this year. And then I think we'll just have to look and see what next year looks like. And I think it's not just absolute levels of unemployment. It's what programs are in place to bridge the gap and otherwise. So this year, again, I think our range, given the strong position we're starting from in Q1, our range accommodates potential incremental pricing impacts for potentially short-term moves to uninsurance or Medicaid. But I think at this point, it's a little early to have real lot of specifics around this one. Thanks, Josh. Dan? Thanks,

Andrew, for the question on baricitinib and mechanism of action and potential on COVID-19. You're right in your comments about a potential for a dual mechanism of action for baricitinib. I think the first publication on the potential of role of baricitinib and COVID-19 came from a group called Benevolent AI where they modeled out that the effects both on viral entry and on inflammatory response could be beneficial in this disease. The trial that we discussed that is the adaptive COVID-19 trial with NIAID is in hospitalized patients. So it's rather later in the disease progression and the design of the trials primarily to look at the effects of baricitinib on that inflammatory cascade. It's notable that that trial currently is conceived of as a factorial design with remdesivir. Of course, in addition to look at the clinical outcomes of these patients of viral load and other factors will also be evaluated. I think if we see success there, that could give us competence to go earlier in the disease course. But given sort of the mixed mechanism of action here, right now we're looking at those hospitalized patients.

Thanks, Dan. Andrew, thanks for your questions. Next caller, please.

We'll come from Dave Reisinger with Morgan Stanley. Go ahead, please.

Yes. Thanks very much. So I have two questions. First, in the event that baricitinib and or the Ang2 succeed in June, what are the next steps would you be filing for approval at that time? And then with respect to the Ang2, could you just discuss the manufacturing capacity and the amount of volume you could produce later this year? And then second, with respect to clinical trials, when do you expect to restart enrollment in the majority of your trials?

Thank

you.

Thanks.

Dave, we'll go to Dan for both of those. Yeah, thanks, Dave. So starting out with the expectations for what if any of our molecules are successful in COVID-19, baricitinib is probably the most straightforward to answer. It's a small molecule that can be produced at large capacity, and it's already approved in geographies around the world for rheumatoid arthritis. So depending on the quality of the data and the benefit risk that we see in COVID-19 patients, you could expect that could potentially move very, very quickly if it's successful. Ang2 is sort of the opposite end of the spectrum. This is an investigational monoclonal antibody. Production is more constrained and lead times are longer, and this is a phase two type trial. I think, though, the one that we're most focused on, which you didn't directly ask about in your question, is the neutralizing antibodies against COVID-19. I think that's where we see the relatively high probability of technical success, given success with neutralizing antibodies against other viruses and also given what we've seen preclinically with our project. And that's also one where you can imagine a broad treatment paradigm. Antibodies like this are likely not only to work in sick patients, but could potentially have a prophylactic use, which then sort of demands large quantities. I think in all these programs, you just also note that these aren't chronic therapies. They're one-time use or a short period of time in the case of baricitinib. But still, I think for the antibody, we're working very diligently to expand our manufacturing capacity that would be ready to deploy both internally and with partnerships if the neutralizing antibodies are successful. We're making those investments in advance. I mentioned we started GMP manufacturing already at our facilities to support the clinical trials, and we're prepared to scale quite rapidly if we see a positive signal with the neutralizing antibody. Your second question was on clinical trial restart timelines. You know, I think it's important to think about the context for why we stopped enrolling new patients and starting new clinical trials. It wasn't so much a problem with our ability to maintain the clinical trials. In fact, I'm quite confident, even more confident today than I would have been a month ago, in our ability to meet all of our sponsor obligations, our ability to deliver drug to sites or even directly to patients where it's needed to measure outcomes either at the sites or by other means directly with patients. So I'm really confident in our ability to carry out the trials. It's a desire to relieve the sites and the hospitals of the burden of running clinical trials. So we're watching our clinical trial sites carefully. Many of them are already starting to ask the same question you are when they can restart. We'll make decisions along with them based on the burden of COVID-19 that they're having and how much time and attention they can devote to clinical trials. Thanks, Dan, Dave. Thanks for your questions. Next caller,

please. The Seamus Fernandez with Guggenheim. Go ahead,

please. A couple here. You know, there's a HMA is a consulting group that estimates the, you know, sort of Medicaid enrollment increases. So I guess I'm just hoping that you guys could put a little bit more granularity around your estimates for expectations for Medicaid enrollment. This group estimates that Medicaid enrollment could increase by 11 to 23 million. Uninsured could increase by 10 to 11 million. And I just maybe if you can just help us put a little context around the percent of volume of Lilly's volume that flows into Medicaid currently versus the percent of sales that flows into Medicaid currently. You can just, I think, help us understand a little bit of the context in that regard. And then the second question for Dan. Dan, I think we were expecting the Phase II Alzheimer's data in the second half of this year for the NGC antibody. Could you just update us on that and how that's progressing? Is that still expected in the second half of this year or should we anticipate that in sort of a 2021 timeframe? Just an update there would be great. Thanks so much.

Thanks, Seamus. We'll go to Josh for the first question and then Dan for your question on the. Don't mind if I have read out. Thanks, Seamus. In terms of across our entire portfolio in the U.S., about 10 percent of our volume is Medicaid right now. About 40 percent is commercial insurance, 20 percent Part B, and then the rest is Part B or hospital-based or uninsured or other types of volumes. You know, as we talked about before, I think the biggest sort of challenge would be a really well-insured commercial patient moving to Medicaid. There are a lot of steps in between those things happening. As I mentioned in a prior question, we are anticipating in our sales guidance for 2020 that we could see some net impact as a function of that. But again, I would say it's and we've looked at all those estimates in terms of what the long-term look could be. And we'll provide more updates on that for 2021 when we have a better sense. But again, I'd say that our sales guidance right now does accommodate the fact that we may see some year term moves to increase Medicaid or increase uninsured. Thanks,

Josh. Thanks, Seamus, for the question on our Alzheimer's Phase II portfolio. You asked specifically about Denenomab, our anti-N3PG A-beta antibody. This is a really robust plaque clearing antibody. We know it can clear plaques to quite a great extent and quite quickly as well. It's an 18-month Phase II study designed to demonstrate efficacy in a relatively large and homogenous population of Alzheimer's patients. This study is fully enrolled. It's proceeding along the previously communicated timelines, which means that the last patient visit will be in the end of this year, as you said. And most likely then we'll have data to talk about shortly after that, although probably in January rather than in December. But no changes to our timelines on that trial. Similarly, the Tau antibody as well as our Symptomatic D1PAN, those are all Phase II studies designed for efficacy. Similarly, fully enrolled and moving along the previously communicated timelines. So no change in the Alzheimer's portfolio.

Thanks, Dan. Seamus, thanks for your questions. Next caller, please.

That will be Steve Scala from Collins.

Go ahead. Good morning. Thank you. It was mentioned that most clinical programs are paused for new starts. A couple questions related to this. First, I realize that every trial is different. But generally speaking, how long will pause have to last to impact the long-term outlook for Lilly's sales visions, say through 2025? And then second, according to clinicaltrials.gov, only five of 155 Lilly trials that are actively recruiting have had recruitment status changed in the last five weeks. Just wondering about this relative to what you said and what the release said. I believe companies are obligated to reflect any changes within 30 days. So I'm just curious why really no changes have been reflected. Thank you.

Okay. We'll go to Dan for both of those questions. Thanks, Steve, for those questions. So the first question was just about like how long does the delay in new enrollment have to be before it starts to impact our long-term financials? Look, I think you know very well that clinical trial timelines and enrollment timelines are often estimates. We give those, rounded usually to the half a year or sometimes just calendar year. So for now, you can think of these as a worst-case scenario being a -to-day delay. So for every day that we're paused enrollment, it's a day delay to when we get the data. Now, our ambition is to beat that. And there's a couple of reasons why we think we can do that. There's sort of a latent demand to be in these clinical trials that's accumulating. So when we flip the switch again to allow enrollment, we think we'll see volos of patients and be able to make up some lost time on enrollment. That's one of the reasons. Another reason why we can even make up some time and be better than day by day is the fact that we can stagger our enrollment in different geographies. Not everywhere in the world is similarly affected by COVID-19. So while our comments on pausing enrollment might apply to the majority of our geographies, there could also be certain countries where we continue to enroll or even shift enrollment more to those countries. As for the clinicaltrials.gov, updating you're right that there's a time lag in that update. There's also a time lag really in stopping enrollment because you can imagine that although we say no new enrollment, there are patients who could be part of the way through screening. And on a -by-case trial by trial, geography by geography basis, we often allow those patients who are ready on their going study procedures to continue those procedures and enroll in the trial. So it takes a little bit of time for all this to trickle through the system. But I am, as I said earlier, looking forward to the day when we can turn these back on when the hospitals and clinical trials sites have gotten beyond the burden of treating COVID-19 patients.

Thanks, Dan. Thanks, Steve, for your question. Next caller, please.

That will be Naveen Jacob with UBS. Go ahead.

Great. Thank you so much for taking my question. Just to see if I may, sorry to beat a dead horse here, but I want to understand relative to the negative 5% price pressure that you had guided to in the U.S., how we should be thinking about that now and related to that. Is, I know you've spoken about, spoken to insulin being very profitable in Medicaid channel. Is that true for trolicity as well? I'm assuming it's not as onerous as it is for insulin, if that's which were to happen, but just any kind of color would be helpful with regards to trolicity. And then just a quick question, if I may, on TALTS. Looks quite strong. You also mentioned changes in rebates and discounts. Any kind of color around pricing for TALTS as well would be helpful.

Thanks, Naveen. We'll go to Josh for both of these price-related questions on trolicity and TALTS. Thanks, Naveen. First, you know, our outlook at the beginning of the year for U.S. price was net declines in the low single digits. And as I mentioned, in the range that we're looking at now, I think we're still in the low single digits, but you know, that could add in the more pessimistic case, maybe that adds a point or something. But it's still in the same range. To your question specifically about products, what we've said is insulins are not profitable in Medicaid. We pay, in effect, 100% rebates for patients who are on our mealtime insulins in Medicaid. So that's the place where you see a real challenge, I think, to the extent that patients are moving from commercial insurance to Medicaid. Trolicity, it's less of an issue. It's still, you know, net positive, but Medicaid just in general is a lower price segment than commercial plans. But it wouldn't be as big of a move as it would be for our commercially insured mealtime insulin patients. On trolicity, I think we've highlighted through the last few years that trolicity access is not as strong as it is for the rest of our portfolio. And what we do in many cases is trolicity patients have to step through various PAs or restrictions in their plans. We make estimates on our utilization, on how things are going to transpire there. What we found in Q1 is we were actually getting more net price for a segment of our patients than we had estimated. So we've got a little bit of a benefit there. I think for the year, we're still sort of assuming the same, that we maintain the kind of access that we have now at relatively constant prices. And you'll see these ups and downs, and it's a little bit challenging and tall for the reason that I mentioned. And you'll see sort of the quarterly ups and downs. But the underlying trend that we see is pretty stable pricing, pretty stable access. Thanks, Josh. Naveen, thanks for your questions.

Next caller, please.

That will be Jeff Meacham with Bank of America. Your line is open. One moment, please. Mr. Meacham, we seem to have lost your line here. Would you please repress one then zero?

We can just go to the next caller and catch Jeff up in a minute if he's not in.

All right. Thank you. Next question will be from Omar Rafat with Evercor. One moment,

please. Hi. Thanks so much for taking my question. I thank you so much for taking my question. I hope everyone's staying safe. There's been some concern about dip safety after a European paper, and I just thought it would be helpful if you could speak to the blinded CV event rate you're seeing across your Phase III program and whether it's in line with what you would have expected. And secondly, I know, Josh, you've gotten only 25 questions on it, so let me just ask the 26th one. You mentioned pretty stable pricing in the diabetes business. Can you speak to whether patients in high deductible private plans still produce the same net price for Lilly as those in Medicaid? Thank you.

Thanks. Well, thanks, Emor. We'll go to Dan around GIP safety and then Josh for pricing.

Yeah. Thanks, Emor, for the question. Surely you're referring to sort of a small epidemiological study that looked at a risk of GIP polymorphisms. I don't think that's directly applicable to what we're seeing with TURG's hepatide. Here we're studying this in a population that has diabetes, and we know from our Phase II trials that the physiological effects of TURG's hepatide, which obviously is combined GIP and GLP, are quite beneficial, and they look like they would have a strong effect on improving cardiovascular outcomes. So we're super confident about that. In terms of the blinded event rates in ongoing studies, that's not something that we disclose or talk about. But certainly, though, the rate of those events is the rate limiting factor in our submission. So that's the long tail in our submission, is waiting to get enough events to discharge any cardiovascular safety risk so we can submit TURG's hepatide.

Thanks, Dan. Josh? Hi, Umar. Thanks for the question, and I think you're building on one of the comments I made, which was I don't think you can just look at sort of a move from commercial to Medicaid. It's very much driven by, you know, plan dynamics and otherwise. And I think without getting into too much detail, yeah, it is fair to say that patients in the high deductible plans, when they're in that deductible phase, you know that we and other pharmaceutical companies have co-pay cards and other things to try to alleviate the, you know, sort of the cash burden at the retail pharmacy. So we do, you know, the net price for those specific prescriptions to us is very low and probably in many cases could be lower than a Medicaid prescription. But again, I think that gets back to what I was saying earlier. I think it's way too premature to make assumptions around what a move from commercial to Medicaid may look like. There are lots of complexities here, and I think lots of things still to be learned about the economy and what 2021 will look like. But it's not, we're not as, I think on a math basis, as concerned as probably it looks like when you just look at just general commercial to Medicaid, or one of the reasons that you are sort of implying in your question. Thanks, Josh. Umar, thanks for your questions. Next caller, please.

We return to the line of Jeff Meacham with Bank of America. Go ahead.

Hey, guys. Thanks so much for the question. Josh, a number of P&L questions for you. You quantified the pull forward COVID impact for a few products. Just wanted to ask you, are those things happening today in the U.S. and do you expect the OUS dynamic to eventually mirror the U.S. and then on your guidance, would you expect normalization of the market to be more of a three-Q or four-Q type of event? And then real quick, Dave, you highlighted at the end, but how would you characterize your discussion with policymakers today versus the beginning of the year, just with respect to headwinds on drug pricing and clearly industry response to COVID having somewhat of a halo effect? Thanks, guys.

Thanks, Jeff. Okay, Josh. Thanks, Jeff. So just on the $250 million we estimated in Q1, as you mentioned, about $200 million of that is in the U.S. And we talked about the three big product categories. I think the rest, the product I didn't mention, it sort of spread nominally among those others. As we look at that $200 million in the U.S., only less than a third of that is at the wholesaler level. So we saw some modest build at the wholesaler. Most of that estimate we're making is that that is either in the retail channel or all the way down to patients, you know, in patients' homes. So I think it's going to be pretty difficult. I mean, we're assuming that that will turn around, but I think being able to sort of make a prediction at this point is tough. I would assume the wholesaler piece will start to normalize more quickly, and I think we're seeing that. The retail and patient piece, I think, will be, some of it will be a function of what happens in social distancing. Otherwise, and some of it, you know, who knows, it may be a little bit more, you know, have a long tail associated with that. What we saw in Europe was about $50 million, and I think most of the estimate is around our diabetes portfolio. And I think that one, we probably assume, is a little more likely to normalize in the second half of this year. So I think, Jeff, we'll try to be transparent about this as we move through the quarters, but I think there is going to be some variability in that US piece that's in the retail channel or all the way to patient homes. Thanks,

Josh. Steve? Yes. On the policy side, I mean, I think you have it right there. Maybe just a little subtext. You know, there's sort of two pressures that prior to COVID, I think we were feeling. One was broad acceptance across both sides of the aisle that there were certain behaviors and actions which are undesirable by the industry and should be curbed. Many of these actually Lilly agrees with. So this is about patent evergreening and strategies that involve, you know, using systems designed to create incentives in a way that perhaps is best case in poor taste and maybe worst case abusive. There's a bunch of Senate related actions to curb these, and I think we're generally for them because we don't do those things. And I think they do create a suppression of the respect for and trust in the industry. I actually think those items will continue amidst the COVID crisis, maybe even be amplified, because as solutions come from the industry, which they will, it's clear that the producers of those solutions will be under a lot of scrutiny to make sure there's broad access and affordability and that we're acting reasonably. But I have to say, I'm speaking to my peers across the industry on many collaborative projects and, you know, within our own company, nobody's really focused on the pure commercial side of this. It's really about solving the problem. And the spirit of collaboration and response has been tremendous. But I think that pressure will be there. And some, there could be actions coming quickly that could strike in those areas, again, from a Lilly perspective, were less, you know, constructive on those. In fact, we've been for many of those proposals. On the other hand, there's, I think, from the more the far left in the U.S. and in certain OUS circles, this idea that perhaps the industry itself is flawed and profit motive in pharmaceuticals is a bad thing. Of course, we vehemently disagree with that point of view. And I do think those voices are significantly quieted today, as everyone realizes that the built up capacities of this industry are the very thing that will allow the world to escape COVID-19. And while in the absence of a pandemic, those may seem like a premium, in the presence of a pandemic, those seem really scarce and important. And so I'm more bullish on that more extreme view being significantly dissipated for some time to come. We need to behave ourselves appropriately and with good taste, if I can use that word, and with kind of balance to our actions as we solve the problem. But I'm encouraged by that so far. So I think we've got a unique, you know, as I said in my comments, Jeff, kind of a once in a generation opportunity to reset the reputation of the industry. And to put in place policies that make sense and balance profit motive, which we think clearly has a place to create new medicines, not just for COVID, but others with curving abusive behaviors and making sure we're earning the respect from patients and policymakers alike. So anyway, we'll work on that, certainly over the next couple of years. But first, we need to work on solving the pandemic problem. And that's got all my energy right now.

Thanks, Dave. Jeff, thanks for your questions. Next caller, please.

That will be Louise Chen with Cantor. Go ahead.

Hi, thanks for taking my questions here. So my first question is, if there's any way you could give us a sense of the underlying earnings growth if you extract the impact from COVID and any non-operational items, even if it's just qualitatively? And then second question is, are you expecting any economic benefit for your COVID candidates in development if they do work? Thank you.

Jeff? Hi, Louise. Thanks. I think if you just, you know, at a very high level, if you just take out the revenue for Q1 that we're attributing to the $250 million that we're attributing to buying patterns and sort of hold everything else the same, you know, we get down to earnings, EPS growth on a more normalized basis of about 18% or so. You know, I think that's probably a reasonable look at the business as with every quarter. There are other things that we could normalize, you know, out of there. But I think that's probably a good sort of starting point. And, you know, as we've mentioned with that, we're expecting that $250 to normalize, you know, sometime through the year, at least in our guidance for now. But that's where we are. I think then on the question around economic benefits, no, there's no benefit assumed in our guidance from any of these treatments. We're much more interested in getting these treatments to patients at this point. And frankly, I'd say at this point, we're probably just assuming some cost, for sure, associated with investment in the trials that Dan mentioned in the scale up in manufacturing and otherwise. So that, you know, some of that thinking is already embedded in our line on the guidance now. Thanks, Josh. Luis, thanks for your questions. Next caller, please.

That will be Vanel Devan with Mizuho Securities. Go ahead.

Great. Thanks for taking my questions. Thanks for all the color on the call. I just had a couple of questions on the pipeline. So one, near QDMA, you mentioned the positive initial top line data and thrives. I guess I've been wondering about your differentiation for that product relative to the other IL-23s. Maybe there's anything more you can share now that you have some of the top line data and just any update on timing, especially on the GI trials, or I think you've talked about that being a kind of more unique opportunity potentially. And then going back to Alzheimer's, I appreciate your comments from before. Just regarding Diane, to you and kind of Obisav and Solon and also from Gansu and AriMab, you mentioned the plaque reduction that you've seen that's done in the Mab. Does the IMQ results in any way change your thoughts around sort of plaque reduction and the biomarker impact and the impact it might have on the clinical outcomes at the end of the day, just because we do not see that correlation in that trial? I know it was a small trial, but any perspective would be helpful. Thanks.

Thanks, Vamal. We'll go to Patrick for the mere QDMAB question and then Dan for the Alzheimer question.

Thank you very much. We announced that Mere QDMAB met all the core primary and key secondary endpoints in the first OASIS-1 trial, which is the placebo-controlled 62-week trial in psoriasis. And that is what we expected as well. We are setting the bar extremely high in psoriasis. We've talked, we've been able now to demonstrate in five -to-head trials, superiority. And the three of those in psoriasis go in terms of time to onset, the level of clearance and the sustainability of the clearance. So we are waiting now for the second phase three trial, which is the -to-head trial versus sekochinomab, a 62-week data. And I think that will particularly inform our decision on how we progress with the psoriasis indication. For Mere, I think we have also stated very clearly that the big excitement is around the ultratip colitis and Crohn's disease. And we really believe that in ultratip colitis there is a big unmet need and we have potentially -in-class and -in-class assets in Mere QDMAB. And we also know that the biologic penetration is relatively low. And we have previously shared that we expect the top-line readouts for the induction data in Q4 this year and the maintenance top-line in 2021. For Crohn's disease, we have announced earlier that we will do a top-line announcement in 2022. At this time with COVID-19, we are certain that there will be a delay in one or both of those programs. However, we believe it's also premature to quantify the impact. And as the situation evolves, we will have a better understanding of the impact as well as our ability to mitigate those. And the delay here that's important to state is driven by difficulties to access the study sites, but particularly infusion centers and the ability for some of those centers to conduct and perform endoscopies. So overall, the high level of excitement still for both ulcerative colitis and Crohn's disease and the -to-head data about the sacroiliac genome will guide our decision moving forward on psoriasis.

Thanks, Dr. Gant. Yeah, as for Alzheimer's, Diane, to you, I mean, of course, this was a really heroic and difficult effort to study the effects of drugs in the And so tough to make conclusions about any clinical effects of SOLA there. As you point out, SOLA is not a plaque-lowering antibody. It works on soluble A data. So can't draw conclusions about plaque-lowering from SOLA and SMAP data. I think, though, the most important things to look at in, Diane, are the biomarker outcomes. And perhaps if you think about the biomarker outcomes, you could add a little bit of confidence around plaque-lowering. But once again, it's a small study and hard to draw those conclusions. I look forward to the results from our phase two trial, which I think should be a clean trial, a clean test of the hypothesis in a relatively homogenous population. That data is not very far off right now.

Thanks, Dan. Well, thanks for your questions. And we're going to the next caller, please.

That will be from Tim Anderson with Wolf Research. Your line is open.

Thank you. A couple of questions, please. On trisepatide, you mentioned results in 2020. And everyone knows that, I think. Is that just likely to be top line or are we likely to see a more complete set of results in some form or another, whether it's publication or presentation? And then second question is on TIBIT, your P1 in China. I feel like over time I've gotten mixed messages from the company on the importance of this product. Maybe a year ago, I was talking to one of the members of senior management and it was kind of described as a China-only product of smaller importance. But I don't know if that's still the current point of view. I asked about it last quarter. I didn't get much of an answer. So the question is really twofold on TIBIT. The development program from here in China in terms of next tumor types and perhaps more importantly your plans to take this outside of China into developed markets, U.S., Europe, or anywhere else that's traditionally considered developed.

Thanks, Tim. We're going to Mike for the trisepatide question and then Dave will take the question on TIBIT.

Yeah, thanks for the question. Just directly, we do believe we'll have our first top line readouts of the SOFAS program for the first trial in Q4 2020 and then additional readouts top line as well as at medical meetings going into 21. Thanks for the question.

Tim, as relates to TIBIT, I don't think your read of the prior commentary is wrong. I think we originally collaborated with InnoVent as a China only play for biologics and cancer and a few other similar opportunities. But two things have changed, which I think and today we're breaking out China for the first time. So maybe that's the third thing that's changed. But what one is that TIBIT was the only PD-1 put on the PDL nationally in China. So that does change the economic profile of it for us and certainly for the Chinese business. And the second is the positive data that was released in the combination with metrexidin in first line non-small cell lung cancer, which is very encouraging and I think does change the trajectory of that certainly in China. Of course, right now we're very focused on the Chinese opportunity and that remains our focus in the short term. And as Josh mentioned in his remarks, there was a great volume growth in China for oncology portfolio and TIBIT is a key part of that. So anyway, great partnership with InnoVent. They do a great job and it's been a successful way to think about building our business, which was a little bit underrepresented in China a decade ago through local partnerships with local innovators. And we're really pleased with how that's progressed.

Dave, Tim, thanks for your questions. Next caller, please.

That will be Carter Gold with Barclays. Go ahead.

Good morning. Thanks for taking the question. I just wanted to, I guess, dig into the comment over the inevitable fiscal pressure on government-funded healthcare, specifically thinking about Europe and the pressure on budgets there. I guess, are you guys viewing it as a possibility, probability or likelihood there's incremental pricing pressure in Europe, I guess, looking out later this year into next? I'm not sure if you have any thoughts there. And then following up on the TIBIT data, TIBIT discussion, when could we expect the Orient 11 data to be presented? Is that something that could still come in first half this year or will we have to wait until the back half of the year? Thank you.

Thanks, Carter. We'll go to Dave for the question for Europe and then Ann for the question about the TIBIT Orient 11 data. Yeah,

as relates to Europe, and I would say this extrapolates to other, you know, government-run health systems like Australia, Canada, Japan as well. We saw a policy response in nearly every jurisdiction following the 08-09 fiscal crisis. Well, this isn't a fiscal crisis. There will be a fiscal crisis brought on by the pandemic in many of these economies. It will lower tax receipts and then the governments will need to look for methods to reduce their spending. I think we can predict that with almost absolute certainty. One of the items on their list is often drugs because it's an input that can be negotiated or in many cases they don't need to negotiate. They just change their rules. And we saw that certainly happen and create a three or four year series of policy moves depending on the relative strength of the economy that suppress drug pricing in places like the United States. In places like Europe and Australia, Canada. So we're projecting that in the future. As Josh mentioned, we don't see a lot of that happening in 20. Probably tax receipts falling in 21 lead to legislative actions in 21 and 22, which leads to suppressed pricing beyond that. That's, to me, a certainty across the industry. And then the real question is how relatively innovative is your portfolio? Because a lot of these policies tend to be using leverage governments can have when there's relative substitutability. So the more innovative your portfolio, the more immune you become to these things. Obviously, we're working hard on that side of the equation and hopefully we'll be on the positive end of the industry. But I suspect as an industry as a whole, there'll be these international pressures will present themselves across everyone's portfolios to some degree or another.

Thanks, Dave. Anne? Yes, thanks for the question on Tyvitz. So with the Phase 3 orient study, as you know, it was an interim analysis that was positive and we're very excited about initiating that submission with InnoVent to the regulatory authorities in China. And we will be submitting that data for a medical meeting in the second half of this year. So you'll see it in the second half of 2020.

Great. Thanks, Anne. Carter, thanks for your questions. That's exhaustive of you. So we'll go to Dave to close.

All right. Thank you all. We appreciate your participation in the call and your interest in the company. Obviously, different times today. And just on a personal note, I know many of the Southside community are based on the East Coast and we hope you're all well and your families are functioning and certainly healthy through this crisis. As usual, any follow-up calls or questions can be directed to our really incredible investor relations team. And again, hope you all stay well and we'll be in touch soon. Take care.

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