Eli Lilly and Company

obesity data we announced this morning. We are focused on driving adoption of our newer medicines, preparing for key product launches, delivering several global submissions for potential new medicines, all the while advancing our pipeline to power the next wave of growth. We are pleased with the progress we saw in the first quarter. Before I get to our results, I'd like to take a moment to address the tragic loss of life and the hardships we are seeing in Ukraine. Our Ukraine office is currently closed and operations are suspended. The safety of our employees and their families continues to be our top priority. We are working through logistical challenges in order to ensure supply of our medicines to those in need in Ukraine. Earlier this month, an initial shipment of medicine donated by Lilly, including insulin, arrived in Ukraine thanks to the tremendous efforts of our partners, Project Hope and Direct Relief. Few of our clinical trial participants are in Ukraine. So while we're doing everything we can to ensure continuity of their medical care, there is minimal impact to our global trials. With regard to Russia, we have suspended investments, our promotional activities, and new clinical trials there. Our Russian operations are now only focused on ensuring people suffering from diseases like cancer and diabetes continue to get the Lilly medicines they need. Should we generate any profits from our sales in Russia, we will donate them to organizations dedicated to humanitarian relief. Our revenue in Russia and Ukraine account for less than 1% of our total company sales in 2021. Moving to our results, you can see on slide 4 the progress we've made on our strategic deliverables so far this year. Q1 revenue grew 15% or 17% on a constant currency basis and was driven by volume growth of 20%. When excluding revenue from COVID-19 antibodies and Olympta due to loss of exclusivity, revenue grew 10% for the quarter. This volume-driven performance in Q1 is attributable to our key growth products, which grew 24% and now account for 61% of our core business. With long IP runways for many of these products and less than 10% of our 2022 revenue exposed to patent expiry in the next five years, along with the potential to launch five new medicines over the next 18 months, the durability of our growth outlook is quite strong. Our non-GAAP gross margin was 76.1% in Q1, an increase of approximately 70 basis points. Excluding revenue from COVID antibodies, gross margin was approximately 80% for the quarter. Our non-GAAP operating margin was 33.4%, an increase of roughly 1,000 basis points. primarily driven by both higher gross margin and lower R&D expenses for COVID antibodies. In our pipeline, we have several important updates since our Q4 earnings call, including the U.S. and EU approval for Jardians in heart failure with preserved ejection fraction, as well as a recommendation from the Independent Data Monitoring Committee for an early stop to the Phase III trial studying Jardians for chronic kidney disease due to clear positive efficacy. The U.S. Emergency Use Authorization for Bebtolivumab for the treatment of mild to moderate COVID-19. The recent U.S. submission of Mirakizumab for the treatment of adults with moderately to severely active ulcerative colitis. And a positive phase three top line readout for SUMAT-1, the first of four global studies to evaluate trisipatide for adults living with obesity or overweight. Dan will talk in more detail later, but we are very excited. with the results of the Phase III SIRMOUT-1 top-line readout. We believe there is significant potential for trisipatide to build off the impressive results we saw from our clinical program in type 2 diabetes and help people with obesity, a disease impacting over 110 million people in the United States and approximately 650 million people worldwide. Obesity is a chronic and progressive disease that causes over 2.8 million deaths globally each year. The economic impact associated with obesity is more than $1 trillion in the U.S. alone. We believe addressing obesity could make a difference in millions of people's lives, have a significant impact on public health, and reduce healthcare costs. We're hopeful that we are entering a new era of obesity care, where people have medicines that can help treat their obesity, and this is our first proof point on that journey. We continue to rapidly advance nucleic acid innovation at Lilly, building on our growing portfolio with the launch of the Lilly Institute for Genetic Medicines, a $700 million facility in Boston. We will develop novel RNA and DNA-based medicines, as well as push the boundaries of delivery technology to unlock difficult-to-treat targets in key strategic areas for us, like neurodegeneration, diabetes, and obesity. We distributed nearly $900 million in dividends in the quarter and completed $1.5 billion in share repurchases. On slides five and six, you'll see a list of key events since our Q4 earnings call, including several important regulatory, clinical, and COVID-19 antibody updates we're discussing today. Now I'll turn the call over to Anat to review the Q1 results.

Thanks, Dave. Before I review the financial results for Q1, it is important to note that beginning this quarter, following direction from the SEC, presentation of non-GAAP measures will not include upfront charges and development milestones related to acquired in-process R&D and development. While this is no bearing on how we conduct our business, it will have an impact on how we represent, how we present our non-GAAP measures. This change in presentation of financial results will have the effect of pulling into non-GAAP measures certain charges that were previously reported only in our GAAP financial results. We expect this change will increase non-GAF operating expenses and decrease non-GAF operating margins and earnings per share. To help with year-on-year comparison of our non-GAF measures, you can find a revised workbook in our investor website, reflecting the updated presentation of our 2020 and 2021 results. Slide seven summarizes financial performance in the first quarter of 2022. I'll focus my comments on non-GAF performance. In Q1, revenue grew 15%. Excluding revenue from COVID-19 antibodies and Olympta, revenue increased 10%, highlighting solid momentum for our core business. Gross margin as a percent of revenue increased 70 basis points to 76.1% in Q1 2022. The increase in gross margin percent was primarily driven by the unfavorable effect of foreign exchange rates on international inventory sold in Q1 2021, partially offset by increased sales of COVID antibodies, which have lower gross margin profile than the rest of our portfolio, and to a lesser extent, lower realized prices. Increase in manufacturing costs and logistics due to inflation had a modest impact on gross margin in Q1. Total operating expenses decreased 6% this quarter, which is a reminder is now inclusive of acquired IPR&D and development milestone charges, Marketing, selling, and administrative expenses decreased 1 percent, while R&D expenses decreased 4 percent, driven by lower development expenses for COVID-19 antibodies, partially offset by higher development expenses for late-stage assets. This quarter, we recognized acquired IPR&D and development milestone charges of $166 million, or 15 cents, of EPS, primarily related to a purchase of a priority review voucher. In Q1 2021, acquired IPR&D and development milestone charges were $312 million, or 27 cents of VPS. Operating income increased 66% in Q1, driven by higher revenue, primarily due to higher sales of COVID antibodies, lower R&D expenses for COVID antibodies, and to a lesser extent, lower acquired IPR&D and development milestone charges. Operating income as a percent of revenue was 33.4% for the quarter and reflects a benefit from COVID-19 antibody revenue, as well as a negative impact of approximately 210 basis points attributed to acquired IPR&D and development milestone charges. Other income and expense was income of approximately 38 million this quarter, compared with income of 35 million in Q1, 2021. Our Q1 effective tax rate was 10.3%, an increase of 140 basis points compared to the same period in 2021. This increase was driven by a lower net discrete tax benefit this quarter, partially offset by decreased tax expenses related to the implementation of the provision in the 2017 Tax Act requiring to capitalize research and development expenses. At the bottom line, we delivered strong earnings per share growth of 63% in Q1, inclusive of approximately 1,500 basis points related to lower acquired IPR&D and development milestone charges. On slide eight, we quantified the effect of price, rate, and volume on revenue growth. This quarter, U.S. revenue grew 31%, and when excluding revenue from COVID-19 antibodies and the LIMTA, revenue grew 14% in the U.S. This growth was driven by volume led by Trulicity, Fresenio, Jardines, Illumiant, and Tulse. We experienced a net price decline of 1% for the quarter and continue to expect a mid-single-digit price decline in the U.S. for the full year. As a reminder, a single competitor to Olympta launched in the U.S. in February, and we expect broad generic entry in May, resulting in significant erosion of U.S. Olympta revenue. Moving to Europe, revenue in Q1 declined 13% in constant currency, and when excluding revenue from COVID-19 antibodies and Olympta, revenue grew 14% in constant currency, driven primarily by volume growth for Trulicity, Tulse, Jardiance, Fresenio, and Illumiant. We expect continued growth in Europe, excluding Olympta. For Japan, Q1 revenue decreased 21% in constant currency, as our business there continues to be negatively affected by significant declines in off-patent products, primarily Cymbalta and Olympta. Key growth products now represent 65% of total revenue in Japan, and we expect a return to growth in Japan beginning in 2023. In China, revenue grew 10% in constant currency. The NRDL axis has driven significant volume growth for newer products like Tyvek, Trulicity, Versenio, and Tulse, and has been partially offset by related price decreases. We expect this improved access to continue to drive future volume growth more than offsetting the price decline. The recent COVID-19 outbreak in China and the subsequent protective measures that are currently being put in place to control the spread of the virus highlight the potential for commercial impacts in China in the near term, particularly for our infused products like Tyvet. Revenue in the rest of the world increased 29% in constant currency this quarter, driven primarily by $95 million in revenue from the sales of rights to Cialis in Taiwan and Saudi Arabia, as well as by increased sales of key growth products. We continue to expect a mid-single-digit net price decline in 2022 for the U.S., Europe, and Japan, with a worldwide net price decline and a high single-digit driven by the expanded NRDL access for our products in China. As shown on slide nine, our key growth products continue to drive robust worldwide volume growth. These products drove nearly 15% points of volume growth this quarter and continue to bolster overall performance and outlook. Slide 10 further highlights the contributions of our key growth products. This quarter, these brands generated $3.9 billion in revenue and made up 61% of our core business revenue, growing 24%. We're pleased with the continued market growth of both the GLP-1 and SGLT-2 classes, where Trulicity and Jardiance are market leaders, as well as with the strong TALS prescription growth. We're also encouraged by the significant update of Versenio in Q1, driven by the approval and launch of the adjuvant indication, which has led to an inflection in both new and total prescriptions. On slide 11, we provide an update on capital allocation. In Q1 2022, we invested $2.4 billion to drive our future growth through a combination of R&D expenditures, business development outlays, and capital investment. In addition, we returned approximately $900 million to shareholders in dividends and repurchased $1.5 billion in stock. Our capital allocation priorities remain unchanged as we continue to fund our key marketer products and expected new launches, invest in our pipeline, pursue opportunities for external innovation to augment our future growth prospects, and return excess capital to shareholders. Slide 12 is our updated 2022 financial guidance. As I previously noted, our presentation of non-GAAP financial measures will now include IPR&D and development milestone charges. For guidance, we will include charges that have been incurred or realized as of the date of the earnings release. and will not include any impact from potential or pending business development. We're providing information that should make this change as easy as possible to understand, as well as incorporate into modeling. As always, please let us know if there's anything else we can do to be of assistance as you navigate through this transition. I do want to reiterate that margin expansion continues to be a priority for our team, consistent with prior communication excluding IPR&D and development milestone charges, we expect to drive further non-GAAP operating margin expansion over time. Getting into the numbers underlying our updated guidance, there are several items that benefited first quarter results which are not expected to recur. These include approximately $1.4 billion of COVID antibody sales, U.S. Olymptia revenue of approximately $250 million, that will be impacted by multi-source generic entrants in Q2 and beyond, a favorable effective tax rate, and a one-time benefit related to the resolution of Cepheclore patent litigation in Canada. I will also remind you that as we look ahead to the second quarter, the Q2 2021 revenue benefited from the sale of Cialis rights in China, which will provide roughly 2.5 percentage points of headwind to our top-line growth in Q2. Starting with revenue, we are increasing the guidance range by $1 billion to now be in the range of $28.8 to $29.3 billion, reflecting the additional revenue from BEMTA Livimed sales in Q1. While we project an unfavorable impact from foreign exchange rate, we are expecting to offset it with stronger core business performance. we anticipate that any additional revenue from cells of COVID-19 antibodies to be limited beginning Q2 2022. While the U.S. government has an option to purchase additional 500,000 doses of beptolivimab no later than July 31st of this year, it is uncertain whether this option will be exercised, and therefore it is not included in our guidance. Moving down the income statement, GAAP gross margin percent is now expected to be approximately 76%, while non-GAAP margin, gross margin, is now expected to be approximately 78%. The majority of this 200 basis point reduction is due to the impact of Q1 BEP to Livimib sales, which has lower gross margin, and to a lesser extent, an increase of approximately $100 million in logistics and manufacturing costs due to inflation. The range for R&D expenses has been increased by $100 million to be $7.1 to $7.3 billion, driven by investment in our late-stage pipeline, primarily Alzheimer's clinical development, and investment to advance the diagnostics ecosystem. Our guidance includes acquired IPR&D and development milestone charges of approximately $521 million, reflecting Q1 charges of $166 million, With the remainder primarily related to a charge associated with the buyout of future obligations that were contingent upon development, regulatory, and commercial success of our mutant-selective PI3K inhibitor, this guidance does not include any impact from potential or pending business development transactions. GAAP and non-GAAP operating margin decreased 200 basis points to approximately 28% and 30% respectively primarily due to the negative impact associated with the acquired IP R&D and development milestone charges to date. Given the accounting change for acquired IP R&D and development milestone charges and the inherent variability associated with stretch charges, our non-GAAP operating margin figure will not measure efficiency in the same way it has done historically. However, you can track our operating margin in the way you deem most appropriate, knowing that we aim to expand operating margin over time exclude an acquired IPR&D and development milestone charges. Our Q1 2022 tax rate and EPS include a favorable impact from the provision in the 2017 Tax Act that requires capitalization of research and development expenses for tax purposes. Our financial guidance for the full year is unchanged and assume that this provision will be deferred or repealed by Congress effective for 2022. If this provision is not deferred or repealed effective this year, then we would expect a reported and non-GAAP tax rate to be approximately 10 to 11%. It is notable that while this provision favorably impacts certain tax items which decrease our effective tax rate, we expect it will increase our 2022 cash payments of income taxes by approximately $1.5 billion. Based on these changes, we have lowered our reported EPS guidance by $0.70 to now be in the range of $7.3 to $7.45 per share and lower non-GAAP EPS guidance to be in the range of $8.50 to $8.30. That $0.35 reduction in our non-GAAP EPS range includes a $0.55 decrease due to the year-to-date acquired IPR&D and development milestone charges. partially offset by improved business performance of 20 cents, attributable to the net benefit of Q1 Bepthelizumab sales, and increased investments in R&D. Now I will turn the call over to Dan to highlight our progress in R&D. Thanks, Anad.

Let me start with today's exciting announcement, the positive top-line results from the Terzepatide Surmount 1 Phase 3 study. Participants without type 2 diabetes who have obesity or overweight with at least one comorbidity achieved up to 22.5% weight loss at 72 weeks, which translates to a mean weight loss of 52 pounds. Terzepatide is the first investigational medicine to deliver more than 20% weight loss on average in a phase three study. Indeed, most people on 10 or 15 milligrams of Terzepatide in this trial achieved 20% or greater weight loss. and up to 63% of patients on 15 milligrams achieved this level of weight reduction. Obesity is a chronic disease that needs more effective treatment options for patients. We're working hard at Lilly to create new, potentially innovative medicines with the aim to modernize how this disease is approached. We hope that Terzapatide can be Lilly's first such medicine, and the Shemount program has been designed to test just that. I'll cover the SHMOUT I results in more detail, but first let me quickly provide an overview of the SHMOUT Phase III program. The SHMOUT program has enrolled more than 5,000 people with obesity or overweight across six studies, four of which are global registration studies. On slide 13, you can see key trial design elements for those four global registration studies. All four studies compare the efficacy and safety of terzapatide to placebo as an adjunct to a reduced calorie diet and increased physical activity. Sermount 1 was designed to evaluate treatment with Ders Epatide compared to placebo to provide weight reduction and safety data for people without type 2 diabetes with obesity or overweight with at least one comorbidity. Sermount 2 will provide weight reduction and safety data for people with obesity or overweight with type 2 diabetes. Sermount 3 will provide data on maximizing weight loss following an intensive lifestyle program. And Sermount 4 evaluates maintaining weight loss. We expect the remaining three global studies to read out in the middle of 2023. Note that dose escalation in the surmount program is consistent with that of the surpass program for the treatment of type 2 diabetes with trisepatide. Patients start with 2.5 milligrams of trisepatide and move up every four weeks in 2.5 milligram increments to reach their target dose. In surmount three and four, study participants will escalate to the maximum tolerated dose of either 10 milligrams or 15 milligrams. Patients escalating the maximum tolerated dose provides the opportunity to evaluate the full potential for weight reduction. Studies vary in duration from 72 to 82, 72 to 88 weeks, and surmount one will continue through 176 weeks to evaluate whether trisepatide can actually slow the time to onset of type two diabetes in participants who had pre-diabetes at the time of entering the clinical trial. We believe this will be important additional information for patients and physicians. Surmount 1, a large trial which enrolled over 2,500 participants, met its co-primary study endpoints and also hit on all pre-specified key secondary endpoints. On slide 14, you can see the first co-primary endpoint in the Surmount 1 study, where Terzapatide delivered up to 22.5% mean body weight reduction in adults with obesity or overweight. With a mean baseline weight across the study of 231 pounds, This translates into a mean body weight reduction of 52 pounds on the 15 milligram treatment arm of the study. Along with the impressive results from the 10 milligram dose, which showed 21.4% mean body weight reduction, we were also very pleased to see how well the 5 milligram arm performed with a 16% mean body weight reduction, also at 72 weeks for the efficacy estimate. Moving to slide 15. Terzapatide obviously achieved the second co-primary endpoint of driving at least 5% weight reduction. Clearly, the vast majority of subjects, including greater than 96% of participants in the 10 and 15 milligram arms, achieved this level of weight reduction. We're really excited that a key secondary endpoint in SIRMOUT1 showed up to 63% of patients achieved at least 20% body rate reduction at 72 weeks, again using the efficacy estimate. This is compared to only 1% of participants who achieved greater than 20% weight loss on placebo as an adjunct to diet and exercise. Moving to slide 16, you can see the safety profile from the Shamont 1 study. Terzapatide was well tolerated in study participants with the overall safety and tolerability profile similar to incretin-based therapies approved for the treatment of obesity. As in the SURPASS program, the most common reported adverse events were GI-related, generally mild to moderate in severity, and usually occurred during dose escalation. Treatment discontinuation rates due to adverse events were between 4.3% and 7.1% for trisepatite treatment arms compared to 2.6% for placebo. The overall treatment discontinuation rates ranged from roughly 14% to 16% in the trisepatite arms compared to over 26% for placebo. The minimal weight loss seen in the placebo treatment group combined with the observed placebo discontinuation rate of 26% demonstrates the limited efficacy of diet and exercise alone and highlights the significant unmet medical need for people with this disease. We'll continue to evaluate the SHMOUT-1 study data and are planning to present findings at a medical meeting in the second half of this year. Of course, we plan to submit our manuscript to a top-tier peer-reviewed journal. As Dave mentioned earlier, obesity is a chronic disease impacting over 110 million Americans, and there is great need for more effective treatment options. While our current alignment with the FDA is to complete the four Surmount Global Registrational Studies prior to submission, we believe the impressive results from Surmount One warrant further discussion. Based on our existing robust data set, we're looking forward to reviewing the data with the FDA and discussing the potential for an expedited path forward for this indication. Moving to the rest of the portfolio. Slide 17 shows select pipeline opportunities as of April 27th, and slide 18 shows potential key events for the year. There have been several other important developments since our last earnings call, and I'll cover these by therapeutic area. In diabetes, along with our partner Beringer Ingelheim, we're proud of the expanded indication for Jardiance as a treatment for heart failure with preserved ejection fraction. which has been classified as the single largest unmet need in cardiovascular medicine. Jardiance is now the first and only heart failure therapy to demonstrate a statistically significant risk reduction in cardiovascular death or hospitalization for heart failure, regardless of ejection fraction. We also announced the phase three trial studying Jardiance for chronic kidney disease will stop early due to clear positive efficacy. The recommendation was made by an independent data monitoring committee. And while we've not yet seen results from this interim analysis, We're excited about the potential for this new indication and expect to share detailed results from the upcoming primary analysis at a medical meeting in the second half of this year. Last month, we began dosing patients in the first of five Phase III trials for our investigational weekly insulin basal insulin FC, or BIF. The QUINT III trial compares weekly BIF to insulin degludec, where patients are currently treated with basal insulin. We intend to start the other four Phase III trials later this year. You'll also see we've advanced our long-acting amylin receptor agonist to phase one development in obesity. Shifting to immunology, we presented mirakizumab induction data from Lucent One at the European Crohn's and Colitis Virtual Congress, demonstrating superiority over placebo for the primary and all key secondary endpoints. These data show patients with moderately to severely active ulcerative colitis achieved statistically superior rates of clinical remission compared to patients taking placebo with nearly two-thirds of patients responding to mirakizumab. The results indicated improved symptom relief, including decreased bowel urgency, and resolution or near resolution of inflammation. Building upon the positive outcomes from Lucent 1, we look forward to sharing maintenance data from Lucent 2 later in Q2. We're also excited to announce that we've submitted to the FDA and expect submissions in Europe and Japan in Q2. Merakizumab has the potential to be the first in class SIL23P19 inhibitor treatment for people with ulcerative colitis. Last month at the American Academy of Dermatology annual meeting, we shared Leberkizumab monotherapy data showing more than 50% of patients with moderate to severe atopic dermatitis experienced at least 75% reduction in disease severity at 16 weeks. Additionally, at the Revolutionizing Atopic Dermatitis Conference, we shared data showing 70% of patients receiving leberkizumab combined with topical corticosteroids achieved at least 75% improvement in overall disease severity. We believe these data could help establish a competitive profile for leberkizumab, and we're looking forward to further data from our maintenance studies in the first half of this year to provide insight into the durability of efficacy. Global submissions are expected by year-end. Moving to baricitinib, The FDA review for alopecia areata is underway, and we're pleased to note that the FDA has granted priority review designation. As expected, we also received a complete response letter from the FDA for baricitinib atopic dermatitis indication, as we were not in alignment with the agency on the indicated population. Finally, in immunology, we have discontinued the Phase II study for IL-2 and ulcerative colitis due to a lack of efficacy based on interim analysis. The safety was consistent with that observed in previous studies, and this decision does not impact the ongoing or planned studies for IL-2 and SLE or atopic dermatitis, as each disease state evaluates a different clinical hypothesis. Moving on to neuroscience and the national coverage determination issued earlier this month for monoclonal antibodies directed against amyloid. We share the disappointment of patients and their caregivers with this NCD, and we note more generally that innovation in new medical areas nearly always starts with data that are less proven and more debated and may proceed initially through regulatory mechanisms such as accelerated approval. We believe that Medicare's decision to use CED in such circumstances is in conflict with FDA's and Congress's intent of expedited regulatory pathways and is likely to have a stifling effect on innovation for new medical areas, causing harm to patients that are waiting and in need of new medicines. That said, we're continuing with our rolling submission to the FDA under the accelerated approval pathway. We intend to complete our initial submission yet in Q2, enabling a potential regulatory decision in early 2023. We believe it would be beneficial for Denetimab to obtain accelerated approval proximal to the Trailblazer ALS II Phase III readout in mid-2023, which would enable parallel discussions with CMS regarding outright coverage, and expedited review time for full FDA approval. We believe that given the thoughtful and robust design of Trailblazer ALS2, if the study is positive, it should meet the high level of evidence criteria set forth by CMS in the NCD decision. At that time, we will advocate for CMS to reconsider outright coverage of Zaninamab. As we stated previously, it's inconceivable to us that once substantial evidence of clinical benefit has been established for any Alzheimer's medicine, People with the disease won't have access to it. Our view of the mid- and long-term opportunity to help patients with deninamab remains unchanged. Shifting now to oncology with pertabrutinib, we're also working on a rolling submission here under the accelerated approval pathway, in this case for mantle cell lymphoma. Here, we also expect to complete our initial submission in Q2. We received a complete response letter from the FDA regarding the submission for centilimab which was in line with our expectation after the Oncologic Drugs Advisory Committee meeting earlier this year. Along with InnoVent, we're assessing next steps for centilinab in the U.S. Further, in the oncology pipeline, we've started two additional Phase III studies. The first is an additional study evaluating versenio in HR-positive HER2-negative advanced or metastatic breast cancer in combination with fulvestrant following progression on a CDK4-6 inhibitor and endocrine therapy. The second is cyclone three, evaluating versenio in earlier lines of prostate cancer. We've also advanced our next generation RET inhibitor to phase one development, and we've discontinued our aura A kinase inhibitor, as we did not see sufficient monotherapy activity to warrant further development. Similarly, in our pain therapeutic area, we've decided to discontinue development of epiregulin TGF alpha, because it did not meet criteria for proceeding. Finally, as Dave mentioned earlier, The FDA authorized beptalivimab for emergency use for certain non-hospitalized patients with mild to moderate COVID-19. Beptalivimab neutralizes Omicron, including the BA.2 sublineage, as demonstrated by pseudovirus and authentic virus neutralization assays. As you can see, Q1 was another busy but successful quarter for pipeline advancement at Lilly. Now I'll turn the call back to Dave for some closing remarks.