Eli Lilly and Company

Ladies and gentlemen, thank you for standing by and welcome to the Lilly Q2 2020 earnings call. Now at this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you wish to place yourself in queue for questions, please press 1 then 0. To remove yourself from queue, please repeat the 1 then 0 command. As a reminder, today's call is being recorded. I will now turn the call over to your host, VP Investor Relations, Kevin Hearn. Please go ahead, sir.

Thank you. Good morning and thank you for joining us for Eli Lilly and Company's Q2 2020 earnings call. I'm Kevin Hearn, Vice President of Investor Relations. Joining me on today's call are Dave Ricks, Lilly's Chairman and CEO, Josh Smiley, Chief Financial Officer, Dr. Dan Skowronski, Chief Scientific Officer, Anne White, President of Lilly Oncology, Patrick Janssen, President of Lilly Biomedicines, and Mike Mason, President of Lilly Diabetes. We're also joined by Sarah Smith and Mike Sipar of the Investor Relations team. 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-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 1st, 2019. Now I'll turn the call over to Dave for some opening comments.

Thanks, Kevin. A lot has changed in the world since our last earnings call. Science has continued to advance our understanding of COVID-19, and efforts across the industry to develop treatments and vaccines are progressing rapidly. While some regions and countries have begun to reopen, COVID-19 cases and deaths are climbing in other places. Despite these challenges, Lilly continues to demonstrate resilience and resourcefulness to progress our mission of making medicines for the millions of patients we serve. I've never been more proud of the company and my 35,000 teammates. This past quarter was unlike any other during my tenure as CEO, concurrently combating social, economic, and public health crises. Economic uncertainty remains as high unemployment persists in many countries. As expected, our business experienced headwinds this quarter, with patients unable to see doctors or access health care during periods when the economies were shut down to prevent the spread of COVID-19, and by the unwindings of forward buying into Q1 that occurred. Overall, our -to-date results are strong and indicative of the underlying trends. I'm proud of Lilly's efforts to ensure patients have access to their medicines, to find creative ways to ensure we advance critical research, and to advance our ongoing efforts to develop treatments for COVID-19. We continue to staff our manufacturing facilities around the globe with essential personnel to ensure there are no disruptions in the supply of medicine. And in recent weeks, we resumed activity in the majority of our clinical trials where enrollment had been paused. We're resuming in-person promotional activities when it's safe, on a -by-country and on a -by-state basis in the U.S. And we will continue to use these virtual engagement tools we've built to augment in-person promotional activities. Throughout Q2, we saw a steady increase in customer contacts and medical education touchpoints as we leveraged new platforms to reach physicians. We continue to see increased interest and volume of virtual interactions from physicians and expect a hybrid model of in-person and remote engagement for some time in the U.S. as well as internationally. We also made good progress this quarter executing our R&D strategy, launching two new medicines in the U.S. including Ritevmo, the first therapy ever approved for patients with RET-driven lung and thyroid cancers, and Lumgev, a fast-acting mealtime insulin for patients with type 1 and type 2 diabetes. Taltz and non-radiographic Axpa, Saramsa in combination with Erlotinib for EGFR mutated non-small cell lung cancer, and Talvid, our new diagnostic for patients with Alzheimer's disease, were also approved in the U.S. Several positive phase III readouts this quarter include Verzenio in adjuvant breast cancer. Now the first and the only CDK46 inhibitor to succeed in this population. Myrichizumab and psoriasis compared to both placebo and -to-head versus co-sensics, and just today in collaboration with Berning-Ingelheim, Jardiens and heart failure patients with reduced injection fraction, both with and without diabetes. We also continue to make progress on our potential COVID-19 therapies, notably the initiation of multiple clinical trials developing neutralizing antibodies, both as monotherapy and in combination. Dan will provide you with more detail during the R&D update. The unprecedented pace at which we're executing this project across our development and manufacturing organizations is evidence of what we are capable as an innovative company. As I mentioned earlier, our Q2 business results were negatively impacted by COVID-19. However, we remain confident in the underlying fundamentals of our business. COVID-19 had a meaningful impact on economic activity, and we observed the following trends in the U.S. A sharp decline in the number of patient visits to physicians, dropping to roughly 50 percent of -COVID-19 levels. Reduced visits translated into fewer new prescriptions with the peak impact in late April and early May in most therapeutic classes. A slow return to healthcare activity through a combination of telehealth and in-person visits, as IQVIA data showed, patient visits were back to 85 percent of -COVID-19 levels in June. And new prescriptions slowly beginning to recover, although some variation across therapeutic areas. While the outlook for economic activity is uncertain, we remain optimistic that patients, physicians, and hospital systems will continue to find ways to ensure patients can access the medicines they need. Turning to our Q2 results, as expected, reduced patient visits and inventory dynamics were both a drag on otherwise solid total prescription trends. Revenue declined 2 percent compared to Q2 2019, and we estimated revenue was negatively impacted by the reversal of largely all of the $250 million dollars of stocking related to COVID-19 that we experienced in Q1. While most existing prescriptions were maintained, new patient prescriptions declined in Q2 relative to -COVID-19 baselines. We estimate this impact to have been about $250 million dollars across the portfolio. Taking into account current trends, we are on track to deliver the financial goals we established for 2020. The strength of our new products, our ability to scale them worldwide, and our productivity agenda position us well to continue to deliver robust business performance and to create shareholder value. Moving to slide 5, you'll see the full list of key events since our last earnings call. Before Josh discusses our financial results, just a few comments about the executive orders that were announced last Friday. We all share the goal of making medicines more affordable and accessible to patients, and believe concepts such as rebate reform and the sharing of savings within the eligible 340B patient population offer real opportunities to lower the -of-pocket cost for patients quickly. However, as I've noted before, the concept of international price indexing is a bad policy. This policy will have almost no benefit to patient -of-pocket costs, but together with reimportation will most assuredly have serious negative consequences for patients. For the safety of our supply chain and for the future of innovation. So now is the wrong time to introduce sweeping government actions that will at best distract and at worst cripple the same industry that's racing to discover vaccines and treatments to defeat COVID-19. Now I'll turn the call over to Josh to review our Q2 results in more detail and provide an update on our financial guidance for 2020.

Thanks, Dave. Good morning, everyone. Moving to slides six and seven, our non-GAAP financial performance in Q2 and during the first half of 2020 was impacted by COVID-19 across many lines of the income state. As Dave mentioned, revenue declined 2% this quarter compared to Q2 2019. It was negatively impacted by COVID-19 in two ways. First, largely all of the 250 million of COVID-related stocking in Q1 reversed as excess supply in the channel and in medicine cabinets was consumed and Q2 closing inventory returned to historically normal levels. Second, reduced patient visits due to COVID-19 resulted in lower new prescriptions across many of our brands, which we estimate had a negative impact on Q2 revenue of approximately $250 million as well. We estimate this impact to be a temporary step down in market size, which we expect will return to pre-COVID levels over the balance of the year with the pace of recovery varying by therapeutic area. Given the stocking and destocking seen between quarters, our first half performance of 7% sales growth in constant currency is a more accurate reflection of underlying performance. Gross margin as a percent of revenue in Q2 was 79.6%, a decline of 140 basis points versus Q2 2019, driven primarily by the negative impact of price, which I'll describe in more detail in a moment. Moving down the P&L, selling general and administrative expenses declined 9% this quarter compared to Q2 2019, as reduced marketing and travel and meeting expenses were only partially offset by investment in virtual tactics. Research and development expenses declined 1% as the pause in clinical trials have shifted activity and expenses to the second half of 2020. In total, operating income decreased 2% compared to Q2 2019. During the first half of... Sorry, I'm just having a technical issue here. I'll just take this one. We just had a system problem. So in total operating income decreased 2% compared to Q2 2019. During the first half of 2020, operating income increased by 14% as revenue growth outpaced operating expense growth by 500 basis points. Operating income as a percent of revenue was 28% during the second quarter and .1% for the first half of 2020. We continue to adapt the way we allocate resources to efficiently operating an environment where the threat of COVID-19 is likely to be disruptive for a sustained period of time. We're expanding our virtual capabilities to support executing our strategy and are committed to our 2020 full year operating margin target of 31%. Other income and expense was income of $447 million this quarter compared to an expense of $32 million in Q2 2019. This quarter's other income was primarily driven by the increase in value of investments in Asian biopharma companies as well as previously private companies and one public here in the US. We have investments across a range of private and public biopharma companies as a part of our external innovation strategy. And these investments allow us to nurture emerging science and access potential new medicines and novel modalities. As we regularly highlight, this land item can be volatile as public market valuations fluctuate. Our tax rate was 13.4%, an increase of 340 basis points compared with the same quarter last year, driven by the mix of earnings in higher tax jurisdictions and a lower net discrete tax benefit than last year. At the bottom line, earnings per share increased 26% in Q2 as the sizeable gain on public equities more than offset the decline in operating income. During the first half of 2020, earnings per share increased 29%. On slide 8, we quantify the effect of price, rate, and volume on revenue. Worldwide revenue declined 2% during Q2, as volume growth of 6% was offset by price. Foreign exchange had an additional 1% negative impact on revenue growth. During the first half of 2020, revenue grew 7% in constant currency, as volume grew 13%, and price declined 7%, or 5% excluding the impact Olympia and Tibet had in China. U.S. revenue declined 3% compared to the second quarter of 2019. Volume growth of 4% was led by Trulicity, Taltz, EmGality, and Verzenio. As mentioned earlier, we saw de-stocking at the wholesaler and patient level due to COVID-19 that contributed approximately $200 million of negative impact during the quarter. In addition, we estimate reduced new prescriptions due to COVID-19 negatively impacted Q2 revenue by approximately $150 million. Pricing was an 8% drag on U.S. revenue growth this quarter, impacted by predominantly changes to estimates for rebates and discounts, most notably impacting Humalog, which was driven primarily by favorable Medicaid adjustments in the prior period and unfavorable commercial adjustments in the current period. Then to a lesser extent by higher growth across the portfolio and lower net price segments and increased rebates to maintain our strong commercial access, which was partially offset by reduced copay program utilization for EmGality and Taltz as a function of improved access versus last year. As we previously discussed, our quarterly pricing trends in the U.S. fluctuate based on delayed invoicing from customers, seasonality of copay assistance, and our obligations during the coverage gap in Medicare Part D. Excluding the impact of the one-time Humalog adjustments and focusing on trends that impact our business going forward, we saw an underlying pricing trend of low single-digit decline in Q2 versus Q2 2019. And this is consistent with our current expectation of -single-digit price decline for the year with the underlying low single-digit net price decline combined with one-time adjustments in the first half of 2020 and modest effects of COVID-19 in the second half of the year. During the first half of 2020, U.S. revenue increased 5% versus last year, volume grew 11%, and price declined 6%. We are encouraged by the improving demand trends in recent weeks and more normalized shipping trends. As we conclude 2021 U.S. contracting negotiations, we remain confident in our strong commercial and Medicare Part D access across the portfolio and our ability to maintain this going forward. Moving on to Europe, revenue declined 4% in constant currency as price and volume declined by 2% each. Strong volume growth from Trulicity, Verzenio, and Taltz was offset by volume declines from Cialis, Porteo, Olympus, Stratera, and Humalog. We estimate European revenue was reduced by approximately $50 million due to COVID-19 related de-stocking in Q2 and roughly $35 million due to COVID-19 related lower new prescriptions. Despite fluctuation across quarters, the underlying trends are very strong as Europe posted volume growth of 11% during the first half of 2020 as our new products continue to scale. In Japan, revenue declined by less than 1% in constant currency as 4% volume growth was more than offset by government mandated price decreases effective April 2020. In addition, we estimate reduced new prescriptions due to COVID-19 negatively impacted Q2 revenue by approximately $35 million. The solid volume growth of Verzenio, Trulicity, Illumia, and Saramsa were the key contributors to growth partially offset by the increased competition for Porteo and the impact of generic Stratera. In China, revenue grew 8% in constant currency driven by 50% volume growth largely offset by price. Volume and price were both affected by the inclusion of TIVET and Olympia in government sponsored programs which substantially increased access for patients to these important cancer medications. Outside of the oncology portfolio in China, we saw a rebound in new patient initiations and in-person customer interactions as the pandemic's impact began to moderate. Our newest launches, Trulicity, Talt, and Illumia are seeing good uptake and Humalog, Cialis, and Cymbalta are again exhibiting solid growth. Revenue in the rest of the world increased 7% in constant currency driven by increased volume from our key growth drivers. Strong performance from Trulicity, Jardians, Talt, and Verzenio was partially offset by decreased Cialis volume. Revenue was negatively impacted by COVID-related reduced new prescription by approximately $25 million, which was more than offset by the sale of a legacy product in Asia. As shown on slide nine, our key growth products continue to drive impressive worldwide volume growth. These new medicines delivered over 12 percentage points of volume growth this quarter. The strong volume growth volume trend in our key products was partially offset by a mix of competition and lower utilization of post LOE products, or KO and Cialis, as well as reduced progenitor royalties from the restructuring of our alliance with Beringer Ingelheim that we announced last year. We exit the first half of 2020 pleased with a 16% -to-date volume growth that our key products have delivered despite a challenging environment. Slide 10 highlights the contributions of our key growth products. In total, these brands generated nearly $3 billion in revenue this quarter, making up 54% of revenue. While 12% volume growth from key products in Q2 is robust, the negative impact on new patients starts from COVID-19 pandemic and COVID-19 related inventory movements across borders, or drag on growth in the quarter. We expect both of these impacts to be transient, and we are seeing -to-brand prescriptions recover in June and July. The underlying business is robust, and while COVID-19 has impacted our therapeutic areas differently, our product-specific trends within the market backdrop are strong. In diabetes, Trulisbee remains the market leader in the U.S. GLP-1 market, with over 45% share of total prescription. While -to-brand prescriptions for the GLP-1 class were 32% less than -COVID-19 levels at one point during Q2, activity is trending in the right direction and now sits at around negative 16% for the week ending July 17. Total prescription trends have slowed some, but were still robust for the class and grew by 27% in Q2 compared to last year. As the class leader, Trulisbee is well positioned for future growth, and we look forward to regulatory action later this year on the higher doses of Trulisbee. We expect the potential launch of additional doses to be an important option to allow patients to realize benefits while extending their duration of therapy on Trulisbee. In another large and fast-growing diabetes class, Jordyans maintains market leadership in the U.S. SGLT-2 class, with over 57% share of total prescriptions. The SGLT-2 class saw a similar magnitude of reductions as the GLP-1 class in -to-brand prescriptions, as new prescriptions were 38% less than the -COVID-19 levels before recovering some in June and July. Current weekly trends are approximately 15% below -COVID-19 levels. Jordyans continues to be the catalyst for class growth in new and total prescriptions, growing over 12 percentage points faster than the market in Q2, with 32% growth versus last year. We're excited by the recently announced positive results of Jordyans in patients with heart failure in the Emperor-reduced trial and look forward to the Emperor-preserved trial re-downed in 2021. We estimate the addressable market from each trial is up to 3 million additional patients in the U.S., adding a potential new source of future growth for Jordyans. In oncology, Fresenio continues to show positive trends in the metastatic setting as U.S. share of market in -to-brand prescriptions continues to increase above 20%. While -to-brand prescriptions for the CDK 4 and 6 class were more than 30% below pre-COVID levels at one point in the quarter, Fresenio fared better at negative 19%, and the most recent week of -to-brand prescriptions is above the -COVID-19 average. Fresenio has positive momentum as the Monarch e-trial results add to the compelling existing data package. We look forward to presenting these data at a medical meeting later this year. Tyvet, our immuno-oncology product in collaboration with Innovent in China, posted another strong quarter of performance and was the biggest driver of China's 50% volume growth in Q2. Tyvet was added to the National Drug Reimbursement List in January this year, and we anticipate strong sales momentum in the second half of 2020. We expect Tyvet to continue to be an important driver of growth in China. Our newest oncology medicine, Retesmo, had a strong launch despite debuting during a challenging external environment. We're encouraged by early demand signals, and initial customer feedback on the impressive safety and efficacy profile is very positive. Our sales force and medical science liaisons are actively engaging with 6,000 lung and thyroid specialists through virtual tactics, and our existing relationships with this customer base are leading to a high-quality interaction and increased brand awareness for this -in-class medicine. While still early in the launch, we're excited about the fast start and continue to believe we have the best in-class product. In immunology, we saw strong -to-brand trends with Pulse early in Q1, followed by a sizable but more gradual impact of COVID-19. Compared to pre-COVID levels, -to-brand prescriptions across immunology declined 36%. While this category has also been slower to recover, the most recent weeks have showed improvements in trend. However, -to-brand prescriptions for the total market are still 21% below pre-COVID levels. Pulse continues to compete for leadership in demoratology, -to-brand share of market, and rheumatology trends are encouraging, although growing from a smaller base. Total Pulse prescriptions grew 11% in Q2 compared to Q1 and 35% versus Q2 2019. We remain confident that our compelling data package of -to-head trials and recent approval in non-radiographic AXPA will deliver growth in a competitive field of immunology agents. In migraine, we've also seen a more prolonged decline in -to-brand prescriptions due to COVID-19. -to-brand prescriptions in the injectable CGRP class have been 15% to 20% below pre-COVID levels since late April and through July. MGALA's share of market remains strong with over 38% of new and total prescriptions within the class. Although -to-brand trends have been impacted by COVID-19, class growth for total prescriptions was robust in Q2, increasing 64% compared to last year and 12% versus Q1 2020. Given the importance of primary care physicians in driving growth with the return of active promotion from multiple competitors, we expect class growth to reaccelerate in the second half of 2020. Also in migraine, our acute therapy, Rayval, was significantly impacted by the lack of patient visits and in-person customer interactions related to COVID-19. While uptake so far has been modest early in the launch, we'll make investments to drive awareness and focus our promotional efforts in the coming quarters to drive uptake. While the field is competitive, we continue to believe our portfolio of both acute and preventative treatment with two mechanisms of action is a differentiator for our migraine franchise. On slide 11, we provide an update on capital allocation. During the first half of 2020, we invested over $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 almost $2 billion to shareholders versus share repurchase, via share repurchase and the dividend. We remain well-capitalized and have the ability to access debt markets at attractive rates. We expect to continue to enhance our long-term growth by acquiring first or -in-class pipeline assets and do not anticipate COVID impacts regarding travel or market uncertainty to affect our efforts. Before we provide an update on our 2020 financial guidance, slide 12 provides an overview of the composition of our U.S. business split by payer segment mix. This is a topic of frequent interest to investors and is pertinent as we monitor the currently high levels of unemployment and the potential for that to negatively impact our business. Based on growth sales during the first half of 2020, within our existing business, commercial plans make up the largest portion at around 40%. Medicare Part D is the second largest segment at approximately 20%, mainly due to our diabetes portfolio. Government and hospital segments make up roughly 15%. Medicaid is around 10%. Medicare Part B is nearly 5%. And then non-contracted business, uninsured and cash, make up the remaining 10%. So as we continue to monitor and analyze the potential impact of unemployment, causing people to lose their commercial insurance and potentially shift to Medicaid, our modeling suggests this will have a modest impact in 2020 and is contemplated in our financial guidance range. We expect these trends to have a larger impact in 2021, and the magnitude will be driven by the size and duration of unemployment in the U.S., The quality of commercial or ACA exchange insurance plans displaced employees move from, the majority of our products as newer products have smaller net pricing spread between Medicaid and commercial plans, and government stimulus or relief plans that may keep patients on commercial insurance. Although there is uncertainty on how all these factors will play out, at this time we anticipate increased utilization of Medicaid versus commercial insurance to be a moderate headwind to revenue in 2021 of approximately $200 million. This approximation contemplates peak U.S. unemployment in the low double digits in 2020 and a gradual recovery in 2021 to high single digits percent unemployed by U.S. We do not have an estimate on the impact of the executive orders on 2021 at this point, but given the uncertainty around them and our modest exposure to Part B, we expect the near term impact to be limited. Given our view of 2021 pricing negotiations, we still expect mid single digit price impacts across the portfolio in 2021. So now moving to slide 13, you'll find our updated 2020 financial guidance. This is based on our best estimates at this time and similar to how we approach Q1, we're balancing transparency and insight into the current view of the business with the uncertainty we're all facing surrounding the extent and duration of the impact of the COVID-19 pandemic. Key assumptions supporting our updated guidance include healthcare activity returns to normal levels in the second half of 2020 as doctors utilize telehealth or in-person visits to see patients despite potential additional COVID-19 outbreaks. The recovery in new patient prescriptions improved in the U.S. reaching and then growing above -COVID-19 levels by Q4 for most brands, noting the trends will differ regionally and by brand. Price headwinds from increased utilization of patient affordability programs and changes in segment mix to increased U.S. unemployment continue to be modest. Clinical trial sites remain open and active in enrolling patients and promotional spend in the second half of the year constitutes a mix of in-person customer interactions, direct to consumer advertising and investments in support in digital promotion. While uncertainty remains regarding the continued spread of COVID-19 and the resulting impact on the pace of economic recovery around the world, we believe healthcare activity will continue to be a priority and that patients and physicians will find ways to access healthcare. We believe the stocking and destocking activity observed in Q1 and Q2 is largely washed out and we're encouraged by the demand trends and more normal shipping patterns we're seeing with our customers. As a result, we're maintaining our revenue range, recognizing additional closures in the healthcare system could cause us to revisit that range later in the year. Moving down the income statement, we're lowering our growth margin as a percent of revenue to be approximately 80% on a non-GAAP basis. This reduction reflects changes in geographic mix and lower realized prices. We expect our GAAP growth margin to be 78%. We're also lowering our range for marketing, selling, and administrative expenses by $200 million to reflect savings from reduced travel meetings and in-person promotional activities, which are only partially offset by investments in digital capabilities. Our range for research and development expenses is unchanged. We expect savings associated with temporary pausing of clinical trial starts and enrollment to catch up in the second half of 2020 as we resume the activity in Q2. Of note, if we see positive data in our neutralizing antibody treatments for COVID-19 that supports broader development, we plan to fully invest in registrational clinical trials and further scaling of manufacturing capacity. Under this scenario, our research and development expenses are likely to be on the high end of our range, as Lilly is self-funding all of these programs. We believe these investments are important to help combat the impact of the global pandemic. Our non-GAAP operating income as a percentage revenue goal of 31% remains as a reduction in total operating expenses offsets the slightly lower gross margin percentage. We're updating the range for other income and expense to $350 million to $500 million of income, reflecting gains in our equity portfolio seen in the second quarter. As I mentioned earlier, this number is, of course, subject to volatility of the capital markets. Turning to taxes, we're reducing our GAAP and non-GAAP effective tax rate guidance to approximately 14%, driven by the net discrete tax benefits we've booked for the first half of the year. So earnings per share is now expected to be in the range of $7.20 per share to $7.40 per share on a non-GAAP basis. Our GAAP EPS is expected to be in the range of $6.48 per share to $6.68 per share. Q2 was certainly an atypical quarter. As I highlighted earlier, COVID impacted our financial results in a number of ways. However, our confidence in the strength of our underlying business and our demonstrated ability to overcome challenges gives us the conviction to reaffirm our robust outlook for sales, growth, and productivity. So I'll now turn the call over to Dan to provide an update on our ongoing efforts to develop treatments for COVID-19, a summary of key data disclosures in Q2, and a pipeline update.

Thanks, Josh. Since our last call, we've had major lifecycle readouts for three of our most important new medicines, Verzienio, Truelicity, and Jardians. All three were positive, all represent clinically meaningful advances for patients, and all should help drive continued growth for these important brands. I'll speak briefly about each, as well as a phase three readout for Merikizumab, a molecule still under development. In addition to advancing our existing R&D portfolio, we have devoted significant efforts to creating and testing potential therapies for COVID-19. And here, too, we have made good progress this quarter. Before I go through the pipeline update, I'll provide an update on our COVID-19 therapies. Moving to slide 14, we provide an overview of the active programs we're pursuing to treat or prevent COVID-19. These programs have moved with unprecedented speed in hopes of finding new medicines to help blunt the impact of the virus. Baricitinib, our JAK inhibitor, has two ongoing phase three clinical trials in patients hospitalized with COVID-19. The anti-inflammatory activity observed by baricitinib and other diseases is thought to be potentially beneficial in treating COVID-19. The first trial is investigating baricitinib in combination with remdesivir as part of the NIAID adaptive COVID-19 treatment trial, and we expect to have data from this trial within the coming month. The second trial is Lilly sponsored and is assessing baricitinib as monotherapy. We expect results from this trial later this year. Second, we're pursuing a phase two trial of an antibody that targets angiopoietin 2, which has been observed to be elevated in patients with acute respiratory distress syndrome or ARDS. Based on trial enrollment, we now expect to have data in-house this fall to inform next steps. While these two efforts may inform treatment of the symptoms of COVID-19, the approach I'm most excited about is virus neutralizing antibodies for the treatment and prevention of COVID-19. Both a single antibody therapies and in combinations. We currently have efforts ongoing with -CoV-555, which arose from our collaboration with Abselera and with -CoV-016, which we licensed from June C Biosciences. The development status is summarized on slide 15. Both antibodies have completed dosing in their phase one studies with safety and PK results that support advancing the molecules. Neither phase one study was designed to collect efficacy data as the 555 trial only enrolled six patients per dose and 016 enrolled only healthy volunteers. 555 is further along in development and has progressed to a large dose ranging phase two study in ambulatory patients recently diagnosed with COVID-19. Here we are focused on reducing viral load. The study is enrolling quickly and we should have data to report by Q4. This will be our first opportunity to share human efficacy data from the neutralizing antibody program. Based on safety and tolerability data gathered to date, as well as taking into account the gravity of the unmet medical need here, we plan to initiate registrational studies in the coming weeks. Even in advance of having efficacy data, we envision studies across several different patient populations, including a phase three study for prevention of COVID-19 in residents and staff at long term care facilities, as well as additional registrational studies for potential treatment indication in both the ambulatory and hospitalized settings. Once underway, the timing for data disclosures from these trials will be highly dependent on patient enrollment and any interim efficacy and safety data we may see. In addition to the monotherapy trials I described for 555, we intend to test the combination of 016 with 555 in case such a combination is needed to combat viral resistance. We look forward to producing additional data for both programs and will provide updates as we achieve program milestones where data becomes available. We continue to invest in manufacturing for these potential therapies at risk, and we're focused on ramping up our manufacturing capacity as quickly as possible. While developing treatments for COVID-19 is an important priority for Lilly right now, we also continue to advance the rest of our pipeline to help people with diabetes, immune disorders, neurodegeneration, and cancer. One particularly exciting development this quarter was the positive interim readouts of the Monarch E trial, assessing the use of Verzenio to reduce the risk of recurrence in HR positive, HER2 negative, high risk early breast cancer. Verzenio is the only CDK46 inhibitor to show a benefit in this setting, where another competing product failed at a futility analysis. Our conviction in the differentiation of Verzenio from the competition continues to increase based on important data, including safety and tolerability data and mechanism of action that have allowed for continuous dosing and therefore continuous target inhibition. This is a unique feature of a bandacyclop. Clinical efficacy that supports use even as a monotherapy in metastatic breast cancer, another unique feature of a bandacyclop. The demonstrated benefit in overall survival in the metastatic setting in combination with full vestrin, something not all CDK46 inhibitors have been able to show. And most recently, positive results in the adjuvant setting, another unique feature of a bandacyclop. These data continue to support our convictions that not all CDK46 inhibitors are the same. The positive results in Monarch E could significantly increase the opportunity for Verzenio. Looking at the Monarch East study clinical pathological criteria for enrollment, we estimate that approximately 20,000 patients in the U.S. would match these criteria. This represents a roughly 50% increase over the current addressable market in metastatic breast cancer, a market projected to reach almost 7 billion in 2020. In addition, we anticipate duration of therapy in the adjuvant setting will be longer. We plan to submit these data by the end of the year to regulators around the world and to present them at a major medical meeting in 2020. Moving to slide 17, we also presented important trulicity data at the virtual ADA and ENDO meetings this summer. In the on treatment analysis, the 3 milligram and 4.5 milligram doses of trulicity demonstrated statistically significant improvement in hemoglobin A1C reduction and weight loss versus the currently approved 1.5 milligram dose at 36 weeks. These doses could allow patients to receive additional clinical benefits and stay on trulicity while still experiencing trulicity disease abuse. We look forward to U.S. and EU regulatory action on the additional doses of trulicity later this year. At the virtual ADA, we also share data which builds upon the existing body of evidence demonstrating the simplicity of the trulicity patient experience combined with its powerful efficacy. In this real world analysis of patients after a minimum of six months of follow up in the U.S., trulicity demonstrated significantly higher adherence and persistence compared to two other weekly GLP ones. In addition, significantly fewer people discontinued treatment on trulicity compared to other agents. This real world evidence complements the robust clinical data generated for trulicity and provides further support for why trulicity is the market leading GLP one. Moving to slide 18, you can see our select pipeline opportunities as of July 23rd. Movement since our last earnings call includes the previously mentioned U.S. approvals for Lumgev, Ritevmo, and Talvid. The U.S. approval of TALTS for non-radiographic EXPA and CYRAMSA for EGFR mutated non-small cell lung cancer. The initiation of the Phase III terzepotide cardiovascular outcome study surpassed CBOT. The advancement of three new Phase II programs, the initiation of three Phase I programs, and the attrition of our first generation KRAS-G12C molecule. While we were excited about our initial KRAS program, we observed unexpected toxicity in the clinic that precluded further development. We're working to understand the mechanistic basis for the toxicity and we are exploring a backup program. Moving to slide 19, we provided an update on our 2020 key events that have occurred during the quarter. In addition to the previously mentioned approvals, initiations, and pipeline progress, we submitted a LUMIENT in the U.S. for atopic dermatitis. As Dave mentioned earlier, we also announced positive Phase III readouts for Jardians in heart failure and Merchizomab in psoriasis. Beginning with Jardians, we were optimistic about the likelihood of success in heart failure based on compelling CV data seen in diabetic patients in the M5 reg outcome trial. We were pleased to see a positive outcome from the first heart failure trial to read out Emperor Reduced. And we will present the data in August at the European Society of Cardiology and submit to regulators later this year. We look forward to additional Jardians data readouts, including heart failure with preserved ejection fraction, the Emperor Preserve Trial in 2021, and chronic kidney disease, the ENPA Kidney Study in 2022. We also announced a positive readout for Merchizomab Phase III in psoriasis, including success on the primary and all key secondary endpoints. It's particularly encouraging to see such robust data for Merchizomab in a -to-head trial since trials such as these are the gold standard for comparing agents. Indeed, we've had a number of positive -to-head trials with TALTS in psoriasis, and now we're pleased to see Merchizomab demonstrate superiority versus co-centics at 52 weeks on both PASI-90 and PASI-100. Despite growing competition in psoriasis, TALTS remains an excellent option for patients that delivers clear skin fast. These new data suggest that Merchizomab also has the potential to be a meaningful treatment for people living with psoriasis. We look forward to submitting Merchizomab in this indication. And importantly, these data further our conviction in IBD, where we see the biggest opportunity. Given the relative priority of indications, we've been staging our investments in psoriasis. We have work ongoing to prepare for the psoriasis submission and plan to submit in the second half of 2021. Accordingly, we've also provided an updated timeline for the Phase III data of Merchizomab in ulcerative colitis and Crohn's disease. We now expect the top-line results for reduction for ulcerative colitis in the spring of 2021 and for Crohn's disease in 2022. Since we announced the pause of new trial starts and enrollment in many programs back in March, I'm pleased to report that we've reopened enrollment in the vast majority of clinical trials, and we are again initiating new trials. As we partner with clinical trial sites going forward, we've made a number of changes to how we run clinical trials that allow for many tests to be completed virtually. These new capabilities have come from necessity, but are also improvements on the way clinical research is conducted, and something will continue going forward. These are challenging times in drug development, but Lilly has demonstrated we have the creativity to adapt to the new environment, and we're committed to bringing new medicines to patients. Dave, back to you for some closing remarks.

Thanks, Dan. While mobilizing our resources to pursue treatments of devastating diseases is a natural part of our history and our company's purpose, On a separate note, I think all major employers are realizing we have a bigger role to play in the fight against systemic racial injustice. And as a corporate leader in diversity inclusion, Lilly is committed to using our platform to speak up, speak out, and work towards solutions to eliminate the racism and inequities that African Americans and other minorities have experienced for far too long. We are stepping up to bring people and organizations together to acknowledge the trauma of racial injustice, understand its many forms, and create lasting change. To underscore our commitment to positive action, we also announced a pledge of $25 million and 25,000 employee volunteer hours over the next five years. The funding and volunteerism will be directed toward combating racial injustice and inequality, primarily here in Indiana, and we plan to partner with other businesses and community groups to achieve our goals. While there's nothing easy about the road ahead, we can no longer accept systemic bias in any of its forms, and the time for platitudes is now behind us. The time for meaningful action, specifically by the corporate community, to drive lasting change is in fact now. So a busy quarter, let me conclude with some closing comments on our progress in the first half of the year. As expected, our business experienced headwinds this quarter based on reduced new patient starts and changes in inventory we highlighted earlier this year. With that in mind, we are pleased that in the first half of 2020, we delivered strong volume-driven revenue growth of 7 percent worldwide in constant currency. We are cautiously optimistic about the recovery of both healthcare activity and prescription trends, and expect both to accelerate during the second half of this year. We continue to find innovative ways to ensure our patients have access to the medicines, to their medicines, and that we can support physicians and hospital systems as they provide care. Our operating margin improved 200 basis points over the first half of 2019, and we made exciting progress on our pipeline this quarter. We saw three top-line Phase III data readouts from important clinical programs. We had five U.S. approvals for NMEs and line extensions, and achieved another, a number of other clinical milestones that Dan just highlighted. The COVID-19 global pandemic continues to be a disruptive force in the way we all work and live. Lilly and the broader pharmaceutical industry are working hard to develop new medicines to treat and to prevent the spread of COVID-19. We anticipate this disruption will continue until vaccines and new medicines can be used to manage the spread of the infection. While near-term challenges do exist, we remain confident in the long-term outlook for our company and the strength of our fundamentals. Lilly and Lilly people will continue to rise to the challenge, and I'm incredibly proud of our efforts to combat the global health crisis, social and economic crises we currently face. This concludes our preparatory remarks. Now I'll turn the call over to Kevin, who will 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. Kevin, if you can please provide the instructions for the Q&A session, and then we're ready for the first caller.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press 1 and 0. If you've already pressed 1 and 0, you're all set. Please press 1 and 0 again to remove yourself from the queue. We will now go to the first question, and that will be from Seamus Fernandez Guggenheim. One more, please, sir. And sir, now your line is open.

Yes, can you hear me?

Yes.

Yes. Okay, great. Thanks. So just a couple of quick questions. You know, first for Dan, Dan, can you help us understand a little bit more about the timing of your COVID-2 antibody data? You know, and also just wanted to get a little bit of the scientific discussion around your choice of pursuing a single antibody. I know that the Aselora technology is unique, but just wanted to have a little bit more of a discussion around that. I think that would be helpful for investors as we think about the choice of a single antibody. I know you've talked about manufacturing as a driving choice there, but obviously the efficacy is paramount. So we just wanted to get a full understanding of that dynamic and that choice and how you hope the study is going to read out. And then, you know, secondly, just as we think about the margin dynamics in the second half of the year, Josh, I was just hoping that you could help us better understand the directional trajectory, you know, of how you're expecting the margins to shape up in the second half, how much of that is driven by, you know, meaningful revenue acceleration versus, you know, just an ability to kind of manage the manage the expense line.

Thanks. Thanks, Seamus. Dan and then Josh.

Great. Thanks, Seamus, for those questions about the COVID-19 antibodies. Maybe just starting with timing. You know, of course, the timing of data disclosures depends on how fast the trials enroll and what the data show. We're committed to getting important information out to the public and the scientific community as quickly as it's available. With respect to the phase two trial that is focused on viral load, I think this is going to be the first and probably a key indicator of potential efficacy for this approach. And I commented that we expect to have that data to disclose from this 400 patient phase two trial in Q4. But again, that just depends on how fast we can enroll these patients. Your second question there was around the rationale for a single antibody versus two or three or cocktails of even more antibodies that have been proposed. And specifically you asked around efficacy. So I think we and others have looked at monotherapy versus combination therapy in a variety of preclinical models of the disease and looking at neutralization of the virus, infection of human cells, for example. And what you find is that combinations don't offer an efficacy boost. A single antibody can generally neutralize the virus just as well as combinations of antibody. The reason that people sometimes try combinations of antibodies is because they're worried that over time resistance could emerge. So I don't expect to see any efficacy boost or efficacy diminution from having a combo or monotherapy in clinical trials. What we'll be looking for instead is whether or not there's emergence of resistance. There are some factors that make that somewhat less likely here. I think the extremely high potency of -5-5 and its ability to effectively neutralize virus very, very quickly may decrease the risk of resistance. We've done some primate studies and we've not seen resistance emerge in those studies at all. But we'll be watching patients carefully and we have the combination therapy that will move forward as a backup if resistance is seen. The advantages of monotherapy are obvious and you commented on them. It's simply that if you have one antibody, you can manufacture twice as much as a combo of two antibodies, three times as much as three antibodies. In a situation like this, I think there's just the idle trade-offs that might indicate maximizing manufacturing capacity is a key objective. So that's where we're aimed here.

Thank you. Thanks, Dan. Josh?

Thanks, Seamus. Yeah, so if we look at our guidance for the year and think about the margin progression in the second half of the year, just a reminder, you know, sales on a constant currency basis grew 7% in the first half and our operating income percentage was a little bit over 29%. So to get to the 31% target we have for 2020, obviously we've got to see margin expansion in the second half of the year. But I think it's pretty straightforward. When we look at the sales range that we have, you know, picking midpoints or wherever you want to pick, we're looking really at something close to, you know, 7% or 8% growth in the second half of the year. So while we expect an acceleration in sort of absolute sales on a -to-half basis, it's not that much of a stretch from where we are. We expect a little bit of a pick-up probably in gross margin in basis points, and that's just a function of more normalized geographic impacts. As you know, we saw more of an impact in the U.S. in the first half of the year than outside the U.S. We expect those things to normalize a little bit in the second half of the year, and we're not anticipating any one-time pricing, you know, impacts either up or down. So we'll see a little bit of a benefit there. But the big piece will come on the off-exit side, and it's not from additional sort of cost savings moves. In our guidance range, we provide for, again, picking wherever you want to pick in the range, a couple hundred million dollars or so of increased investment in absolute dollars in a combination of SG&A and R&D in the second half of the year. So it's really just the absolute sales benefit that we'll see in the second half against a lower absolute increase, but still an increase in off-exit. That gets us to something over 31 percent in the second half of the year. Put that together, that puts us at 31. We feel like most of these things are certainly in our control, as I mentioned earlier, and as Dan's talked about on COVID, we're going to invest fully behind those opportunities. That is contemplated in our guidance range, and to the extent we're higher on off-exit, you know, the higher end of the range, it's going to be primarily be because of seeing good data and continue to move fast there. But we're confident in the margin expansion opportunity into the second half of the year for the ratings I just mentioned.

Thanks, Josh. Seamus, thanks for your questions. Kevin, next caller, please.

And that was in line of Jeff Mecham, Bank of America. Please go ahead.

Question, just had a few. On Brasenio, I know we have yet to see data details, but can you speak to the real-world duration of therapy today in metastatic and then what you would expect from the Monarch E setting? And then a quick drug pricing question for Dave. I know obviously you spent a lot of time on these issues, but what are the hurdles to getting IPI implemented? And then when you look across the Lilly portfolio, can you speak to categories that may be more impacted from the executive order, either IPI, rebates, et cetera? Thank you.

Thanks, Jeff. We'll go to Ann for the question on Brasenio and then Dave on IPI.

Well, Jeff, thanks for the question on Brasenio. And the duration question is an important one and something that we're really excited about as part of the additional opportunity in EBC. And so we do expect the duration of treatment to be longer than the metastatic setting. And to your question, what we've seen in RWE in the metastatic setting is about eight months. Now we'll need to see what that actually is once patients are being treated upon approval in the adjuvant setting. But obviously we're encouraged. The fact is the treatment duration in the study itself was 24 months. So we do expect it to be much longer than the eight months that we see in the metastatic setting.

Thanks, Ann. Dave? Yeah, thanks, Jeff. Well, I mean, you know, we all observed last Friday's announcements. I think mostly these are not particularly new ideas. So my statements may be a repeat from prior calls. But on IPI specifically, you know, this is being proposed under the CMMI model, Affordable Care Act. So that by itself is probably a problem to seek to regulate the entirety of the U.S. physician-infused market via that mechanism. And, you know, I think you expect the industry to vigorously challenge that authority. EOs don't create new authority. But if implemented, and we have yet to see the text, by the way, I'm not sure the White House has put that out yet. But let's assume it's something like the 2018 blueprint proposal. We are relatively underexposed to this idea because it affects Part B, physician-infused drugs. Today, you know, the two material medicines fit that in our portfolio, Olymptah and Saramza. And of course, Olymptah, we expect to patent expiry in spring of 2022. So you have a time window impact that's quite short. And Saramza, which is obviously longer and a meaningful product, but a part of our growth story but not a cornerstone of it. Going forward, of course, if we looked at future medicines in the pipeline, there are infused medicines in immunology and notably in Alzheimer's. Should those succeed, that would, you know, you'd be concerned about. But I think drug companies have more ability to navigate on future products than they do on past products launched in the past because you can affect your primarily European pricing outlook, perhaps with constrained demand in Europe, but focused on a common floor price for the U.S. So, you know, we can navigate it. That said, it's horrible policy. And I think we'll sense a wrong message at a time when this industry is working literally day and night to help us all escape from COVID-19. Do we really want to be talking about this disruptive force? And the most well-capitalized companies are the least affected, Biotech, which, you know, we're not part of that small company group, but they will be severely affected and investor interest in many of their companies could drop precipitously. I think that would be a real loss for what is an industry that's basically U.S.-based. So we'll fight it hard and hopefully it won't come to be un-rebate. Again, this is an idea we've pursued and been for for some time, as well as frankly, you know, we're not disappointed by the 340B pass-through idea that was presented as well. We think that the patients who drive the volume that plans negotiate discounts on should benefit from those discounts, frankly, as they do in every other part of the health care system except medicines, so that we think costs sharing and copay should be based on net price, not list. And these ideas forward that, again, lots of barriers to implementation on those as well. And I'm sure other groups will oppose them, but we'll continue to support that concept of sharing the savings.

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

Tim Anderson, Wolf Research. Please go ahead.

I have a commercial question on CDK46 class. So Pfizer's Ibram's is market leader, but it is the only CDK46 that failed to show a survival benefit in formal phase two trials and metastatic. And of course, it failed in AGIBEN. Does Lilly think that the metastatic share that Ibram's has is materially at risk to competitors like Roseneo or will there realistically be stickiness to the segment? Pfizer says that its real-world studies that show an OS benefit will protect it, but wondering what your view is. So it's really a question on the metastatic segment. And then on trisepatide, how would you characterize your level of confidence that the first upcoming phase three results are going to be data that really wows investors like the phase two trial results did? It's notable that analysts already carry about a $5 billion estimate for trisepatide in the consensus model.

Thanks, Tim. We'll go to Ann for the question on the CDK46 class and then Mike Mason for the question on trisepatide.

Well, thanks for the question, Tim, on Roseneo. And we believe we've seen really positive trends with Roseneo in the metastatic setting. And I think Josh mentioned those in some of the intro. And we've really capitalized on the positive overall survival data from monarch two in the combination of all best strengths. And so what we've seen versus Q2 2019 is worldwide growth of 56 percent in revenue and US growth of 35 percent. And then if we look globally, we now had 49 approvals worldwide. And I think probably an important metric is that Japan NBRX share of market now is 58 percent. So we've seen a very strong launch in Japan. And so we believe obviously that with statistically significant survival data, that's really the gold standard in this class. And so we believe that more and more physicians will be trying Roseneo and we've seen that in the continued increase in the NBRX. And so we'll continue to share that message. We believe that this is the best in class agent. And I think it just goes to that whole picture of the differentiation that we see with Roseneo over time. And I just think that that will shift physicians minds. The positive results from Monarch E, as Dan mentioned, really do differentiate it from both CDK 4 6s. And then we've got statistically significant results, not just in the overall population, but then in the hard to treat populations, those with visceral disease and primary endocrine resistance. And again, you didn't see that with some of the other CDK 4 6s. So I think we were starting to feel pretty strongly. And I think physicians are starting to agree with us that we have a differentiated agent here. And so you'll continue to see us press in the metastatic setting because we have that survival data. And now we get to make the move into the adjuvant setting.

Thanks, Dan. Mike.

OK, for Dr. Zepetide, we're glad to see that you were wowed by our type our phase two data and for patients living with type two diabetes. You know, I think the best thing really to do is to go back and take a look at the phase two clinical studies. I mean, we saw at the 15 milligram dose up to 2.4 percent a one C reduction and weight loss up to 12.7 percent versus placebo and just six months of studies. So we're excited to see how to Zepetide can can perform in this patient population and longer studies in phase three. There's nothing to tell us that we won't see exciting data coming out of the phase three. We don't have any new information suggests otherwise. So we are incredibly confident about Zepetide not only in type two diabetes, but also we're excited to see its potential in Nash and obesity. So our enthusiasm remains very, very high. Thank you for the question.

Thanks, Mike. Tim, thanks for your questions. Next caller, please.

And that's Umum Rafat of Evacor. Please go ahead.

Thanks so much for taking my question. Dan, I'm just trying to reconcile the positive commentary around your covid map heading to registrational trials versus perhaps lack of any data, efficacy data visibility from phase one. And if you could possibly speak to any trends you've seen already, that would be really helpful. And then on KRAS, I might have missed it, but if you could just add some more color on whether you ran into a therapeutic index challenge before efficacy kicked in and if you could speak to what's the highest dose you actually doze patients with on your KRAS. Because it seems like other KRAS members who didn't really have any efficacy until a very high dose and all of it kicked in at a certain dose. So be really helpful. Thank you.

Thanks, Umur. Dan, you'll take both of those?

Yeah, sure. Thanks. Thanks for both of those questions. So on the covid map, you're sort of asking about the rationale of going to registrational studies without having seen efficacy data. It's not something we usually do. You're right. Of course, here it's, as I said, the gravity of the situation and the liquidity with which we desire to test these therapies that have driven us to that decision. So you asked about sort of trends that that might have encouraged us from the phase one study and unfortunately the answer is we don't have anything to talk about. We had one phase one study that was in healthy volunteers. So they didn't have covid 19, nothing to see there. The other was so small in the hospitalized patients, six patients per dose group. And I think what we saw there is basically what you would expect across doses and placebo. All of the patients actually did really well and got better and left the hospital. And that's not atypical for a phase one study here that the population that physicians typically pull into those studies are some of the better patients who might be at the end of their disease course. I wouldn't expect antibodies in any case to have much effect in people whose viral load is already low and their immune system is already clearing the disease. So that's where we are. I think the phase two study on the other hand is patients who are early in the disease course. They're just within a few days of getting diagnosed. My expectations they'll have high and in many cases increasing viral loads in the absence of therapy. And the goal here is to show that the therapy decreases the viral load. So that that's the important readout. But as I said, we'll have started the phase threes by then on KRAS. This is an issue of off target toxicity. So it's not related to the KRAS target itself is our view. That does therefore kill the therapeutic index and not possible to proceed with that drug. I don't think we at this moment give details on the exact nature of the toxicity or the highest dose that we tested. But we didn't feel we could proceed based on the doses at which we saw that tox. And we're trying to resolve that in the backup program. We have some preclinical models for the tox. We'll see if they bear out or not.

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

Andrew Baum of Citi. Please go ahead. Mr. Baum, your line is open now.

Hello, can you hear me?

Yes. Yep.

Question on US drug price reform. There are a number of live propositions, obviously, the executive order referencing reform, which obviously Lily has supported that it requires a positive CBO score in order to move forward. First question is, do you think there's any possibility that could be achieved given the history of the CBO score and the belief required of an overall reduction in pricing through market based competitions to get there in the CBO to reflect that? And that's number one. And number two, an alternate proposition has got bipartisan support in the Senate, but it's stopping from reaching the Senate floor by Mitch McConnell. I know you have some concerns over that bill, but there's a potential way forward to mitigate a more debeterious solution under either of the potential options going forward. Can you see this progressing? Many thanks.

Thanks,

Andrew. We'll go to Dave for both of those. Yeah, thanks, Andrew. On the EOs, you're talking about rebate reform and the idea of pass-through and the history here is, as you pointed out, the CBO score was extremely negative. In our math, largely driven by the one assumption you noted, which is that rebate value would essentially accrue back to manufacturers and thus raise premiums. It's a deeply flawed assumption. Of course, we'll compete, but the whole idea would be to move the basis of competition from sort of discriminated prices that are private to list price or other means to deliver pricing directly to consumers, discounts that pass through, for instance. So that, of course, requires industry actors to change their practices, and that's not something that can be coordinated or messaged very well due to antitrust laws. So we're sort of in this catch-22 on committing to deliver on sharing the savings, but not being able to do that publicly. I think that's a problem, and it's particularly a problem for legislation. Of course, the executive order method has other problems in terms of legal power, but if enacted under administrative rules, there isn't necessarily a requirement to square the budget. So savings can be assumed in other ways, and there's a different authority doing the math. That said, I think there are headwinds on this point, both within the administrative executive branch as well as on the Hill. Nonetheless, it's the right thing to do, and I think we need to continue to push for ways that everyone would have confidence that the industry would compete in a way that would lower consumer -of-pocket costs. I can tell you that's the goal when we advocate for this policy, and we need to find ways to provide that assurance, I think, to get movement. You talked about Senate finance, and Grassley reintroduced a version of his bill to try to make one last push. I believe his chairmanship is ending in any case at the end of this Congress, so it's understandable why he's doing that. I don't think that that package has much of a chance to advance. There are always ways stars get aligned, and there's a number of health extenders do at the end of this Congress, but it's a pretty big piece of legislation to throw on an extenders package. The only possible way is that it does produce positive budget impacts in terms of use to pay for other things, but probably you don't need the whole package. So I think that's still a narrow path, and the most likely scenario is that these EOs can't take a force and don't take force prior to a new presidential term, a new Congress sitting, and that Senate finance doesn't go anywhere either, nor does HR 3. I think that's sort of the probable planning scenario.

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

And that will be from the line of Louise Chen of Cantor. Let's go ahead.

Hi, thanks for taking my questions. So my first question is, is there any way to quantify the operating margins? What we would have seen in the first half 20 without R and D COVID spending and also headwind sales from the pandemic. And the second question I had was, how do you think about trisipatide as a single solution for diabetes, NASH, and obesity? Thank you.

Thanks, Louise. We'll go to Josh for the first question and then Mike for the second one.

Thanks, Louise. Yeah, I think in the first half, as I mentioned, our operating margin was 29.1%. I think if you add back some of the loss prescriptions, but then also keep in mind we had some savings associated with promotion. You know, we're probably closer to 30%. We said as we came into the year, we expected margin expansion through the year. So that's still in track, you know, on track. But, you know, we're probably off by, you know, somewhere in the range of, you know, 50 to 100 basis points or something, something there.

Thanks, Josh. Mike.

It's a great question on trisipatide. And I think we have just a phenomenal opportunity to not just be able to provide glucose control for those living with type 2 diabetes, but really affect their overall metabolic health. And so I think the contributions of both GLP and GIP can provide the opportunity to really provide improved metabolic health across type 2 diabetes, obesity, and NASH that, you know, are related. And so it's a great question. I think it's a good opportunity for us to expand our focus beyond just helping someone living with type 2 diabetes better control of glucose. So great question. And obviously it's an area that we will focus on. There will be people living with type 2 diabetes that are in our NASH and obesity studies.

Maybe just to add to that, it goes, maybe without saying it, but I'll say it. You know, the current utilization of GLPs in the total diabetes population in developed markets is something like one in eight or one in ten patients. And so the hope here is that we can rearrange the priorities and the sequence of treatment in a way where this powerful category, and here a dual acting GIP-GLP, could be used earlier and more broadly to manage disease outcomes in a very different way. Today type 2 diabetes is a disease of failure, and perhaps this technology could help doctors and patients find success much earlier in the disease course. Thanks, Mike and Dave.

Luis, thanks for your questions. Next caller, please.

Terrence Flynn of Goldman Sachs.

Please go ahead. Great. Thanks for taking the questions. I was wondering on another one on Virginia if the marquee data is going to be at ESMO or San Antonio breast. And then if you think penetration in the adjuvant setting will be higher or lower or the same as in the metastatic setting over time. And then Josh, just on contracting, you talked about how those discussions are wrapping up now. Anything notable in terms of truelicity or tauts that we should consider as we think about those contracts for for 2021? Thank you.

Thanks, Terrence. We'll go to Ann for the question on monarchy and then Josh around contracting.

Yes, so thanks for the question, Terrence. So on the presentation, we will be presenting at a medical meeting later this year. Unfortunately, I can't confirm which one yet, but we will be presenting at a meeting this year. As far as on the penetration, well, that's, I think, what's exciting about this opportunity is that we are the only CDK46 to have positive results in the adjuvant setting. And so I think our penetration for the high risk patients, which is the population that we had in monarchy, will be extremely high. So as we're hearing people react even to the top line opportunity, we're seeing that there's a lot of enthusiasm for having CDK46 in this setting. And so we look forward to sharing those results, as I said, later this year. Again, we see, as I think Dan and others mentioned in the introduction, we see this as an opportunity probably about 20,000 patients here in the U.S. as we matched our criteria in the study to the SEER database. So I think we see a pretty significant opportunity. It's really probably half again of what we have in the metastatic setting, which has been significant. So we do answer question. We do expect strong penetration in the space over time.

Thanks, Ann. Josh?

Yeah, and as you know, Terrence, we won't sort of talk specifically about individual contracts or anything at this point. But I think for what we have seen, first I go back to the earlier comments, we see a pretty similar pricing environment in 2021 to what we're seeing here, which would be modest net price decline, meaning we're providing slightly more rebates than what we're anticipating in terms of list price increases. And then we couple that with the other dynamic factors that we've mentioned. I think if you think about trulicity, we've said sort of expect something plus or minus 5% net price declines over time. I think that's how we're viewing next year. It's a very competitive environment, of course, but we're focused on maintaining access, not looking to trade price or share or anything like that. So I think those negotiations are going as expected. With talks, we've been focused on upgrading our access. And so to the extent that we're able to do that, you'll see that as a net price decline potentially, but compensated for by increased access. Again, I think we're happy with the progress we're making this year and continue to focus on improving where we can for next year. But overall, again, I'd say the general trend is we have fierce competition in the classes we're in, but we're focused on maintaining at least the access we have today and when we have the chance, upgrading in areas like immunology. Thanks, Josh. Terrence, thanks for your questions. Next caller, please.

Next will be Chris Schott, JP Morgan. Please go ahead.

Great. Thanks so much for the questions. Just maybe first on on Virginia, you highlighted 20,000 patients potentially in the US, maybe just a similar metrics about how you're thinking about the size of the eligible population and developed ex-US markets. And then the second question, very helpful color in terms of kind of the mix and unemployment headwinds for 2021. Any updates in terms of how you're thinking about potential international price pressures from some of the budget deficits we're seeing globally? Is that is that a 21 headwind to think about as well or is that going to take a bit longer to manifest itself? Thanks so much.

Thanks, Chris. We'll go to Anne for Verzenio and then to Dave on the international question.

Great. So thanks so much for that question on the Verzenio eligible population. And so, as I said, in the US, about 20,000 eligible patients, which is about 10 to 15 percent of the HR positive HER2 negative EBC population. Outside the US, the pathologies similar, we estimate. So we estimate patient numbers in Europe about 10 percent larger than the US. And then Japan is about one fourth of the size, the US. So I hope that answers the the estimate questions outside the US.

Great. And on international pricing, I think we've talked about this before, but we don't have that many proxies for this kind of situation. But what we do know is economic activity, particularly in Europe and Japan, has fallen like in the US tax receipts accordingly. And if we use 20 to 20, it is a proxy really took almost three years for the policy implications of that to show up in drug pricing health budgets. And that's natural because there's a lag in tax receipts and then there's a lag in policymaking in response to it. I would expect that to happen. And the normal things that occur are clawback mechanisms and methods to keep the medicine's budget within some proportion of the health budget. I think that will be a headwind the industry will face over the next two or three years. I would say, though, that if history follows and I don't see any reason why it wouldn't because Europeans in particular were successful at capping drug spending growth in the early part of the last decade, the burden of that tends to follow fall disproportionately on older products that are scaled and perhaps with more competition in the categories. Whereas newer products, I think actually more really affected. They're more driven by health technology assessment and the procedures to get an initial price. And they don't really drive much budget pressure versus end of life. As you know, we continually advocate for more biosimilar and generic adoption in these markets as the first lever to pull. And so I think also for products that are exposed to biosimilars and generics, you probably would see more pressure on the back end of this as well.

Thanks,

Dave. Chris,

thanks for your questions. Next caller, please.

And next question is from Emil Zivan from Mizzou. Please go ahead.

Great. Thank you. And thanks for taking the question. So a couple of I can. So one on just on the margin discussion and specifically on SGA. Let me know if you have any comments you can share just in terms of your sort of more virtual promotional efforts here this past few months and a sense of how productive they've been. And we're just trying to get a sense and to think about going forward is your spending on SGA potentially going to be less than what you were thinking before. If you go to more of a hybrid sort of model, what do you expect within a year or so your SGA spending would be essentially what it would have been before the pandemic. And then the second one is just maybe more on the business development side, just given some of the volatility of seeing and some of the uncertainty around COVID and also drug pricing. Do you see any changes to how you're thinking about potential licensing or acquisitions in terms of size or in terms of therapeutic areas? Are there any specific areas where you feel more need or desire or capacity to bring in additional assets? Thanks so much.

Thanks, Vamal. We'll go to Dave for your first question and then Josh for the second one

on BD.

Yeah,

Vamal, for some years now we've been on a journey to build out the capabilities to reach customers where they want to be reached and have relevant information at that time, as well as around launches and key data readouts to be able to expand our capacity beyond just the sales channel to reach customers. That has proven pretty useful during this pandemic. And I would say overall the conditions, which, as I mentioned in my prepared remarks, are variable around the world in terms of being able to safely send reps into the field and actually even be able to be let into medical buildings and facilities. I think there's a constraint there. So we've leaned into this. We've accelerated some of the plans we had to increase volume and the richness of this capability. Overall, I think the results are, I think we prefer to run the hybrid model everywhere where we have sales reps and these capabilities where we can't send sales reps. These capabilities have been useful. Is it as productive? I think it's certainly more efficient and it's more scalable. Whether it's as impactful, I think we'll need to watch through time. We have different markets we serve and I can say that in specialty markets where you've got a smaller number of physicians and you can target your efforts extremely well. We mentioned Retevmo launch on this call, which is kind of a first thing for us was an approval and launch during the pandemic. I think we're pretty pleased with the progress there. On the other hand, primary care brands, you know, it's a little more challenging because the way these practices are run and the variability and physicians accessibility. So I think the whole industry is probably learning this, but on the other side of this, we'll have a much more enhanced capability and you can bet we're spending huge amounts of time on a global basis, lifting that up now in a way that's pretty rigorous. So, you know, more to come there, productivity to be seen, efficiency, yes, effectiveness. You know, we probably see a lot of variability right now.

Thanks,

Dave. Josh?

Yeah, so on business development, our strategy hasn't changed. We continue to focus on acquiring potential first in class or best in class projects or products in our therapeutic areas. There's a high bar there. We've had great progress in our internal pipeline, but we remain committed to finding those kind of opportunities. We have, you know, we're generating very strong cash flow. We've got good investment grade ratings and good liquidity, good access to capital markets. So even with all the disruption related to COVID, I don't see any change for us and in our ability to interact with, you know, smaller companies or, you know, access potential projects hasn't changed. That's not impacted by COVID. So it's really just a function of finding the right opportunities and ensuring that we can structure the deals in ways that create value for, you know, for both sides and we'll continue to focus on that.

Thanks, Josh. Vamal, thanks for your questions. Next caller, please.

Next is Carter Goh of Barclays. Please go ahead.

Good morning. Thanks for taking the questions. I guess two for Dan. First, on the bare sit-in of studies in COVID, can you maybe just sort of, you know, frame sort of how you're thinking about these studies, your level of confidence in light of some of the other agents repurposed from RA that have failed, albeit upstream of Jack and Abhishan. And then as far as on the N3PG antibody side, are sort of timelines still in tact? We still expect that data to read out early next year and any commentary on how you're thinking about the hurdles. Thank you. Thanks, Carter.

Dan?

Yeah, sure. Thanks. On bare sit-in, of course, we're encouraged and the reason we did this trial is based on preclinical data around the mechanism of action of bare sit-in. And I think the clinical effects of immune modulation in hospitalized patients with COVID-19 has been mixed. As you pointed out, there have been some failures. There have also been some promising efficacy signals and even success. So, of course, with dexamethasone. So I think we just have to wait and see how this works. Treating patients in the hospitalized setting is important. If we can reduce length of stay or decrease mortality, that'll be an exciting result and maybe a stopgap measure until we have medicines that actually can fight off the virus. So, like, I hope that the neutralizing antibodies will. As for N3PG, yeah, we're still on the same timeline as we've always been. The trial will wrap up at the very end of this year, which means we'll have data internally and likely some kind of top line just in the very start of next year. I think given the size of the study, we have a reasonably high hurdle rate. We are hoping to see a large effect size. We base that belief on the level of plaque clearance we can get. We get deeper and faster plaque clearance than has been shown with any other agents. So, if clearing plaques is important to stopping disease progression, we should have a strong effect. It's noteworthy that we also designed this trial to select a very careful patient population based on their tile levels at baseline. So, we also expect a smaller standard deviation because the population should have a more uniform progression. I also note that we started a second trial with N3PG already.

Thanks, Dan Carter. Thanks for your questions. Next caller, please.

Next, Steve Scala of Cowan. Please go ahead.

Thank you. When we see the data from Monarch E, can you reassure us that the disease free survival improvement won't be an underwhelming 1 to 2 percent? Really seems excited about the data. So, I would assume it's going to be stronger than 1 to 2 percent, maybe 3, 4, 5 percent. And then secondly, Roche announced last week that it will have data from a large phase two trial of a Tau antibody very soon. Should the Roche study fail? Can you highlight any differences between the Lilly and Roche molecules and or the study design that could sustain optimism for the Lilly program? Or if the Roche molecule fails, should we assume that the Lilly molecule likely will follow a similar fate? Thank you.

Thanks, Steve. We'll go to Ann for the question on Monarch E and then Dan for the question on Tau.

Well, Steve, thanks for the question. Obviously, we just shared the top line at this time, so I can't go into the detailed data, as you know, prior to the data disclosure. But what I can tell you is that we do believe that the positive results of Monarch E are clinically meaningful and will add to the existing body of evidence that Verzenio is differentiated from other CDK 4-6s. And this is a major milestone for Verzenio and we believe does have the potential to change the paradigm of how early breast cancer is treated. So we really look forward to sharing the data with you at a meeting later this year.

Thanks,

Ann. Dan? Yeah, thanks. And with respect to the Tau antibody, again here, I just say we're still on track for the data readout. This one will come in the second half of next year. I'm excited about this mechanism, but we don't have clinical data yet. The Roche readout will be important and we'll be watching it carefully. And of course, on behalf of patients and the mechanism, we'll be hoping for their success. But there are some differences, as you pointed out, both in molecule and trial design that make read through more complicated. One, I think, important aspect of molecule design is that there's lots of different species of Tau in the brain. There's a lot of soluble Tau that is monomeric and probably not involved in the pathogenesis of Alzheimer's disease that can sop up antibody and sort of reduce the effective amount of antibody available to get the bad kinds of Tau. Our antibodies designed specifically to bind aggregated Tau, so we think that should improve its ability to actually hit the target. Very high doses of these antibodies are generally used to overcome this soluble monomeric Tau problem. So that's one difference between that Roche antibody and in fact, all of the competitors and ours. The second difference is around trial design. And here again, we've used our unique expertise in Tau imaging and biomarkers to select a patient population that we think, A, will be more uniform in its disease pathogenesis. Progression along as the signal better and B, be more likely to be responsive to a Tau therapeutic. It's likely these therapies will be effective if they are effective at stopping the spread of Tau rather than removing preformed Tau. And so I think it's important to have patients who are in the midst of the spreading town, not patients in town spread throughout the entire brain. So we'll watch them carefully, but they'll be cautioned on readers.

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

Navin Jacob, UBS. Please go ahead.

Hi, thanks for taking my questions. Just a couple on some launch products. Ritevmo, just wondering how that launch is going. What is the diagnosis rate for RET right now? And where do you see that will reach over the next one to two years? And then just timelines for Ritevmo and XUS markets. And then separately with regards to your migraine franchise, just want to get some color on how you view the CGRP market growing from here going forward, as well as tied to that. And I know it's still early in the launch, but the launch does seem to be a little bit slower than some of the competitors out there. Just wondering what the dynamics you're seeing in their understanding that COVID-19 is also making things a little bit challenging in the neurology setting. Thank you so much.

Thanks, Navin. We'll go to Ann for the question on Ritevmo and then Patrick on migraine.

Well, thanks, Navin, for the questions on Ritevmo. So the launch is going well, as Dave mentioned in his introduction. And so we're encouraged by the early demand signals that we've seen with Ritevmo. And the initial customer feedback on the data has been very positive. So they're impressed by the efficacy and the safety data across multiple indications and lines of therapy that we're able to get into the label. And it's the largest, obviously, RET inhibition population that's been studied in 700 patients. We don't have RxData to report yet, but we're aware of patient starts in a number of our top accounts, which is supported by the downstream channel orders. So it's clear that our -to-market advantage is resulting in the treatment of patients who have identified RET even in previous testing. So that kind of leads to your question around diagnostic testing. So what we've seen historically is that RET is showing up on panels probably about 30 percent of the time. So you've hit on one of the key criteria of the launch is to continue to drive that testing rate up. And so it's been very much a focus of our efforts both to work with pathologists out in the U.S. on making sure that they have RET on their panels now that we have an actionable, very actionable biomarker for them to test against. Our goal is essentially to eventually see testing rates like we see in some of the other targeted therapies, which approach 80 percent. Now, the question that we'll all have to assess is how quickly we can get there. But our goal is to drive that up as quickly as we possibly can. And so that's a big focus of the launch. And we have partnerships with Thermo Fisher and Illumina and other things in the works to really drive that up across the industry, because we do believe that that's actually the best care for patients, regardless of the retreated RET or other targeted therapies that we want patients to get the right therapy for them. As far as the timelines, so as you know, we've submitted in Europe and so we're awaiting regulatory action there. That submission was accepted at the beginning of this year. And then we look to submit in Japan and China either late this year or early next. So still working with regulatory authorities there.

Thanks, Anne. Patrick?

Thank you very much. Well, the overall CGRP market continues to grow very nicely. And when we look at the market growth year to year, we're talking about the growth of 64 percent versus last year, while MGALITY actually continues significantly outperforming the market with a growth of 151 percent. And even if we look at the last quarter, we see that the CGRP market continued to grow with 12 percent, despite the significant decline in terms of new to brand. And we continue to remain very confident in the future of MGALITY and aiming for a market leadership in the preventive market. And we see also strong market leadership, particularly in primary care, where we have expanded our efforts in 2020 and with quite a few new trialists. So very, very optimistic in terms of the CGRP market for MGALITY. If we look at the reval launch, I think it's fair to say that we are not pleased with the performance so far, but we need to have in mind that we had approximately one month in the marketplace prior to we were hit by COVID-19. And we made the conscious decision to actually pull back from our promotional efforts, both in the field as well as in terms of seeding promotion overall. We have started to start up virtual proactive detailing and we remain very confident in the molecule, taking into account that it's the only one that actually can offer a strong relief from the most painful physical symptoms as well as the most popular symptoms associated with migraine. And we know that there is a huge opportunity. Out of the six million people being treated in the U.S. today, 35 to 40 percent of those are not responding to the cryptons. And in terms of efficacy relief with one single dose, we believe we have a unique value proposition, but still a lot of work to be done.

Thanks, Patrick. Naveen, thanks for your question. I think we have time for one more caller, please.

And that's from the line of David Reisinger, Morgan Stanley. Please go ahead.

Thanks very much. So I have two questions, please. First for Dan, if you could just help us understand a little bit better regarding the Absalara antibody 400-patient Phase 2, which was initiated mid-June. Just curious, given the primary endpoint is that day 11, why would results not be revealed until the fourth quarter? And then second for Josh, could you comment on the swings in other income? I guess it's really more on a go-forward basis since you already discussed what happened in the second quarter, just to maybe provide any modeling suggestions to us for modeling other income in future quarters. Thanks very much.

Thanks, Dave. We'll go to Dan and then Josh.

Yeah, Dave, thanks for the question on the timing of Phase 2. You're right. It's a 400-patient study that initiated last month. It got up to a bit of a slow start, I think, as we saw at that time in the country, the pandemic shifted in geographies. We shifted our efforts accordingly. It's now enrolling very, very quickly. The timing of data disclosure depends on that rate of enrollment, though. So it could, in fact, be sooner than Q4. I think I'm confident it will be by, of course, sometime during Q4 at the latest. As you point out, the day 11 time point is a critical point. So 400 patients enrolled and then 11 days later, nasopharyngeal swabs and viral assessment and then database lock and analysis and reporting. All that will just take probably a couple of weeks from the end of the study. So we'll keep investors updated and the community updated on the progress of the study. That's what we're doing today.

Thanks, Dan. Josh?

Thanks. Yeah, on our OID, of course, in the first half of the year and particularly in the second quarter, as I mentioned, what we're seeing there is the -to-market gains from the roughly $2 billion of investment securities we hold. Again, we hold these as a function of business development deals and venture capital deals to stay abreast of breaking science. And obviously, we're making good decisions there, at least as of Q2. We don't anticipate or we don't forecast gains going forward there. So really, if you keep that neutral, Dave, what we're really thinking about then is we're in a net debt position. So we pay interest costs on the debt. And then the only way we see anything that's positive is if we see investment gains change. So I think for modeling purposes, look at our sort of net debt position. We've got great rates against the debt. So it's pretty modest negative costs, but that's sort of what we assume. And then any unusual items that flow through there, of course, we'll report. And we tend to just, as you saw in Q2, let those flow through. But we're not anticipating anything significant in the second half of the year. So mostly you're just going to see the negative impacts of our net debt position.

Thanks, Josh. David, thanks for your questions. And we'll go to Dave for the close. Thanks, Kevin.

Well, we appreciate your participation in our earnings call today. A remarkable quarter. And thank you for your interest in Eli Lilly. Please follow up with our IR team if you have any additional questions that we didn't address today. And hope everyone stays well. We'll talk to you soon.

Thank you, ladies and gentlemen. That does conclude your conference. We think we do thank you for joining. You may now disconnect. Have a good day.