Joe Fletcher:

Thanks, Paul. Good morning, everyone. Thanks for joining us for Eli Lilly and Company's Q2 2024 earnings call. I'm Joe Fletcher, Senior Vice President of Investor Relations. And joining me on today's call are Dave Ricks, Lilly's Chairman and CEO; and Dr. Dan Skovronsky, Chief Scientific Officer and President of Lilly Immunology; Gordon Brooks, Interim Financial -- Chief Financial Officer; Anne White, President of Lilly Neuroscience; Ilya Yuffa, President of Lilly International; Jake Van Naarden, President of Lilly Oncology; and Patrik Jonsson, President of Lilly Cardiometabolic Health and Lilly USA. And we're also joined by Makela Irons, Mike Springate, Lauren Zurke of the IR 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 several factors, including those listed on Slide 4. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent filings with the SEC. The information we provide about our products and pipeline is for the benefit of the investment community. It's not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, please note that our commentary will focus on non-GAAP financial measures. Now I'll turn the call over to Dave.

Gordon Brooks:

Thanks, Dave. So, I'm on Slide 7, which summarizes the financial performance in the second quarter of 2024. Second quarter revenue growth of 36% was primarily driven by Mounjaro and Zepbound as well as Verzenio. When excluding revenue from the sale of rights to Baqsimi in Q2 of last year, revenue grew 46%. Gross margin as a percent of revenue increased from 79.8% in Q2 of '23 to 82% in Q2 of '24. Gross margin in the quarter benefited from favorable product -- and higher realized prices, partially offset by higher production costs. R&D expenses increased 15% driven by continued investment in our portfolio and in our people. Marketing, selling and administrative expenses increased 10%, primarily driven by promotional efforts associated ongoing and future launches as well as investments in our people. Operating income increased 90% in Q2, driven by higher revenue from new products, partially offset by operating expense growth. The effective tax rate on a non-GAAP basis was 16.5% in Q2 of '24 compared with 16.1% in Q2 of '23. The Q2 '24 tax rate reflects a mix of earnings in higher tax jurisdictions, while the Q2 '23 rate reflected the impact of earnings from the sale of rights for Baqsimi. At the bottom line, we delivered earnings per share of $3.92 in Q2, an 86% increase compared to the prior year. Q2 '24 results include a negative impact of $0.14 from acquired IPR&D charges compared to $0.09 in the prior quarter, Q2 of '23. On Slide 9, we quantify the effect of price, rate and volume on revenue growth. U.S. revenue increased 42% in Q2. Volume growth of 27% was driven by Zepbound, Mounjaro and Verzenio, partially offset by sale of rights for Baqsimi in Q2 of '23 and declines in Trulicity. Realized prices increased 15%, largely driven by Mounjaro access and savings card dynamics. As noted in our Q4 -- Q1 2024 earnings call, unprecedented demand for our incretin medicines led to wholesaler back orders at the end of Q1. In Q2, we fulfilled the majority of these back orders, improving wholesaler stocking levels. We estimate that U.S. Mounjaro and Zepbound aggregate sales in the second quarter were positively impacted by channel stocking that we estimate totaled high teens to mid-20s as a percent of U.S. sales as we rebuilt inventory from extremely low levels in the spring and to account for the growth of these brands. We are pleased that the group's supply situation is reflected on the FDA shortage website, which currently shows all doses of Mounjaro and Zepbound, listed as available and the two lower doses of Trulicity as available. While wholesaler back orders in the U.S. have been reduced substantially, it's important to note that the pharmaceutical supply chain is complex, more so for medicines that require refrigeration and offer at several different doses. These factors may continue to result in variability in the patient experience at the pharmacy counter. While supply and demand has come into better balance, we expect increase in demand may result in periodic supply tightness for certain presentations and dose levels. We have a continued broad agenda to further increase supply, and we'll continue to look at all options. Today, we are excited to announce plans to further expand access to Zepbound with the launch of the 2.5-milligram and 5-milligram single-dose files in the coming weeks with more details to come at that time. In Europe, revenue grew 20% in constant currency, primarily driven by Mounjaro launch uptake in the U.K. and Germany. We also had strong volume growth from Verzenio, Jardiance, which was partially offset by decreased volume from Trulicity. Japan performance was strong in the second quarter with 15% revenue growth in constant currency. Volume growth of 21% was driven by uptake of Mounjaro and Verzenio. Moving to China. Q2 revenue increased 1% in constant currency. Growth was driven by -- Olumiant and Taltz, partially offset by Trulicity and Cialis. Mounjaro was recently approved in China for type 2 diabetes and chronic weight management. We have not yet announced expected launch timing in this market. Revenue in Rest of World increased 61% in constant currency, primarily driven by Mounjaro volume growth from demand and channel dynamics. Slide 10 provides additional perspective on performance across our product categories. Verzenio solid growth in the second quarter across major geographies with worldwide sales increasing 44%, driven by the early breast cancer indication. Jaypirca revenue increased to $92 million worldwide, which included a $19 million partner milestone payment related to Japan. Jaypirca continued impressive quarter-over-quarter growth, building on the brand's uptake from both the MCL and CLL patient populations. OMVOH is launched in the U.S. and 14 international markets with sales of $26 million in Q2. These launches continue to progress well with increasing patient starts. And in the U.S., we expect sales to accelerate as the product-specific code went live on July 1. Mounjaro sales in Q2 were $3.1 billion globally with $2.4 billion in the U.S. Revenue growth in the U.S. reflected continued strong demand as well as the improved channel dynamics discussed earlier. We're seeing solid uptake in Mounjaro outside the U.S., with sales in Q2 totaling $677 million. In the first half of the year, we launched the quick pen presentation in the U.K., Germany and the UAE. So far in Q3, we've also launched Mounjaro Quick Pen in Spain and plan to launch an additional market throughout 2024. In Q2, worldwide Trulicity revenue declined 31%. U.S. Trulicity revenue decreased 36% driven by lower volume, primarily due to competitive dynamics and supply constraints, partially offset by improved wholesaler stocking levels on services. Turning to Slide 11. We have an update on the U.S. launch of Zepbound. We've seen exceptional growth trends for Zepbound that have accelerated as production has ramped leading to sales of over $1.2 billion in Q2. We are rapidly building our formulary coverage for Zepbound in the U.S. and as of July 1 had approximately 86% access in the commercial segment. We estimate over 50% of employers have opted into anti-obesity medicine coverage and see that modestly growing as we work to expand coverage. On Slide 12, we provide an update on our capital allocation. Slide 13 shows our updated 2024 financial guidance. We are raising our full year revenue outlook by $3 billion to be between $45.4 million and $46.6 billion. This increase is due to strong performance across our non-incretin medicines as well as Mounjaro and Zepbound. Additionally, we have improved clarity into the timing and pace of our production expansion and Mounjaro launches outside the U.S. We achieved a number of supply-related milestones in Q2 and have increased confidence regarding our expectation that production of salable doses of incretin medicines in the second half of 2024 will be at least 1.5 times the salable doses taken half of 2023. Based on the midpoint of the range, our updated guidance implies revenue growth of 38% in the second half of the year, below 31% in the first half. In the second half of the year, we expect a more significant growth in Q4 compared to Q3. Given the update to revenue guidance, we now expect the ratio of gross margin less OpEx divided by revenue to be in the range of 36% to 38% on a reported basis and 37% to 39% on a non-GAAP basis. For other income and expense, we now expect between $525 million and $425 million of expense on a reported basis, and between $400 million and $300 million of expense on a non-GAAP basis. Both ranges reflect lower expected net interest expense and the reported range reflects net losses on investments in equity securities through Q2 of '24. We have increased our estimated effective tax rate to be approximately 15%, driven by changes in our forecasted mix of earnings in higher tax jurisdictions. Earnings per share is now expected to be in the range of $15.10 to $15.60 on a reported basis $16.10 to $16.60 on a non-GAAP basis. Both ranges -- the updates mentioned earlier as well as acquired IPR&D charges through Q2 of $0.24. The reported range includes a charge in Q2 of '24 associated with anticipated litigation payments. Now I'll turn the call over to Dan to highlight our progress on R&D.

Dave Ricks :

Thanks, Dan. Before we go to Q&A, let me briefly sum up our progress in the second quarter. Exceptional revenue growth in Q2 was driven by Mounjaro, Zepbound and Verzenio. We are pleased with the ramp in production in the first half of the year and expect continued expansion ahead. Significant advances in our pipeline include the approval of Kisunla for Alzheimer's disease, the submission of tirzepatide for moderate to severe obstructive sleep apnea and obesity in the U.S. and Europe and positive results from the Phase 3 study of tirzepatide for heart failure with preserved injection fraction and obesity. We are investing in product launches, the advancement of our pipeline as well as our ambitious manufacturing expansion agenda. All of this and the incredible work of our teams around the world give Lilly leadership confidence that we have a very bright future ahead and better opportunity than at any time in our company's history to impact human health on a global scale. Now I'll turn the call over to Joe to moderate the Q&A session.

Operator:

[Operator Instructions]. And the first question today is coming from Seamus Fernandez from Guggenheim. Seamus your line is live.

Joe Fletcher :

Thanks, Seamus. I think I'll go to Gordon. Do you want to touch on that, or Patrick?

Operator:

The next question will be from Terence Flynn from Morgan Stanley. Terence your line is live.

Joe Fletcher :

Yes, sure. I think, Dave, do you want to hop in and...

Operator:

The next question will be from Chris Schott from JPMorgan. Chris your line is live.

Joe Fletcher :

Maybe, Dan, do you want to start on that? And then...

Patrik Jonsson:

A few additional comments. I think when we look at the marketplace, about two are very important barriers. We have been extremely successful in gaining access across both Mounjaro, where we are currently 93% access in commercial and 89% in Part D. And similarly, for Zepbound, 86% after 7 months in the marketplace, that's quite significant. The second piece is the amount of outcome indications. We are investing heavily in both Mounjaro and Zepbound, and similarly for the Phase 3 assets of our Zepbound and retatrutide. So, I think, overall, we think that we are extremely well positioned to compete here. And we are not surprised to see that most of the firms are actually leaning into this very important space. But with the cost we have not had in the market today, the Phase 3 assets and what we referred in the prepared remarks, we are well positioned to compete today and tomorrow. And that -- both different indications, assets Gene [ph] therapy, et cetera, all hands-on deck on our side.

Operator:

The next question will be from Tim Anderson from Wolfe Research. Tim your line is live.

Joe Fletcher :

Thanks, Tim. Dan, you want to start with some comments?

Dave Ricks:

Yes. And just from a policy standpoint, I mean, you can expect us to be active here. We've taken public positions. We're obviously engaged with regulators and considering all kinds of legal actions and filed some. Of course, compounding is a long-standing practice under the 503A provisions of FDA, which is meant to customize doses for individual patient needs that we don't -- it's not clear to me medically what that would be for tirzepatide. But I guess that's legal in a sense. It's the mass production that's concerning. And we don't see a lot of that with our medicine more with the other one. But I think if we just step back and reflect them why the -- there's shortages because of parenteral manufacturing constraints in the industry and the lead companies. A lot of that constraint is investing and proving those processes are compliant with the GMP standards that the FDA and Europe or NX1 have enforced. And we agree, by the way, with that strict enforcement. So, it's a little odd that the answer to that constraint, which is about raising the standards of the industry to a sterile product is to create another industry that is non-sterile product. So, we're just pointing that out. And I think you can see Lilly on the front foot here over the coming months to address this. But ultimately, the real thing to address is the increasing coverage on insurance and increasing supply. We -- drive on supply. We'll step that up another notch with the availability of vials, and we need to work with primarily the government as well as employers to expand coverage. So OBC medicines are affordable. People when we get to those points, this will be an issue. But in the meantime, people can get hurt. And as Dan said, it's pretty concerning what's happening.

Umer Raffat:

Thanks for taking my question. I want to ask on operating leverage, if I may. I know in the first quarter, when you guys raised the guidance by $2 billion on top line, it dropped down to EPS by $1.30. This quarter, guidance went up by $3 billion, but it dropped down at a much higher leverage at $2.16 EPS, almost a 90% incremental margin. And my question is not so much what your operating leverage is going to be in 2025 or a forward year guidance. But instead, I'm basically asking if you annualize the momentum of your 4Q numbers per this year's guidance, the EPS upside implied to consensus could be almost as much as half of Lilly's entire full year EPS where it stands right now. So, I'm just trying to think through, how do you plan on spending on various functions and what the incremental margins could look like as the revenue momentum really kicks in with the improving supply?

Gordon Brooks:

Good. Thanks. Appreciate the question. Yes, I mean, we've been speaking for a long time about operating margins and getting to the mid- to high 30% range. As we've seen this year, Mounjaro and Zepbound are taking an inflection point upwards and so we're seeing ourselves at the top end of that range. For the first half, margins are a little inflated. We haven't yet lend in to all of our promotional channels and incretins. You don't see, for instance, TV commercials in the incretins. We haven't done that looking at the -- given the supply situation. And in R&D, it takes time to scale R&D thoughtfully. So, it doesn't always move exactly in sync quarter-by-quarter with revenue. That said, our guidance for the year does indicate we will stay in the upper 30% range for the full year, with growth first half, if you look at the first half, as the two quarters' growth into the second half. And you should also expect to see within that mix, stronger sales and marketing growth as we get to new launches in the second part of the year and the R&D continue to scale the growth from what we've seen thus far. So those are the dynamics we see on operating margin for 2024.

Mohit Bansal:

Great. Thank you, very much for taking my question. Congrats on the quarter. My question is regarding the rest of the world sales for incretins. It seems like Mounjaro is doing quite well there. And if I take out the -- like 15% or so for stocking in the U.S., it seems like ex-U.S. is already about 33% this early in the launch. So, I would love to understand how has been your experience so far? And is there going to be any different uptake for ex-U.S. versus your prior generation incretins for both Mounjaro and Zepbound given that these are really efficacious drugs?

Ilya Yuffa:

Sure. Thanks, Mohit, for the question. We've seen some great progress with the launch of Mounjaro outside of the U.S. I think what you've seen in terms of growth in the earlier launch countries, such as the U.K., UAE and Saudi, UAE and Saudi are both key markets that make up rest of world, have already achieved a leading share and continue to drive momentum and overall market growth. And so, as you take a look at Q2, the main driver of that growth has been in Mounjaro in markets where we've already launched earlier in the cycle and majority of that coming from the Quick Pen presentation with a lot of that in the UAE. Some of that is channel dynamics similar to the U.S. At the same time, if you take a look at Q2 and the trajectory for Q2 relative to historical peak sales of any of our brand, has already surpassed that with a limited number of markets where we've launched. And so, as we look at the coming quarters, obviously, we just recently launched in Germany and now also Spain with Quick Pen presentation. We'll also look and monitor the demand and also supply capacity and expect to launch in new markets. The near-term growth, I would expect predominantly coming from already launched markets of Mounjaro.

Alex Hammond :

Thanks for taking my question. In the prepared remarks, Dan mentioned engagement with regulatory authorities on a potential pivotal trial in NASH. Can you provide any color on these discussions and how Lilly is thinking about tirzepatide versus -- for this indication? When could we receive updates? Thank you.

Dan Skovronsky:

Yes. Thanks for the question. We're really excited about the opportunity to help patients suffering from NASH. I think the data that we shared in Phase 2 for tirzepatide appetite is really quite profound in terms of the size of effect we can have. There's a couple of issues in mass drug development that we're trying to tackle, probably the most significant of which is current standard of liver biopsy to identify the patients to enroll in these trials and also then measure the outcome. Liver biopsy is obviously an invasive procedure and difficult to find patients to consent to these trials and of course, there's risk to patients. We're working hard to develop noninvasive biomarkers that can be used to identify the right patients to enroll in mass studies and also potentially could be used as an outcome to know if a drug is working. My hope is that we could develop those kinds of biomarkers that could be used both purposes and could be suitable for accelerated or approval of mass drugs in the future. Of course, long-term traditional approval for Astra still requires demonstration of outcomes. So, in that environment, we have two drugs that I think could both be great mass drugs and we'll have to decide whether to invest in one or both of those drugs, depending on the regulatory path we see. We'll keep investors updated as we make decisions about these molecules in mesh.

Evan Seigerman:

Hi, guys. Thank you so much for taking my question. I wanted to touch on manufacturing and specifically, on the concern that you raised back in February around the proposed acquisition of Catalent by Novo Holdings and the subsequent sale to Novo Nordisk. Are you still as concerned as you were in February? Or given what you've been able to do with your own footprint? Is this less of an issue?

Operator:

The next question will be from Dave Risinger from Leerink. Dave your line is live.

Joe Fletcher :

Thanks, Dave. Patrik, do you want to comment on persistency and benefits?

Operator:

The next question will be from Kerry Holford from Berenberg. Kerry your line is live.

Operator:

Apologies team. We will get Kerry reconnected with a better line momentarily. And we'll move on to the next question, in the meantime, if that's okay from Chris Shibutani from Goldman Sachs. Chris your line is live.

Joe Fletcher :

Dan, you want to chime in?

Patrik Jonsson:

Just from a commercial point of view, we are regularly conducting both consumer and provider market research. And when we're looking into the preferences, the true drivers today is still the degree of weight loss and safety and tolerability. And when we look at the needs beyond that, it's actually the need of an oral, and an oral with an injectable-like efficacy. So that's probably the new that comes beyond what we're currently serving today and particularly to serve those patients that have a fear of injections. When we look at over aspects, I think what comes beyond that would be the compensation of weight loss, lean mass versus fats and durability. And I think we are looking into all of those aspects as well.

Operator:

And we have Kerry Holford from Bernberg reconnected. Kerry your line is live.

Joe Fletcher :

Much better.

Joe Fletcher :

Gordon, do you want to touch on that briefly?

Operator:

The next question will be from Akash Tewari from Jefferies. Akash your line is live.

Joe Fletcher :

Dan can focus on that first question about oral [indiscernible].

Operator:

The next question will be from Trung Huynh from UBS. Trung your line is live.

Joe Fletcher :

Okay. On that second one, I don't think we'll probably give much of a good answer on that. So, I'll maybe ask Ilya to weigh in just on that first question around how ex-U.S. reimbursement is going.

Joe Fletcher :

Thanks, Ilya. Paul, I know we have a lot in the queue. Maybe we just have two more questions and then wrap things up.

Steve Scala :

Thank you so much. The FDA definition of shortage seems clear and tirzepatide no longer meeting the definition of shortage seems to imply Lilly is meeting demand. I assume you will say that that's not the case, but the definition at least in black and white is quite clear. I assume this is FDA's determination. So, does Lilly agree with FDA's conclusion? How is demand being met? How is demand being measured? And what does demand look like?

Operator:

Last question today will be from Louise Chen from Cantor. Louise your line is live.

Joe Fletcher :

Thanks. Dan, anything to add on?

Joe Fletcher :

Great. So, I think we'll wrap up. Dave, closing remarks.

Operator:

Thank you. And ladies and gentlemen, this does conclude our conference for today. This conference will be made available for replay beginning at 1:00 p.m. today running through September 12 at midnight. You may access the replay system at any time by dialing (800) 332-6854 and entering the access code 297484. International dollars can call (973) 528-0005. [Operator Instructions]. Thank you for your participation. You may now disconnect your lines.

Anat Ashkenazi:

Thanks, Dave. Slide 6 summarizes financial performance in the first quarter of 2024. First quarter revenue growth of 26% was driven by new products, primarily Mounjaro and Zepbound. Gross margin as a percent of revenue increased from 78.4% in Q1 2023 to 82.5% in Q1 2024. Gross margin in the quarter benefited from higher realized prices, variable product mix and, to a lesser extent, improved production costs.

Christopher Schott:

Congrats on the progress here. I just had a question, just was hoping you could elaborate a bit more on the capacity dynamics that are leading to the guidance raise today. Specifically just looking for little more color, is this more U.S. or international? And should we read this as more capacity in the system than you expected or just a faster ramp of the new plant and maybe the same overall capacity as you exit the year?

Anat Ashkenazi:

Thanks for the question, Chris. And as we've mentioned earlier in the year when we issued guidance, we said that we expect capacity and supply to ramp towards the second half of the year, and that's what we're seeing.

Mohit Bansal:

I have a question regarding the pricing. So if you look at the script trend, it seems like there was a little bit of adverse relationship in the pricing versus fourth quarter. Can you comment on that? And how should we think about the cadence of price volume over the quarters for the year?

Patrik Jonsson:

Thank you very much, Mohit. When you look at the pricing of Mounjaro, I think it's important to take into account that in the Q4 earnings, we announced a onetime adjustment for Mounjaro in Q4 that was quite significant. So it was a onetime adjustment in the base of Q4.

Operator:

The next question is coming from Umer Raffat from Evercore.

Joe Fletcher:

Thanks, Umer. I'll go to Patrik for that question.

Seamus Fernandez:

Great. So really just wanted to ask, Dan, as you have assessed the Phase II SURMOUNT data in NASH, just interested to know how you are thinking about those data and the opportunity for tirzepatide in that setting or perhaps if retatrutide remains the right target molecule to move forward there? We've had a lot of speculation around some of the comments from the last quarter and just trying to firm that up and also when we're likely to see those data, I believe, they're expected at EASL, but if that is possible to confirm.

Daniel Skovronsky:

Thanks, Seamus. So I'll start with the last part there. Yes, the abstract was accepted and will be presented at EASL early June. So that will be the opportunity to see the full NASH package from that Phase II trial.

Operator:

The next question will be from Tim Anderson from Wolfe Research.

Joe Fletcher:

Thanks, Tim. Okay. I'll maybe hand to Dan for some comments.

Operator:

The next question will be from Terence Flynn from Morgan Stanley.

Joe Fletcher:

Thanks for the question, Terence. I'll hand to Patrik for commentary on IQVIA and LillyDirect.

Akash Tewari:

So your team presented data on a monotherapy GIP agonist at ADA last year, but it looks like you are moving the amylin into Phase II. Can you talk about why amylin might be preferred versus GIP as a maintenance regimen for obesity? And how your product could defer versus others when it comes to half-life and preferential agonism versus calcitonin and amylin?

Daniel Skovronsky:

Yes, there are a lot of good questions in there. Thanks for following so closely. So on the GIP, the long-acting molecule, I think primarily in that experiment, we were excited to show the benefits of isolated GIP agonism, just to answer some mechanism of action questions around tirzepatide. But as you point out, there's potential for that molecule for other indications or as a monotherapy or combination with other mechanisms.

Operator:

The next question will be from Trung Huynh from UBS.

Joe Fletcher:

Thanks, Trung. I'll let Patrik respond.

Operator:

The next question will be from Geoff Meacham from Bank of America.

Joe Fletcher:

Thanks, Geoff, for the question. Paul -- Dave, you want to weigh in? .

Operator:

The next question is from Kerry Holford from Berenberg.

Joe Fletcher:

Thanks, Kerry. So a good multipart question, but on Lp(a), happy to talk about lepodisiran. So Dan, do you want to comment on this?

Operator:

The next question will be from Steve Scala from TD Cowen.

Joe Fletcher:

Thanks, Steve. Dan, do you want to take the question on SURPASS-CVOT?

Operator:

The next question will be from Evan Seigerman from BMO Capital Markets.

Joe Fletcher:

Thanks, Evan. Anne, you want to discuss [ donanemab ] and AdCom?

David Risinger:

And let me add my congrats on the progress and the guidance raise. So my question is on orforglipron. Novo Nordisk has raised some concerns about the scalability of orforglipron manufacturing given its complexity. I haven't spoken to Novo directly, but someone told me that they mentioned there are 35 steps in the process. I don't know if that's true. But could you please discuss how Lilly is building out its manufacturing capacity and whether the company expects to be able to meet global demand in the Western world after launch in 2026? Or whether we, the investment community, should expect supply constraints and should be guarded about how we try to model orforglipron's ramp after launch?

David Ricks:

Okay. Great. Dave, great to hear from you. I mean, first of all, it is true that orforglipron is a complicated large small molecule, a large small molecule, if you were, and there are many steps in the process. You can read about them in our patent filings, I think.

Louise Chen:

I just wanted to ask you about your next wave of obesity drug. It looks like you've got half a dozen of these in development. And where do you think you can most differentiate yourself?

Daniel Skovronsky:

Yes. Thanks, Louise. We're excited about that portfolio of earlier-stage obesity molecules. I think there's a number of opportunities for improvement over even an excellent drug like tirzepatide. We think about the quality of weight loss as one aspect. So for example, even on tirzepatide, we see the ratio of lean to fat mass approved as patients lose weight on these drugs. Could we make it improve even faster with the muscle stimulating agents like bimagrumab? But maybe that's under investigation.

Joe Fletcher:

Thanks, Chris. Paul, next question?

Joe Fletcher:

Oh, yes, there you are. Go ahead, Chris.

Joe Fletcher:

Thanks, Chris. Anat?

Operator:

Next question will be from Carter Gould from Barclays.

Joe Fletcher:

Thanks, Carter, for the question. Dan, you want to comment on bimagrumab?

Srikripa Devarakonda:

Congrats on all the progress. I have a question about your radiopharma pipeline. You mentioned PNT2002 in your oncology pipeline. Can you talk about how you see that advancing? And given what you've seen so far, where you see this being placed in the landscape in terms of market share?

Jacob Van Naarden:

Yes, happy to. Thanks for the question. We're really excited about bringing radiopharmaceuticals into the portfolio by way of the acquisition of POINT Biopharma, and we are supplementing that acquisition with additional work through our discovery labs and the ability to make these medicines ourselves. So I expect we'll have more to talk about in terms of additional medicines over the course of the next couple of years in addition to PNT2001.

Joe Fletcher:

Paul, I think we've got time for maybe one more question. We're right at 11. So maybe a final question in the queue.

James Shin:

I just wanted to try and reconcile the guidance lift with the 1.5x saleable doses being maintained.

Anat Ashkenazi:

So let's start with the 1.5 dose -- sellable dose comment that I made on the guidance call in February. So that reference is not a number of devices, but number of sellable doses. And as we ramp up capacity for KwikPen, recall that unlike the single-use vial or the auto-injector, that KwikPen is a multidose device that has multiple doses available for patients.

Operator:

Thank you. And ladies and gentlemen, this does conclude our conference for today. This conference will be made available for replay beginning at 1:00 p.m. today running through June 4 at midnight. You may access the replay system at any time by dialing (800) 332-6854 and entering the access code 317750. International dialers can call (973) 528-0005. Thank you for your participation. You may now disconnect your lines.

Joe Fletcher:

Good morning and thank you, Paul. Thanks for joining us for Eli Lilly and Company's Q4 2023 earnings and 2024 guidance call. I'm Joe Fletcher, Senior Vice President of Investor Relations. And joining me on today's call are Dave Ricks, Lilly's Chair and CEO; Anat Ashkenazi, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific Officer and President of Lilly Immunology, Anne White, President of Lilly Neuroscience; Ilya Yuffa, President of Lilly International; Jake Van Naarden, President of Loxo at Lilly; Patrik Jonsson, President of Lilly Diabetes and obesity and Lilly U.S.A. We're also joined by Michaela Irons, Mike Springnether and Lauren Zierki of the IR team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Actual results could differ materially due to several factors, including those listed on Slide 3. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Forms 10-Q and 8-K 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's not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, please note that our commentary will focus on non-GAAP financial measures. Now I'll turn over the call to Dave.

Anat Ashkenazi:

Thanks, Dave. Slide six summarizes financial performance in the fourth quarter of 2023, and I'll focus my comments on non-GAAP performance. We are pleased with the strong financial performance in the fourth quarter and for the full year. Our performance was highlighted by continued acceleration of revenue growth, driven by our new products and growth products. Q4 revenue increased 28% compared to Q4 2022. Excluding divestiture, this represents a quarter-over-quarter acceleration revenue growth driven by Mounjaro, Verzenio, Jardiance and the recent launch of Zepbound. For the full year, revenue increased 20% driven by robust volume growth of 16%. Gross margin as a percent of revenue increased to 82.3%. Gross margin in the quarter benefited from higher realized prices, partially offset by higher manufacturing expenses. Marketing, selling and administrative expenses increased 17%, primarily driven by higher expenses associated with launches of new products and additional indications as well as higher incentive compensation costs. R&D expenses increased 28%, primarily driven by higher development expenses for late-stage assets and additional investments in early-stage research as well as higher incentive compensation costs. In Q4, we recognized acquired IPR&D charges of $623 million, which negatively impacted EPS by $0.62. In Q4 2022, acquired IPR&D charges totaled $240 million or $0.23 negative impact to EPS. Operating income increased 29% in Q4, driven by higher revenue from new launches, partially offset by operating expense growth. Operating income as a percent of revenue was approximately 28% for the quarter and included a negative impact of approximately seven percentage points attributable to acquired IPR&D charges. Our Q4 effective tax rate was 13.1% compared to 7.3% in Q4 2022. The higher effective tax rate for Q4 2023 was primarily driven by a lower net discrete tax benefit compared to the same period in 2022 and the new Puerto Rico tax regime. At the bottom line, we delivered earnings per share of $2.49 in Q4, a 19% increase compared to Q4 2022, inclusive of the negative impact of $0.62 from acquired IPR&D charges compared to $0.23 in Q4 2022. On Slide 8, we quantify the effect of price, rate and volume on revenue growth. U.S. revenue increased 39% in Q4, driven by robust growth of Mounjaro, Verzenio and Zepbound. Net price in the U.S. increased 27% for the quarter, driven by Mounjaro access and savings cards dynamic as well as the onetime favorable change in estimates for rebates and discounts. Excluding Mounjaro, net price in the U.S. decreased by high single digits. Europe continued its trend of strong growth in Q4. Excluding $65 million in revenue associated with milestones received for the EU approval and launch of Revenue was up 11% in constant currency, driven primarily by volume growth of Verzenio, Jardiance and Taltz. For Japan, we are pleased to see robust growth in Q4 as revenue increased 15% in constant currency, driven primarily by volume growth of Verzenio and Mounjaro. Moving to China, Q4 revenue increased 7% in constant currency with volume growth of 10% partially offset by price declines. Volume growth in Q4 was primarily driven by Pivot. We are pleased to see China return to growth in 2023. Revenue in the rest of the world decreased 10% in constant currency. However, when you exclude the impact of the Q4 2022 sales of rights for Alimta Korea and Taiwan, sales grew 9% in constant currency, driven primarily by volume growth of Mounjaro and Verzenio. Slide nine shows the contribution to worldwide volume growth by product category. As you can see, the new products and growth product categories combined contributed approximately 15 percentage points of volume growth for the quarter. Slide 10 provides additional perspective across our product categories. First, I would like to highlight Verzenio, which saw worldwide sales growth of 42% in Q4 driven by robust demand growth and, to a lesser extent, higher realized prices. The continued positive momentum is driven by early breast cancer indication with steady performance in the metastatic indication. Jardiance continued its strong 2023 performance with worldwide revenue growth of 30% for the quarter. In the U.S., Jardiance revenue increased 29%, driven by increased demand. In Q4, worldwide Trulicity revenue declined 14%. U.S. revenue decreased 18% driven by lower volume and lower realized prices. We experienced intermittent delays for filling orders of Trulicity. Starting in early December and going through January, all dose strengths of Trulicity were indicated as having limited availability on the FDA drug shortage site. We expect to experience intermittent delays orders of certain doses in the coming months. In international markets, Trulicity volume continued to be affected by measures we have taken to minimize potential disruption to existing patients, including communications to health care professionals not to start new patients on Trulicity. Moving to Slide 11, Mounjaro continued its robust growth as more Type 2 diabetes patients benefited from the medicine. Q4 revenue grew to over $2.2 billion globally, up from $1.4 billion in Q3 2023. In the U.S., Mounjaro revenue of $2.1 billion in Q4, up from $1.3 billion in Q3 2023, benefited from a onetime change in SMS for rebates and discounts. Adjusted for this onetime change, sequential net sales in the U.S. would have grown approximately 30% in Q4. Since our last call, we further expanded patient access to Mounjaro. As of February 1, access for patients with Type 2 diabetes in the U.S. was 90% in aggregate across commercial and Part D, including 92% access for commercial patients. This expanded access puts Mounjaro near parity with established injectable Incretins and gives more patients the opportunity to start therapy on Mounjaro for Type 2 diabetes. Since the $25 noncovered co-pay part program expired on June 30, we now consider all prescriptions paid. Compared to Q4 2022, the Mounjaro net price in Q4 2023 benefited from this change to the co-pay part program in the U.S. Recall that after a change to the noncovered co-pay program in late 2022, patients already started on the $25 co-pay card could remain in the program until June 30. Today, commercially insured patients without coverage utilize the current noncovered co-pay program and pay roughly half the list price for Mounjaro prescription. Turning to Slide 12. In November, we received FDA approval for Zepbound for adults with obesity or those who are overweight and have weight-related comorbidities. We then announced on December five that Zepbound available at U.S. pharmacies, and we started building commercial formulary access before the end of the year. We are pleased with the early access of approximately one-third of commercial lives covered as of February 1. Access in this market will be more gradual as individual employers need to opt in to coverage after the typical formulary contracting takes place. We are focused on building formulary access and employer opt-ins, but we expect that it will take some time before we reach broad open access in this market. Meanwhile, the commercial savings for our program is available at U.S. pharmacies for those who do not yet have coverage. In Medicare Part D, weight loss drugs are still prohibited from reimbursement. In Q4, we recognized $176 million in sales for Zepbound with approximately 3/4 of that coming from initial channel stocking. The initial prescription trends we have seen are encouraging. On Slide 13, we provide an update on capital allocation. Looking forward to 2024 and beyond, we have confidence in our existing commercial portfolio, bolstered by the recent launches of Mounjaro, Jaypirca, Omvoh, and Zepbound and the potential launches of the Donanemab and Lebrikizumab, all of which we expect to serve as drivers for contained growth through the balance of the decade. On Slide 14, you'll see a summary of our outlook; outline our capital deployment decisions in relation to achievement of our strategic deliverables. We will invest in our current portfolio and in the future innovation through R&D, business development and a comprehensive manufacturing expansion agenda designed to drive revenue growth and speed life-changing medicines to patients. We will continue to return capital to our shareholders through dividend increases in line with earnings growth over time and share repurchases with excess capital. Moving to Slide 15, we highlight some of the dynamics that may impact our 2024 financial results. We expect continued robust revenue growth with revenue from our core business which excludes revenue from divestiture growing nearly 30% at the midpoint of our guidance range, driven by positive momentum to simply launch products. In Incretins, anticipated growth will be led by Mounjaro and Zepbound. In 2023, we made tremendous strides in expanding access from Mounjaro, and we entered 2024 with 90% of commercial and Part D lives covered. Zepbound coverage is off to a good start in its early December launch, and we expect both Tirzepatide to contribute substantially to Lilly's revenue growth in 2024. While we expect Mounjaro and Zepbound to be drivers of revenue growth, this will be partially offset by an expected continuation of the softer Trulicity sales trends that we saw in the second half of 2023. Recent revenue declines for Trulicity in the U.S. has been driven by supply tightness. Volume has also been impacted by our actions outside the U.S. As for supply outlook for Emberton, our manufacturer organization continues to execute well on the most ambitious expansion agenda in our company's long history. Given strong demand and time required to bring capacity fully online, we continue to expect demand to outpace supply in 2024. In late 2022, we showed our expectation that by year-end 2023, our capacity for Incretin auto-injector pens would double. This goal was achieved through significant efforts from our manufacturing colleagues and partners around the globe. In 2024, our capacity execution efforts will continue with equal urgency and will be accomplished not just through increased auto-injector capacity but also through alternative presentation like our multi-use Quick Pen, which received regulatory approval in the U.K. in late January. We expect our manufacturing site in Concord, North Carolina, will initiate production as early as the end of 2024, with product available to ship in 2025. And we are pursuing a host of the projects, internal and external, large and small, to further expand capacity. Now I'll provide a bit more context on the timing and pace of our Incretin supply plans in 2024. While we're continuing to expand supply every quarter, we expect the most significant production increases to come in the second half of the year. We expect our production of sellable doses in the second half of 2024 will be at least one and a half times the production in the second half of 2023. Note that while last year, our commentary focused on capacity of auto-injectors devices compared to 2022, we're now referring sellable doses produced, which is more relevant to patients and investors. Beyond Incretin, we look forward to progressing our launch project for two other medicine approved and launched in 2023, Jaypirca and Omvoh. Jaypirca was initially approved by the FDA in January 2023 for adult patients with relapsed or refractory lymphoma under the accelerated approval program, received FDA approval also on the Accelerated Approval Program in December 2023 for adult patients with CLL or SLL that have received at least two prior lines of therapy. We look forward to the ongoing opportunity to help patients with this medicine as our best Phase III program continues. Omvoh was approved in October 2023 in the U.S. and earlier that year in Japan, Europe and other markets and represents a compelling new options for patients struggling with moderate to severe ulcerative colitis. And in 2024, we look forward to potential U.S. launches of two more medicines, Donanemab and Lebrikizumab. We continue to expect FDA regulatory actions on Donanemab in Q4 2024 and remain confident in the substantial potential for Donanemab to benefit patients with Alzheimer's disease. With the current state of diagnostic and treatment readiness, initial uptake will be somewhat limited, and we expect Donanemab to contribute only modestly to growth in 2024 once approved. Lebrikizumab, which last year was approved and launched in Europe under the brand name by our partner, received regulatory approval in Japan in January. As for the U.S., we look forward to the potential proof of Lebrikizumab by the end of the year. We believe the efficacy, safety and dosing of Lebrikizumab can make it a compelling option for patients and prescribers in a large and growing market for the treatment of moderate to severe atopic dermatitis. Given the expected timing of FDA regulatory action, we expect Lebrikizumab to contribute only modestly to revenue growth in 2024. Beyond our recently launched portfolio of medicine, we expect continued growth from Verzenio driven by the early breast cancer indication where the magnitude and maturity of our clinical data reinforces it as a standard of care treatment in node-positive high-risk early breast cancer. Jardiance has been another outstanding contributor to growth, and we expect revenue growth to continue in 2024 though at a slower price as strong growth may be dampened by pricing dynamics in the U.S. Outside the U.S., we expect an acceleration of growth in every major geography led not only by the anticipated launches of Tirzepatide but also continued strong growth of Verzenio, Jardiance, and Taltz. Lastly, we seek to create long-term value beyond this decade. We will continue to invest across our value chain, in our recent and upcoming potential launches, in our pipeline, and in our manufacturing footprint. Slide 16 summarizes our initial 2024 financial guidance. Starting at the top line, revenue is expected to be between $40.4 billion and $41.6 billion. Using the midpoint of the 2024 range, this represents roughly 20% growth or 29% growth for our core business, which excludes the impact of divestitures that took place in 2023. In terms of phasing of our revenue growth throughout 2024, while we don't provide quarterly guidance, we expect revenue growth to accelerate in the second half of the year, consistent with the increased availability of Incretin doses. In terms of pricing for our core business, which excludes divestitures, we expect a high single-digit percent price decline in 2024. The lingering base period impact of the Mounjaro non-covered co-pay card dynamics will dampen these price declines in the first half of 2024, with more significant price declines expected in the second half of the year. During this year, we are taking a streamlined approach to our guidance line items related to expenses. Rather than provide three separate guidance line items for gross margin, research and development costs and marketing and sale and administrative costs, we are presenting a single new ratio representing our margin after planned costs, calculated by subtracting R&D costs and marketing and administrative costs from gross margin and dividing that figure by revenue. We express this ratio as a percentage, and for 2024, we expect it to be in the range of 31% to 33% on a non-GAAP basis. While we are not providing a specific guidance number for gross margin as a percent of sales, our expectations remain consistent, but we will maintain gross margin of approximately 80% on a non-GAAP basis as productivity gains and volumes are offset by pricing pressures and the cost of new manufacturing facilities. As for our expense growth across key categories, we expect marketing and administrative expenses to again grow in 2024 though at a slower pace than revenues, with growth driven by marketing investments in our recently launched and upcoming launch products. We also expect R&D expenses in 2024 to increase, driven by growing investments across all phases of our pipeline as we invest for the future, with the majority of dollar growth driven by ongoing and new late-phase opportunities. We expect R&D expense to increase at a higher rate than marketing, sell and administrative expenses. Other income and expense is expected to be between $400 million and $500 million of expense, primarily driven by higher interest expense. Turning to taxes; we expect our 2024 non-GAAP effective tax rate to be approximately 14%. Note that this rate does not assume or repeal of the provision of the 2017 Tax Act, requiring capitalization, amortization of research and development expenses for tax purposes. Should such a change take effect, our effective tax rate for 2024 would be moderately higher. Earnings per share is expected to be in the range of $12.20 to $12.70 on a non-GAAP basis. Consistent with our prior practice, we are not including any potential or pending acquired IPR&D and even milestone charges in our 2024 guidance, and we will provide updates each quarter from the impact of IPR&D on earnings per share as acquired IPR&D and development milestone charges are incurred. For guidance modelling purposes, we're currently estimating diluted weighted average share outstanding for 2024 to be approximately 903 million. We entered 2024 with strong momentum and a remarkable opportunity to help millions more patients with our medicines. For our investors, 2024 should be another exciting year, driven by expected revenue growth in our core business, near an approaching 30% and continued investments to drive future growth. Our outlook for top-tier revenue growth and operating margin expansion remains on track. Now I'll turn the call over to Dan to highlight our continued progress in R&D.

David Ricks:

Thanks, Dan, and congrats to you and the team for a big year. Before we go to Q&A, let me briefly sum up our progress in the fourth quarter. Q4 revenue growth accelerated as our recently launched product portfolio continued to gain momentum. We achieved meaningful advances in our late-stage pipeline with the FDA approvals of Zepbound and Jaypirca. We continue to invest in recent and upcoming launches, late-stage medicines, early phase capabilities and in business development, all of which will serve as a foundation for future growth. In Q4, we completed the acquisition of POINT Biopharma and announced plans to build a new manufacturing site in Germany. We returned over $1 billion to shareholders via dividend. Lastly, in January, we announced that Jana Norton, our Executive Vice President of Global Quality, will be retiring at the end of July after 34 years of service. During her tenure, Jana has overseen significant expansion, modernization and improvements in our quality and manufacturing processes. I'd like to thank her for her many years of outstanding service to Lilly. Now I'll turn the call over to Joe to moderate our Q&A session.

Operator:

[Operator Instructions] And the first question today is coming from Terence Flynn from Morgan Stanley. Terence, your line is live.

Joe Fletcher:

Thanks, Terence, for the question. I'll hand over to Ilya Yuffa, President of Lilly International for that question.

Operator:

The next question is coming from Chris Schott from JPMorgan. Chris, your line is live.

Joe Fletcher:

Thanks, Chris. I'll hand over to Patrik to comment on that question about Zepbound coverage.

Operator:

The next question is coming from Seamus Fernandez from Guggenheim. Seamus, your line is live.

Joe Fletcher:

Thanks, Seamus, for the question. Dan?

Operator:

The next question is coming from Umer Raffat from Evercore. Umar, your line is live.

Joe Fletcher:

Thanks, Umer. Dave?

Operator:

The next question is coming from Tim Anderson from Wolfe Research. Tim, your line is live.

Joe Fletcher:

Thanks, Tim, for those couple of questions. Maybe we'll field the one on the interim look, Dan?

Operator:

The next question is coming from Mohit Bansal from Wells Fargo. Mohit, your line is live.

Joe Fletcher:

Thanks, Mohit, for the question. Dan, back to you.

Operator:

The next question is from Louise Chen from Cantor. Louise, your line is live.

Joe Fletcher:

Thanks, Louise, for that question. So about the downstream opportunities in NASH and elsewhere, Patrik, do you want to field that?

Operator:

The next question is coming from Kerry Holford from Berenberg. Kerry, your line is live.

Joe Fletcher:

Thank you, Kerry, for the questions. I'll hand over to Ilya to talk about the branding of Tirzepatide OUS.

Operator:

The next question is from Geoff Meacham from Bank of America. Geoff, your line is live.

David Ricks:

For that I can start, Patrik, jump in. Yes, thanks for the question. The idea was really actually borne out of the challenges patients face every day in the U.S. and sometimes seeing doctors. And you'll know we have a Doctor Finder tool as well as telehealth partners on the platform for migraine, diabetes, and obesity. Finding medicines and their pharmacies, that's been a challenge. And I think particularly as supplies are tight, many patients report driving to 5, 6, seven pharmacies to find the medicine they need that simplifies that process. And then I think in addition, there's been a lot of noise about drugs that are illicit or copies or compounded versions of Zepbound or other weight loss drugs and that's concerning to us. And I think it's concerning to patients. So by going to Lilly Direct literally, they have confidence in the supply. And finally, application of our savings programs has also been a challenge at the pharmacy counter and that happens 100% of the time on Lilly Direct. We haven't thought about it as a way to create some new retail distribution business. It's a way to serve the patients that want our medicines better. That's sort of the frame we're in now. Early days. We're trying to develop it to be smoother, better, include more products over time, have better information about physicians and telehealth providers. So look for more developments there, but good start so far. A lot of energy and enthusiasm from the patient community.

David Risinger:

Yes, thank you and congrats on today's updates. Congrats on today's updates. So my question is for Dave and Dan on lean muscle loss associated with Incretin use. Could you help me understand Lilly's take on this debate and comment on Tirzepatide data to date relative to semaglutide? What I've observed is that SURMOUNT-1 showed a 3:1 lean muscle loss ratio, whereas SEMA's STEP one trial showed a 1.5:1 ratio, albeit with a slightly different assessment.

Daniel Skovronsky:

Yes. Thanks for your question. Maybe just starting with our take on lean versus fat mass. I think the ratio of lean to fat mass is an important thing to think about. Body composition, not by weight matters to patients, for example, in risk of Type 2 diabetes or cardiovascular disease, that ratio seems to be important. The good news is that for patients on Tirzepatide, that ratio appears to improve. As you pointed out, they lose far more fat mass than lean mass. And so in every trial we've done, at the end of the trial, if we measure body composition, it's better, a higher ratio of lean to fat than at the beginning of the trial. So we see this changing body composition as a benefit, potential benefit of Tirzepatide to be further explored. Of course, it's also a benefit we want to further extend. You've seen us try to improve the total amount of body weight loss. We're also trying to improve further improve, I should say, the change in body mass composition. And that's why you saw us acquire and experiment with drugs like [indiscernible] the number you quote from the Tirzepatide and semaglutide studies seem right to me. Of course, they're not head-to-head studies. But it does raise a question here about whether there's a potential benefit of GIP-1 -- GIP agonism here in addition to GLP-1 agonism. That's probably the way I would interpret this data.

Evan Seigerman:

I would love to get your take on how you're thinking about the opportunity for the oral GLP-1s. We've seen some mixed data from competitors. And I just would love to get how you see this evolving in context of your investment in orforglipron.

Patrik Jonsson:

Thank you very much. When we look at the opportunity in obesity, we have more than 110 million in the U.S. and 650 million globally. I think taking into account the current supply constraints across markets, it's impossible to reach all of those with injectables. So I think that's the big opportunity we have for orforglipron. And what we have seen so far in Phase II, if we can replicate those data in Phase III, we have an oral medicine here with a weight loss along the lines of the best competitive Incretin, not at the level of Tirzepatide, but that's the level of the best Incretin in the marketplace and with no food or water restrictions. So we really see the opportunity here with orforglipron to reach patients across the globe. And there is another component as well. If we look at the current market, approximately 20% of patients with obesity are actually concerned to take an injectable. So that's another opportunity with orforglipron. So we believe that's a really strong drug in our hands moving forward in the space of chronic weight management.

Stephen Scala:

There could be several reasons why Lilly is not initiating a Phase III trial of Tirzepatide in NASH. First, Lilly believes it has better molecules. Second, there is something in the Phase II data which is less than ideal. Or third, Lilly will do a Phase III. It just hasn't gotten around to finalizing plans, but that really can't be yet. To draw a parallel, you're starting a Phase III with LPA without even telling us the Phase II was positive. So what would be best for us to conclude about Tirzepatide and NASH?

Operator:

The next question is from Chris Shibutani from Goldman Sachs. Chris, your line is live.

Joe Fletcher:

Thanks, Chris. Patrik, do you want to comment on duration of therapy?

Operator:

The next question is coming from Akash Tewari from Jefferies. Akash, your line is live.

David Ricks:

I would frame like why I said that, but maybe Specific DDI question in the SGLT2 coadministration. I just said that because we're just starting the Phase III. And we all know small molecule, there's a bit of empiricism in terms of eliminating safety risk. And of course, every day, as we expose more patients to the drug and we have higher doses, that's a good day where we don't announce that the drug has a problem. At some point, we reached a lot of confidence. We just weren't at that point. We're not at it now. I think we're running the Phase III experiment and we need to discharge the off-target safety that is inherent in small molecule discovery, and we've seen in this class from others. But nothing specific on my mind. Maybe Dan can further reassure us.

Operator:

The next question is from Trung Huynh from UBS. Trung, your line is live.

Joe Fletcher:

Dan?

Operator:

The next question is from Carter Gould from Barclays. Carter, your line is live.

Joe Fletcher:

Thanks, Carter. Anat, do you want to field that?

Operator:

The next question is coming from James Shin from Deutsche Bank. James, your line is live.

Joe Fletcher:

Dave?

Joe Fletcher:

Thank you, Dave. Our next question?

Rajesh Kumar:

Hi there. Can you give us some color on, you know, how the access with employers is playing out? Are you getting exclusive access for your drugs or you're being added to the existing access your competitors' drugs have? And what is the nature of discussion, especially given that, you know, the pound is priced at a more attractive list price? I'm assuming with rebate, the differences might be a bit smaller, but any color there might be super helpful.

Patrik Jonsson:

I think the only addition would be that we are always aiming for open access. We believe that's important for the providers and the patients we are serving. So that's going to be our aim when it comes to employer opt-in as well. And we believe a move by pricing set down 22% below the competition, despite launching with a best-in-class profile, is also a good signal for increased and enhanced employer opt-in.

Operator:

Certainly. The next question is from Andrew Baum from Citi. Andrew, your line is live.

Joe Fletcher:

Thanks, Andrew. It's a very long-term question. I'll pass over to Anat to talk about 2032 and beyond.

Joe Fletcher:

Maybe a final question, Paul, and then we'll wrap up.

Timothy Anderson:

So one of the competitor data, obviously, everyone is watching as the Amgen data this year. And their messaging is around longer dosing frequency, monthly dosing and then possibly a greater effect of weight loss off-therapy. So can you comment on your views of the value of extended dosing like monthly or longer? And then do you believe in that argument about efficacy being sustained off-therapy? Or is that just a function of the fact that this drug lasts longer?

Daniel Skovronsky:

I'll start with the second, and then maybe Patrik will weigh in on potential value here although that could be a good question for Amgen. Look, I think the sustainability data I saw in that publication are a bit underwhelming. It's a very high-dose drug at half-life of an antibody. So just based on plasma concentrations, that would be extended to -- expected to remain there after a month or two. It doesn't surprise me, but what we're seeing is that at doses that are reasonably well tolerated, if there were any doses that are reasonably well tolerated, weight loss is lower than what we would need to see to take a molecule to Phase III for sure. And sustainability doesn't appear to be at all differentiated.

Joe Fletcher:

Dave, do you want to wrap this up?

Operator:

Thank you. Ladies and gentlemen, this does conclude our conference for today. This conference will be made available for replay beginning at one p.m. today running through February 20 at midnight. You may access the replay system at any time by dialing (800) 332-6854 and entering the access code 187676. International dialers can call (973) 528-0005. Thank you for your participation. You may now disconnect your lines.

Joe Fletcher:

Good morning. Thanks everybody for joining us for Eli Lilly and Company's Q3 2023 Earnings Call. I'm Joe Fletcher, Senior Vice President of Investor Relations. And joining me on today's call are Dave Ricks, Lilly's Chair and CEO; Anat Ashkenazi, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific and Medical Officer; Anne White, President of Lilly Neuroscience; Ilya Yuffa, President of Lilly International; Jake Van Naarden, President of Loxo at Lilly; Mike Mason, President of Lilly Diabetes and obesity; and Patrik Jonsson, President of Lilly Immunology and Lilly U.S.A. We're also joined by Michaela Irons, Mike Springnether and Lauren Zierki of the IR team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Actual results could differ materially due to several factors, including those listed on Slide 3. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Forms 10-Q and 8-K 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's not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, please note that our commentary will focus on non-GAAP financial measures. Now I'll turn over the call to Dave.

Anat Ashkenazi :

Thanks Dave. Slide 6 summarizes financial performance in the third quarter of 2023. I'll focus my comments on non-GAAP performance. We're pleased with the strong financial performance this quarter, highlighted by continued acceleration of revenue growth, representing robust momentum in our core business. Q3 revenue increased 37% versus Q3 2022. Excluding revenue from the olanzapine portfolio and from the COVID-19 antibodies, revenue increased 24% in Q3. This represents a quarter-over-quarter acceleration of revenue growth, driven by Mounjaro and the continued strong performance of Verzenio and Jardiance. Gross margin as a percent of revenue increased to 81.7%. Gross margin in the quarter benefited from the divestiture of the olanzapine portfolio, the absence of COVID-19 antibody sales in Q3 2023, and higher realized prices partially offset by increases in manufacturing expenses. Marketing, selling and administrative expenses increased 12%, primarily driven by higher expenses associated with new product launches and additional indications, as well as compensation and benefit costs. R&D expenses increased 34%, primarily driven by higher development expenses for late stage assets and additional investments in early stage research. This quarter, we recognized acquired IP R&D charges of $2.98 billion, which negatively impacted EPS by $3.29. In Q3, 2022, acquired IP R&D charges totaled $62 million, or $0.06 of EPS. Operating income decreased 71% in Q3, driven by acquired IP R&D charges, partially offset by higher revenue associated with the divestiture of the olanzapine portfolio. Operating income as a percent of revenue was approximately 6% for the quarter, and reflected a negative impact of approximately 31 percentage point attributable to acquired IP R&D charges. Our q3 effective tax rate was 84.6%. This represents an increase of approximately 74 percentage points compared to the same period in 2022. The increase in the effective tax rate was primarily driven by the non-deductible acquired IP R&D charges incurred this quarter. Other than the impact of acquired IP R&D, the underlying tax rate was consistent with previously providing guidance. At the bottom line, we delivered earnings per share of $0.10 in Q3, a 95% decrease versus Q3 2022, inclusive of an increase of $1.22 of EPS associated with the divestiture of the olanzapine portfolio and a negative impact of $3.29 from the acquired IP R&D charges. On slide 8, we quantify the effect of price rate and volume and revenue growth. This quarter U.S. revenue increased 21%. When excluding revenue from the olanzapine portfolio and COVID-19 antibodies, U.S. revenue grew 32% driven by robust growth of Mounjaro, Verzenio and Jardiance. Net price in the U.S. increased 13% for the quarter driven by Mounjaro, access and savings cards dynamics. Excluding Mounjaro, net price in the U.S. decreased by high single digits. As mentioned in prior earnings calls, we expected Mounjaro access and saving card dynamics to have a meaningful impact on reported U.S. price changes in the second half of 2023, which was evident in Q3. Europe continued to post robust growth against this again this quarter. Excluding revenue from the olanzapine divestiture, revenue was up 7% in constant currency driven by volume growth of 11% primarily from Verzenio, Jardiance and Taltz. For Japan, Q3 revenue decreased 16% in constant currency. Excluding Mounjaro, which had a one time upfront payment associated with the sales collaboration agreement in the base period, revenue in Japan decreased 3% in constant currency, driven primarily by customer buying patterns related to [indiscernible]. Moving to China revenue increased 20% in constant currency with volume growth of 25% partially offset by price decline. Volume growth in Q3 was driven by Tyvyt and Verzenio. We're encouraged by the growth we have seen this year in China. Revenue in the rest of the world increased 23% in constant currency, as volume growth of 28% was driven by Mounjaro, Verzenio and Jardiance. Slide 9 shows the contribution to worldwide volume growth by product category. As you can see the new product and growth product categories combined, contributed approximately 17 percentage points of rolling growth for the quarter. The absence of revenue from COVID-19 antibodies compared to the base period was a headwind of nearly six percentage points to volume in Q3. This headwind will abate as COVID-19 antibody sales were minimal after the third quarter of 2022. Lastly, revenue from the sales of rights to the olanzapine portfolio delivered nearly 22 percentage points of growth this quarter. Slide 10 provides additional perspective across our product categories. First, I would like to highlight Verzenio, which saw worldwide sales growth of 68% in Q3, driven by robust volume growth. The continued positive momentum is driven by the early breast cancer indication with steady performance in the metastatic indication. Jardiance continued its strong 2023 performance with worldwide revenue growth of 22% for the quarter. As you heard earlier in Q3 Jardiance was approved by the FDA for the treatment of adults with chronic kidney disease at risk of progression. In Q3 we saw worldwide Trulicity revenue decline 10% as volume growth in the U.S. was more than offset by lower prices driven by changes to estimates for rebates and discounts in both periods, as well as unfavorable segment mix and higher contracted rebates. In international markets, Trulicity volume continues to be affected by measures we have taken to minimize potential disruption to existing patients, including communications to healthcare professionals, now [ph] to start new patients on Trulicity. Moving to slide 11, we continue to be pleased with the strong performance of Mounjaro, as more type 2 diabetes patients benefit from the medicine. Mounjaro revenue grew to just over $1.4 billion globally this quarter, up from $980 million the previous quarter. In Q3, we continued to make progress in expanding access to Mounjaro. As of October 1 access for patients with type 2 diabetes in the U.S. reached 78% in aggregate across commercial and Part D, including 85% access for commercial patients. This expanded access gives more patients the opportunity to start therapy on Mounjaro for type 2 diabetes. As communicated last quarter, since the $25 non-covered copay card program expires on June 30, we now consider all prescriptions paid. As a reminder we define paid scripts as those prescriptions outside of the $25 non-covered copay card, but inclusive of the $25 covered copay card. We expect Mounjaro net price will continue to benefit from the higher percentage of paid prescription, but will also continue to face a headwind for more rebated volume as access improves. Looking forward to the end of the year with increased access we expect to continue to see overall growth in prescription trends. In terms of Mounjaro supply, we're continuing to make progress in our manufacturing expansion agenda. Given strong demand, we continue to experience tight supply throughout most of Q3, which impacted results for the quarter. Most recently U.S. product shipments have increased and inventory levels at U.S. wholesalers have improved with all doses of Mounjaro now listed as available on the FDA shortage website. While supply constraints have eased in the U.S., outside the U.S. Trulicity and -- outside the U.S. to Trulicity and Mounjaro supply remains tight, which materially impacted performance in these regions. With device assembly online at RTP, we are on track to achieve our goal of doubling capacity by the end of this year from where we were a year ago, and are gradually increasing production each quarter. We're also continuing to focus on other parts of the supply chain, as demand is expected to remain high and production bottlenecks may shift over time. As we mentioned in last quarter's earnings call, we are moving forward with different presentation of Mounjaro to reach more patients around the world faster. We have launched with a single dose vial in Australia, and plan to launch in other markets outside the U.S. in the coming weeks and months. The introduction of a single dose vial presentation in these geographies is intended to serve as a bridge to a multi-dose quick pen, which we expect will be available starting in 2024. We're also preparing for potential launch of tirzepatide for obesity in the U.S. this year. Our auto injector capacity and output continues to increase. And we look forward to bring tirzepatide to more patients in the months and years ahead. On slide 12, we provide an update on capital allocation. In the first nine months of 2023, we invested nearly $12 billion in our future growth through a combination of R&D expenditures, capital investments and business development outlays. In addition, we've returned nearly $4 billion to shareholders in dividends and share repurchases. Slide 13 presents our updated 2023 financial guidance. Guidance for the first four line items including revenue, gross margin percent, marketing and selling and administrative expenses and R&D expense is unchanged. I would note that we are trending towards the higher end of our estimates for gross margin and the top end of our ranges for operating expense categories. You'll see that we've updated guidance for acquired IP R&D charges, OID, tax rate EPS, to reflect the inclusion of IP R&D charges for completed transactions through Q3, and year-to-date results on equity investments and GAAP guidance. These updates do not include the effect of potential charges associated with pending or future business development transactions after Q3. We will provide our initial 2024 guidance when we report Q4 results. Now I will turn the call over to Dan to highlight our progress in R&D.

David Ricks:

Thank you, Dan. Before we get to Q&A, let me briefly sum up our progress in the third quarter. This quarter revenue growth accelerated as our recently launched product portfolio continued to gain momentum, of course led by Mounjaro. Excluding revenue from the divestiture of the olanzapine portfolio and the sale of COVID-19 antibodies in 2022, revenue grew 24%, driven again by Mounjaro, Verzenio as well as Jardiance. By continuing to invest in recent and upcoming launches, late stage medicines and early phase capabilities as well as in business development, we are confident that we have positioned ourselves for growth now and in the coming years, with the opportunity for continued margin expansion. We achieved meaningful advances in our late stage pipeline, with the FDA approval of Omvoh for the treatment of moderately to severely active ulcerative colitis, as well as Jardiance for the treatment of adults with chronic kidney disease, and the positive Phase 3 VIVID 1 results for mirikizumab for adults with moderately to severely active Crohn's disease. Looking forward, we are expecting regulatory responses before the end of the year on our submissions for pirtobrutinib, and accelerated approval in CLL as well as tirzepatide for obesity. In Q3, we completed several targeted acquisitions, intended to bolster our early and mid stage portfolio. Directly following the quarter we also announced an agreement to acquire POINT Biopharma which will further expand our R&D capabilities in oncology. Lastly, we returned over $1 billion to shareholders via the dividend. A few weeks ago, we announced several leadership changes. Mike Mason, our Executive Vice President and President of Lilly Diabetes and Obesity will retire from the company at the end of 2023 after 34 years with Lilly. In his current role, Mike is overseeing tirzepatide, late stage development and an unprecedented type 2 diabetes launch. Mike leaves behind an enduring legacy that reflects his deep compassion for patients and his commitment to our people. With this being Mike's last earnings call, I would like to thank him for his many years of outstanding service to Lily and wish him all the best in his next chapter of life. Patrick Johnson will assume leadership of Lilly Diabetes and Obesity. In addition to his current responsibilities as President of Lilly USA Dan Skovronsk, our Chief Scientific Officer and president of Lilly Research Labs will take on the additional role of President of Lilly Immunology from Patrick. And in a related move, David Hyman is assuming the role of Chief Medical Officer for the company from Dan, overseeing the full Lilly portfolio. Leigh Ann Pusey, our Executive Vice President for Corporate Affairs and Communications has decided to leave the company at the end of 2023. Leigh Ann has left a lasting impact on Lilly and the patients we serve. And we're grateful for her many contributions over the past six years. So as we begin this new chapter of growth for our company, we are very confident that our deep experience of our leadership team will allow us to continue to accelerate our efforts to make medicines and be more effective and more innovative in the years ahead. So now, let me turn the call over to Joe and he'll moderate the Q&A session.

Operator:

Thank you. [Operator Instructions]. And the first question today is coming from Tim Anderson from Wolfe Research. Tim, your line is live?

Joe Fletcher:

Thanks, Tim. Mike, you would you like to weigh in on the persistence of therapy on obesity?

Joe Fletcher:

Thanks, Mike. Next question, Paul.

Seamus Fernandez:

Great. Thanks so much for the question. So I really wanted to drill into orforglipron, and those Phase 3 programs. Dan, I was just hoping that you could clarify for the market, if there's any monitoring in that study related to liver enzyme elevations. I think there was one case in the Phase 2 diabetes study that you conducted. Just wanted to know if there's any related concerns associated with that. Or if this is kind of as expected, an all hands on deck moving forward opportunity. Thanks.

Joe Fletcher:

Thanks, Dan. Paul, next question.

Terence Flynn:

Great, thanks so much for taking the questions. Anat you had mentioned shifting the date of your 2024 guidance call early next year. Just want to know what drove that change? And if you can assure us that there are no issues with tirzepatide OBC review and/or manufacturing? Thank you.

Joe Fletcher:

Thank you Anat. Paul, next question.

Mohit Bansal:

Great. Thank you very much for taking my question. And my question is regarding the P documents [ph], seven biomarker data you have shown at CTAD. It seems like the predictability is getting to 94% of these tests, even C2N was pretty good. So do you have any thoughts on at this point, how close are we to actually make this -- bring this to prime time? And when the donanemab gets approved do you think this could be the test doctors use? Or it will still take some time to get to that?

Anne White:

Yes. So we shared at CTAD, we were pleased with the data that we saw. And we're also pleased to see progress across the field in blood biomarkers. We definitely believe that this is incredibly important to drive access and early diagnosis in Alzheimer's disease. So you've seen us invest in a number of fronts, our own p tau 217, but also partnering with others who are working on good tests to elevate the area. So it's a strategy of raising all boats. But yes, we did share our data. And we intend to make this available in a phased approach commercially as an LDT starting at the end of this year, in a couple of sites, and then continuing to expand over 2024. But at the same time, you'll see us continue to publish the data. We think that what's incredibly important in the field, is that good correlative data, particularly with amyloid PET, which is the gold standard in diagnosis is published and shared so that we can continue to make sure that we have high quality tests out there. So that's part of our goal with delivering this test is to really set a standard for what blood tests should look like. So look forward to hearing more over the next coming months as we publish that data and then make that more broadly available.

Operator:

The next question is coming from Louise Chen from Cantor, Louise your line is live.

Joe Fletcher:

Thanks, Louise, for the question. I'll hand over to Mike about the potential approval for other oral diabetes drugs and potential impact on injectables?

Joe Fletcher:

Thanks, Mike. Paul, next question.

Geoff Meacham:

Good morning, everyone. Thanks for the question. Just had one on tirzepatide supply. I know you guys have, a plant in North Carolina and another one coming online next year. But if you look beyond that, if you have demand anywhere near what's modeled, and even outside of obesity and diabetes, obviously, supply could remain tight. So the question is, is there a threshold of treated patients like in the near term that will inform your decision on adding manufacturing capacity? And how much does the outlook for or orforglipron have on that? Thank you.

David Ricks:

Yeah, thanks, Geoff. Obviously a hot topic. We work on this multiple hours every day. You're citing the announcements we've made and as mentioned great progress is showing manufacturing agenda RTP sort of on track to deliver on its goal. But as we exit the year, and then that kind of in market volume following that Concord, which is a few hours away, and kind of a replica site also, well on track for coming online in '24. So that's good news in the ERMA [ph] presentation, which is -- what we call our auto injector, from trulicity, and the current presentation from Mounjaro in the U.S. We've announced previously that we're introducing now single use vial presentation ex-U.S., so that we aren't basically sitting on approvals and connect patients have access to the medication. That will follow them by a multi use injector that uses different property, plant and equipment than what we're talking about here. So a couple of things to point out. You're noting kind of new greenfield site expansions. We've rightfully made a big deal out of. We're not done with those. I think you might hear more about that in the future. Of course, we are aggressively planning that and not banking on or forced upon to rescue us from this. We think that there is a need to take up parenteral incretin supply pretty dramatically from the current levels. And we plan to do that. But that will be in a combination of the current syringe-based auto injector, the vial capacity, we've already talked about. The multi use injector, which will come online sometime next year, and is a highly efficient play for us because it uses current systems and different ones from the auto injector. And then there's third party agreements that have been ongoing in the background. And to point out here, we are not relying on one. We have a diverse portfolio of third parties, recognizing that, the probability of full supply from any one is probably less than one. But buying up as much capacity as available in all those systems. So we've got a, I think the all hands on deck phrase was used earlier. I mean, this is really all hands on deck. And it's a problem we work every day. So we're not at all happy with the capacity. We've announced already, you'll see more. Some we don't announce that we'll just layer in to the volume we ship. And of course, long term new presentations like solid oral opens up even more possibilities, but we need to do everything we can now given the huge potential for global obesity treatment for our medicines to play a key role in that, and then ultimately impact hundreds of millions of people. So a lot of work to do here yet ahead. Thanks for the question.

Operator:

The next question is from Laura Hindley from Berenberg. Laura, your line is live.

Joe Fletcher:

Thanks, Laura for the question. I'll hand over to Ilya Ufa, President of Lilly International. Ilya, do you want to address Trulicity ex-U.S. contributions in the quarter and going forward?

Joe Fletcher:

Thanks Ilya, Paul. Next question?

Umer Raffat:

Hi, guys. Thanks for taking my question. I realize Mounjaro has not approved in obesity yet. But I'm just very curious how you're thinking about the pros and cons heading into that pricing decision, if there is any, because Novo does have that price premium, as you know, on Wegovy or Ozempic. So on the one hand, while Mounjaro price could be the same because the dose is the same, but on the other hand, Novo has this dynamic where it can offer a lot more rebate for the obesity indication than you can, if you leave the price unchanged. I'm just curious what your thought process is heading into that.

Michael Mason:

Yeah, thanks for the question. Obviously, we're not going to talk about price prior to approval. We're evaluating every scenario. We will make the right decision for patients who live with obesity. Thanks,

Operator:

The next question is coming from David Risinger from Leerink. David, your line is live.

Joe Fletcher:

Thanks, Dave for the question. Mike, do you want to talk a little bit about that, about the longer term appreciation for the broader health benefits of medicines, like tirzepatide?

Joe Fletcher:

Thank you, Mike. Paul, next question.

Evan Seigerman:

Hi, thank you so much for giving me the question and congrats on the progress. So given the executive changes announced in October, how should we think about the direction of the immunology business now with Dan at the helm? Thank you guys.

David Ricks:

Sure, I can start and let Dan comment. Look, we've been really pleased with this business, which I think is important to take the long view here. I mean, I was involved in creating this like 10 years ago, and both [indiscernible] and now mirikizumab, and hopefully soon Lebrikizumab will form a really core portfolio for us, really exploiting ideas that we had some time ago. What's next, and you see here today advancing another checkpoint agonist into Phase 2 is a lot of decisions about, okay, what's next to take immunology to the next level. And that's largely going to be about key decisions, both internal portfolio and potentially externally, like with our DICE acquisition, to find a new set of either single agent or combinations that can raise the standard of care in tough immunology diseases, noting, in particular in IBD and RA, the standard of care is hardly satisfied today. We measure real pretty low performance status of success. So that's the mission that Dan and we've hired Mark Genovese to the company and others to really build a portfolio the future. So I don't Dan, if you want to

Joe Fletcher:

Thanks, Evan, for the question. Next question, Paul.

Christopher Schott :

Great. Thanks so much. Just as we're thinking about the upcoming tirzepatide obesity approval, just interested in your perspective of how we should anticipate commercial coverage ramping, as we think of maybe the first couple of quarters post launch versus where it could be in a year or two from now, a business how quickly can we think about coverage coming on board? Thank you.

Michael Mason:

Yeah, no, it's a good question. It will ramp up. We're trying to be disciplined. And we're trying to make sure that we bring on access as quickly, as is prudent. And so just like we did with Mounjaro we will take and make sure that we sometimes access has to materialize at an organic pace where it makes sense. And we'll make sure and use our judgment. So just like with Mounjaro, while we'd love to get out of the gate quickly, most importantly, as a setup for long term success. So you'll see a kind of a natural ramp up that you would with any new product. And I think it's important, as you look in the first quarter of our launch last January, when you saw Wegovy resupply. They were resupplying into a market where they already had capacity. So I think when you look at our access, and you look at our volume as we head into next year, you'll see a ramp up in volume as you see a ramp up in our access.

Operator:

The next question is from Steve Scala from TD Cowen. Steve your line is live.

Joe Fletcher:

Thanks, Steve for the question, Dan.

orforglipron:

So there's no hesitation or trepidation there at all. I think though notwithstanding those two molecules, which I expect to be great and important contributors to human health, we have, tirzepatide. I'm not exactly sure if we've maximized the dose response, if we hit the flat part of the dose response curve yet. It looks like we might be close. But we want to explore it. And so we're testing the higher doses in Phase 2. I think we've had enough patients on this drug for long enough that I expect the risk of uncovering a new safety signal with sort of marginally higher doses is extremely low. So not worried about that at all.

Operator:

The next question is from Chris Shibutani from Goldman Sachs, Chris, your line is live.

Joe Fletcher:

Dan, do you want to weigh in on--?

Michael Mason:

Probably the key question I'm looking at is like how much of the effect was driven by drug effect versus weight loss is probably the key question we're looking at.

Operator:

The next question is coming from Carter Gould from Barclays. Carter, your line is live.

Joe Fletcher:

Thanks, Carter for the question. Dan you want to comment on the flow data?

Joe Fletcher:

Paul, next question.

Trung Huynh :

Morning, all. Thanks for squeezing me in. Just one on Mounjaro U.S. pricing. So by our calculations, we think that 3Q '23 the net price is around 440 per TRX. For the rest of the year do you think that net price can continue to go up and above the saving card price of 450 [ph]. Although payers willing to pay for this, or is this broadly capped now until that saving card ends? And for next year, can you just give us your thoughts on if net price can meaningfully keep increasing? Thanks.

Michael Mason:

Yeah, no, I'd be happy to do that. I think maybe at a macro level, I would say that our gross to net for Mounjaro in Q3, that kind of normalized. Before then we had a number of saving card changes that that, made our gross to net rate dynamic. Our last and copay card change occurred late in Q2, so at the end of June. And so Q3 was a kind of a pure quarter, where we didn't have any other copay card changes. And I would say that our Mounjaro rate normalized at that point, you know, going forward, I think what you'll see is what you see normally for a product at this point in the lifecycle that as we pursue gaining access, there'll probably be some pricing pressure related to that. But we don't have any other coping card changes planned in the near future.

Operator:

The next question is coming from Robyn Karnauskas. From Truist Securities. Robyn, your line is live.

Joe Fletcher:

Thanks, Nicole for the question. I think it's very -- if I heard you right, you're thinking about IRA impacts to maybe semaglutide and potential impacts to Mounjaro. Mike, do you want to comment on that briefly?

Joe Fletcher:

Thank you Mike. Paul, I think we have two calls left in the queue. Why don't we go through those two quickly, and then we'll wrap up?

Seamus Fernandez:

Oh, great. Thanks for the follow up question. So just in terms of how you're thinking about the introduction of oral treatments, and the importance of pushing for what would be hopefully a maintenance type regimen. Is Lily looking at oral therapies as more of a maintenance regimen opportunity, or do you see a broader opportunity here, perhaps bringing in other mechanisms that perhaps could aid in pursuing, I guess, the ever elusive metabolic set point? Thanks.

Daniel Skovronsky:

Yeah, thanks, Seamus. Maybe to paraphrase Dave's previous answers, it's sort of in all of the above here, I think there's great opportunities on the oral as a standalone therapy for initiation of therapy. Also, yes, for maintenance therapy globally. And also, yes, for potential combinations. You know, I point out the obvious fact that this is a GLP. One monotherapy. So we benchmark it against the best injectable GLP1 monotherapy. But I don't expect as an oral it will achieve the same levels of efficacy we can see with dual agonism like tirzepatide. So the future certainly will hold combinations like that. Thank you.

Operator:

Certainly. The last question will be a follow up from Tim Anderson from Wolfe Research. Tim, your line is live.

Joe Fletcher:

Thank you, Tim, for the last question, Dan.

Joe Fletcher:

Thanks, Dan for the last one, Dave.

Operator:

Thank you. And ladies and gentlemen, this does conclude our conference for today. This conference will be made available for replay beginning at 1 pm today running through December 7 at midnight. You may access the replay system at any time by dialing 800-332-6854, and entering the access code 544467. International dialers can call 973-528-0005. Again, those numbers are 800-332-6854 and 973-528-0005 with the access code 544467. Thank you for your participation. You may now disconnect your lines.

Joe Fletcher:

Good morning. Thank you for joining us for Eli Lilly and Company's Q2 2023 Earnings Call. I'm Joe Fletcher, Senior Vice President of Investor Relations. And joining me on today's call are Dave Ricks, Lilly's Chair and CEO; Anat Ashkenazi, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific and Medical Officer; Anne White, President of Lilly Neuroscience; Ilya Yuffa, President of Lilly International; Jake Van Naarden, President of Loxo at Lilly; Mike Mason, President of Lilly Diabetes; and Patrik Jonsson, President of Lilly Immunology and Lilly U.S.A. We're also joined by Michaela Irons, Mike Springnether and Lauren Zierki 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 several factors, including those listed on Slide 3. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Forms 10-Q and 8-K 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's not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, please note that our commentary will focus on non-GAAP financial measures. Now I'll turn over the call to Dave.

Anat Ashkenazi:

Thanks, Dave. Slide 6 summarizes financial performance in the second quarter of 2023. I'll focus my comments today on non-GAAP performance. In Q2, revenue increased 28% versus Q2 of 2022. Excluding revenue from Baqsimi and from COVID-19 antibodies in the base period, revenue increased 22% or 23% on a constant currency basis. This acceleration on revenue growth was achieved despite lingering headwinds from Alimta's loss of exclusivity in the United States, which occurred in the first half of last year, and the effects of which should normalize going forward. Gross margin as a percent of revenue was flat in Q2 at 79.8%. Gross margin in the quarter benefited from product mix, including onetime revenue from the sales of rights to Baqsimi, which was offset by increases in manufacturing expenses related to labor costs and our investments in capacity expansion. Total operating expenses increased 14% this quarter. Marketing, selling and administrative expenses increased 18%, driven by higher marketing and selling expenses associated with recent and upcoming new product launches and additional indications. R&D expenses increased 32%, driven by higher development expenses for late-stage assets and additional investments in early-stage research. This quarter, we recognized acquired IPR&D charges of $97 million or $0.09 of EPS. In Q2 2022, acquired IPR&D charges totaled $440 million or $0.46 of EPS. Operating income increased 69% in Q2 driven by higher revenue, including revenue associated with the sales of rights for Baqsimi and lower IPR&D charges, partially offset by higher R&D and SG&A expenses. Operating income as a percent of revenue was 27% for the quarter and reflected a negative impact of approximately 115 basis points attributable to acquired IPR&D charges. Our Q2 effective tax rate was 16.1%. This represents an increase of 190 basis points compared to the same period in 2022 driven by the impact of the new Puerto Rico tax regime in the sales of rights for Baqsimi. At the bottom line, we delivered earnings per share of $2.11 in Q2, a 69% increase versus Q2 of 2022, inclusive of $0.43 of EPS associated with the sales of rights for Baqsimi. On Slide 8, we quantify the effect of price, rate and volume on revenue growth. This quarter, U.S. revenue increased 41%. When excluding revenue from COVID-19 antibodies and Baqsimi, U.S. revenue grew 30% driven by robust growth from Mounjaro, Verzenio and Jardiance. Net price in the U.S. increased 2% for the quarter driven by Mounjaro access and savings cards dynamics. Excluding Mounjaro, net price in the U.S. decreased by low single digits, consistent with prior trends. As I mentioned in our Q1 earnings call, we expect Mounjaro access and saving cards dynamics to have an even greater effect on reported U.S. price changes in the second half of this year. Europe continued its growth trajectory with revenue in Q2 up 6% in constant currency driven primarily by volume growth for Verzenio, Jardiance and Taltz. Volume in Europe increased 12% in the second quarter. For Japan, Q2 revenue increased 7% in constant currency as we continue to see robust growth in our newer medicine, led by Verzenio, and to a lesser extent, Jardiance, Olumiant and Mounjaro, the last of which launched in Japan in April. Moving to China. Revenue increased 20% in constant currency with volume growth only minimally offset by price declines. Volume growth in Q2 was driven by Tyvyt and Verzenio. We are pleased to see our China business return to growth. Revenue in the rest of the world increased 19% in constant currency as volume growth of 20% was driven by Mounjaro, Verzenio and Jardiance. Slide 9 shows the contribution to worldwide volume growth by product category. As you may recall on our Q1 earnings call, we simplified the categorization of our products with a focus on 2 categories

David Ricks:

Thank you, Dan. Before we go to Q&A, let me briefly sum up our progress in the second quarter. This quarter saw an acceleration of revenue growth as our recently launched product portfolio gathers momentum. Excluding COVID-19 antibodies and Baqsimi revenue, we grew 22% driven by Mounjaro, Verzenio and Jardiance. The quarter also saw a continuation of investment in our future growth in our manufacturing expansion, in late-stage medicines, in early phase capabilities and in business development. Notwithstanding these long-term investments, we continue to expect our revenue will grow more rapidly than our expense base in the coming years and see significant opportunity for margin expansion. We also achieved meaningful advances in our near-term pipeline with positive phase -- positive top line results, detailed data disclosures and submission of donanemab for traditional approval to the FDA and EMA, and completion of the tirzepatide submission in chronic weight management, alongside positive top line results from 2 more Phase III trials for the SURMOUNT program. We also shared data from 4 mid-stage clinical trials for orforglipron and retatrutide and initiated Phase III trials for both assets. Lastly, we announced several targeted business development moves intended to bolster our early- and mid-stage portfolio and our R&D capabilities, and we returned over $1 billion to shareholders via the dividend. Now I'll turn the call over to Joe to moderate the Q&A session.

Operator:

[Operator Instructions]. The first question today is coming from Louise Chen from Cantor.

Joe Fletcher:

Thanks, Louis. We'll go to Mike for that question on the recent SELECT news.

Operator:

The next question is coming from Geoff Meacham from Bank of America.

Joe Fletcher:

Thanks, Geoff. I'll go back to Mike for that question on persistence rates of Mounjaro.

Operator:

The next question is coming from Tim Anderson from Wolfe Research.

Joe Fletcher:

Thanks, Tim. I'll go back to Mike for that question, a follow-up on SELECT.

Operator:

The next question is coming from Kerry Holford from Berenberg.

Joe Fletcher:

Thanks, Kerry, for the question. And yes, we'll go to Anat with that commentary on the OpEx guide and additional context.

Operator:

The next question is coming from Chris Schott from JPMorgan.

Joe Fletcher:

Was close to multiple questions there, Chris. But let me hand over to Mike to provide expectations on Mounjaro volume and gross-to-net dynamics as we move in the second half, given the RTP news, and then also given the changes to the co-pay program at the end of June. Mike?

Operator:

The next question is coming from Terence Flynn from Morgan Stanley.

Joe Fletcher:

Thanks, Terence. Mike, I'll hand that over to you for commentary on single brand versus multiple brands for tirzepatide.

Operator:

The next question is coming from Colin Bristow from UBS.

Joe Fletcher:

Thanks, Colin. I'm going to hand to Anat to talk a little bit about the RTP commercial supply and supply dynamics in the near term.

Operator:

The next question is coming from Steve Scala from Cowen.

Joe Fletcher:

Thanks, Steve. I'll hand over to Dan for that.

Operator:

Next question is coming from Umer Raffat from Evercore.

Joe Fletcher:

Thanks, Umer, for the question. I'll hand over to Dan for that question on orforglipron liver dynamics.

Operator:

The next question is coming from David Risinger from Leerink Partners.

Joe Fletcher:

Dan?

Operator:

The next question is coming from Chris Shibutani from Goldman Sachs.

Joe Fletcher:

Thanks, Chris. I'll hand over to Mike to talk about Trulicity and Mounjaro, and any switching dynamics or observations we have. Mike?

Operator:

The next question is coming from Mohit Bansal from Wells Fargo.

Joe Fletcher:

Thanks, Mohit. We'll take your comment under advisement. It's a fair point. To your question on long-term supply, I'll maybe hand back to Anat to talk a little bit more about manufacturing dynamics and plans.

Operator:

The next question is coming from Evan Seigerman from BMO.

Anne White:

So much for the question on donanemab. And just to refresh Evan's memory, we have submitted accelerated approval submission, which was designated as a priority review. We did receive a CRL just based really on wanting more exposure. So it's a pretty simple request. Our resubmission with TRAILBLAZER-ALZ 2, the Phase III study, which certainly fulfilled any expectations on the CRL. And those good news, I think going through the accelerated approval, the FDA had the chance to review all of the aspects of the submission, preclinical manufacturing and others. So I would say we feel pretty confident at this point about the quality of our submission. And they've accepted that. They're reviewing it for traditional approval. So as we've said, we expect action by the end of the year.

Robyn Karnauskas:

I guess I have a big-picture question. So you're in payer discussions right now ahead of approval for weight loss from Mounjaro. For those payers that are not willing to cover, not on the fence, what do they need to see as you expect the cadence of supply versus access to shift in 5 years? Can you give us a sense of what that looks like and what they really need to see?

Michael Mason:

Yes. I think there's a couple of dynamics that will play out. I mean, first of all, we need to build a long-term clinical and real-world evidence to support payers' decisions, and we're doing that. We're spending literally billions of dollars in clinical evidence to show what tirzepatide and our pipeline can offer patients who have obesity and payers with regards to medical cost savings. We're confident in our modeling that payers will see medical cost offset with tirzepatide. And so I think that will be an important piece of it. I think the other dynamic is a lot of times, we focus on the clinical story. But there is things beyond the economic analysis that I think will play a role. If you go and really discuss with people who live with obesity, improving their health is a top personal goal. Sadly, when we look at the data, 82% people live with obesity experience physical functioning reductions, while 77% experience reduced mental, emotional well-being. Patients using tirzepatide showed significant improvements in physical, mental and emotional well-being in the SURMOUNT-1 trial. And it's clear from the patient testimonies that we had in our SURMOUNT clinical trials that tirzepatide can meaningfully improve the lives of people with obesity. The massive interest that we see in obesity medications is really driven by the fundamental desire for people living with obesity to improve their health. People live with obesity should have a loud and powerful voice in this debate. And I think that's going to be a big component of payer decisions, whether that be an employer or be state or federal government. And so I think what you're going to see is over time, you're going to see data like the SELECT data, data like MMO or other clinical trials, continuing to build the case on economic side for these. While you're going to see the voice of people living with obesity who really want a better life, more hope for the future, who will be demanding access for these agents. And I think both over time, we'll continue to build access across the U.S. as well as globally.

Andrew Baum:

A non-Mounjaro and non-donanemab question coming up. We estimate there's about $2 billion of Dupixent in the U.S. from adults with atopic dermatitis. When you are thinking about the launch of lebrikizumab, given the relatively little clinical differentiation, and therefore, the need to displace the Dupixent, could you just comment on how you're thinking about the launch? I'm assuming similar to Wegovy or [indiscernible] to some similar to Mounjaro or [indiscernible], the obvious thing would be to launch a very, very large bridge program in order to secure formulary access, tapping into that high-deductible patient population. Just interested in your thoughts here, please.

Patrik Jonsson:

Thank you very much for the question on lebrikizumab. Now based upon the data we have seen, we realized it's not a head-to-head, but we're extremely encouraged by the maintenance data, having more than 80% of patients achieving skin clearance at week 16 and maintaining it at week 52. We really believe that we are positioned to launch a first-line biologic that actually has less frequent dosing than Dupixent. So that's a big differentiator and targeting the most relevant cytokine for atopic dermatitis, being IL-13 with a slow rate and high potency. From an access perspective, we see we have atopic dermatitis market growing significantly. And we know that payers are looking forward to options here. So we are believing but PBMs are willing to enter into discussions to enable a rapid access of lebrikizumab. And of course, here, we can capitalize on the strong footprint we have in dermatology and the portfolio we currently have in immunology. And our strategy will entirely focus on value and the differentiation with our medicine and what it brings to the marketplace for atopic dermatitis.

Carter Gould:

I appreciate all the color on the manufacturing side. At the same time, Anat, a lot of those sites you talked about, those were sort of in your plans to start the year. So I guess my question is, as we think about sort of the derisking of orforglipron, the move to Phase III, has that in any way changed your sort of expected build-out for your longer-term manufacturing needs and really on the peptide side of the incretin side?

David Ricks:

Yes. Sure. I'll jump in. I mean, just as we think about this over the long term, first of all, versus where we started the year, there is one change we're talking about today, which are these new presentations that we'll be launching beginning even this year into next year. It's important for people to know that the constraint we experience now is in the parenteral auto-injector space. So to the degree we move outside of that, using our multi-dose pen that's currently developed for insulin and we're redeveloping for tirzepatide or certainly the vial, which is quite accessible and high-volume systems available, we'll be able to make more than we had planned previously, just to be clear. That's on top of sort of an on-schedule expansion at RTP in the other North Carolina site as well as other internal nodes of capacity. So I think that's good news for Mounjaro. That all said, for the prior questions here, will that be enough to meet demand? I'm not so sure. So while the volume is moving up into the right, we need more. And does like today's news, will only expand the opportunity. So you're right to point out that other molecules, in orforglipron in particular, could play a big role in meeting global demand for obesity treatment and all the related complications because it's a completely different technology in that it's using oral solid, and there's quite a bit of capacity around the globe for that. Orforglipron is a complicated molecule to make. It's got many steps. But it puts us in using a different set of assets and processes than the current ones we're using. So that's an important program, particularly for global access and availability over the long term. Just to remember as well, 2 years ago, we were probably treating 10 million people globally with incretins. And the WHO is estimating there'll be 1 billion people with obesity and related conditions by 2050, I believe. So a long way away from getting all the way to that. We need things like orforglipron to work for us to meet the needs of all the patients in the world.

Trung Huynh:

Just one on IRA. So one of the components that's been implemented in the part -- is the Part D redesign that starts impacting in '24, and then there's going to be some more meaningful changes in '25. On our calculations, we think it should benefit products under $25,000 a year, like your GLP-1 portfolio, but a negative for drugs priced above $25,000 a year. So given the mix of products you have in your portfolio at various different price points, directionally, how do you see that impacting earnings in the next few years?

Anat Ashkenazi:

Yes. So if we -- I think you were referring to the Part D redesign associated with removing the coverage gap, but I'll also mention the negotiation. I wouldn't necessarily look at what the dollar amount is. But rather, you're right, there are going to be varying degrees of impact on products based on how quickly they move through the catastrophic phase. So just to give an example from Lilly. If you're thinking about an oncology product where patients get to the catastrophic phase very quickly, there is probably an additional cost associated with that for us moving from the previous 70% coverage gap to the 10% participation in the initial phase and then 20% in the catastrophic phase. For other indications, it might be the opposite. So there is a mix there. But then important to think about the fact that given that patients are now going to have a limit of out-of-pocket when they get to the pharmacy counter, hopefully, that should improve adherence and compliance to medications, which should drive, obviously, better health outcomes for these patients, but also as we're thinking about medication kind of adherence. So there's going to be some pushes and pulls of that part of the IRA. The more significant one that I would refer to is the so-called negotiation that we have as part of that, that's going to come later in 2026 and 2028 with the first cohort of products to be announced this year. I think that could have quite a meaningful impact on the drugs that are going to be negotiated in terms of the price discounts that the government is going to arrive at as part of that process.

Kerry Holford:

Just a quick one on Verzenio. Just interested to see whether you can tender from a proportion of those drug sales now are represented by use in the early breast cancer setting. And given we've now seen the Kisqali NATALEE data at ASCO, just interested to hear how you're thinking about competition coming into that space?

Jake Van Naarden:

Yes. Thanks for the question. So I'll answer the proportion of sales really on new patients or NBRx. TRx is sort of a lagging indicator, of course, that takes into account iterations of therapy. But what we're seeing on the NBRx side is about, call it, between 30% and 45% of prescriptions are in early breast cancer versus metastatic. And obviously, that number bounces around sort of week-to-week, month-to-month. So that's more or less in line with what we expected. So that's what's happening there. On the competitive dynamics in the adjuvant setting, now that we've seen the NATALEE data from Kisqali at ASCO, which by the way, were not really surprising to us, I think when you take a step back, and this is sort of both our opinion as well as what we've heard from thought leaders, we just really don't see what the Kisqali 3-year regimen is giving to patients to justify the additional year of therapy relative to the 2-year regimen that we've offered patients with Verzenio. Obviously, cross-trial comparisons notwithstanding, if anything, you see a marginally larger effect size with the 2-year Verzenio regimen in high-risk patients, obviously, the NATALEE study studied a larger population. The node-negative patients are at lower risk and frankly, not part of our indication. We didn't study those patients. I think to the extent that folks want to use Kisqali there, that's not really our business. Maybe it could be beneficial for those patients, I can't really say. I think the other thing, and Dan mentioned this in the prepared remarks, is that there's been a lot of talk in the past, of course, about the differences in the tolerability of these two agents. And I think one of the things that perhaps was somewhat surprising in the data we saw at ASCO with the high rate of discontinuations for toxicity of Kisqali, especially with many patients still on therapy. So that number, of course, will go up with more follow-up. So I think these 2 drugs, while they have different tolerability profiles in terms of what the side effects are, they actually have somewhat similar overall tolerance profiles. And importantly, the Verzenio tolerability can actually be managed with dose reductions without sacrificing efficacy. It's not clear that the same is true for Kisqali given the nature of those adverse events. So we continue to feel really good about what Verzenio can offer to patients and its competitive profile in the marketplace, and that's been validated by -- in talks with prescribing physicians. So we continue to feel good, and we just got to make sure that all the patients who can benefit from the medicine know that it's out there for them.

David Ricks:

Great. Well, we appreciate your participation in today's earnings call and your interest in the company. It's been a very productive first half of the year for Lilly, and we look forward to continuing our momentum into the second half. Thanks again for dialing in. And as always, please follow up with the IR team if you have questions we have not addressed on today's call. Have a great day.

Joe Fletcher :

Good morning, and thank you for joining us for Eli Lilly and Company's Q1 2023 Earnings Call. I'm Joe Fletcher, Senior Vice President of Investor Relations. And joining me on today's call are Dave Ricks, Lilly's Chair and CEO; Anat Ashkenazi, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific and Medical Officer; Anne White, President of Lilly Neuroscience; Ilya Yuffa, President of Lilly International; Jake Van Naarden, CEO of Loxo at Lilly; Mike Mason, President of Lilly Diabetes; and Patrick Jonsson, President of Lilly Immunology and Lilly USA. We're also joined by Mike Springnether, Kendo Waha and Lauren Zierke 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 several factors, including those listed on Slide three. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent filings with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It's not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, please note that our commentary will focus on non-GAAP financial measures. Now I'll turn the call over to Dave.

Anat Ashkenazi :

Thanks, Dave. Slide six summarizes financial performance in the first quarter of 2023, and I'll focus my comments on non-GAAP performance. In Q1, revenue declined 11% versus Q1 2022. When excluding revenue from COVID-19 antibodies, revenues increased 10% or 12% on a constant currency basis, highlighting solid momentum for our business despite a substantial headwind from a loss of exclusivity in the United States, which did not yet face meaningful generic competition in the base period. Gross margin as a percent of revenue increased 230 basis points to 78.4% in Q1 2023. The increase in gross margin percent was driven primarily by lower sales of COVID-19 antibodies, partially offset by lower realized prices. Total operating expenses increased 15% this quarter. Marketing, selling and administrative expenses increased 12%, driven by higher marketing and selling expenses associated with recent and upcoming product launches and indications. R&D expenses increased 23%, driven by higher development expenses for late-stage assets. This quarter, we recognized acquired IP R&D charges of $105 million or $0.10 of EPS. In Q1 2022, acquired IP R&D and development milestone charges totaled $166 million or $0.15 of EPS. Operating income decreased 38% in Q1, driven by lower revenue, primarily due to 0 sales of COVID-19 antibodies this quarter, paired with higher R&D and SG&A expenses. Operating income as a percent of revenue was 23% for the quarter and reflected a negative impact of approximately 150 basis points attributable to acquired IP R&D charges. Our Q1 effective tax rate was 12.8%. This represents an increase of 250 basis points compared to the same period in 2022, driven primarily by the tax impact of the new Puerto Rico tax regime. At the bottom line, we delivered earnings per share of $1.62. On Slide seven, we quantify the effect of price, rate and volume on revenue growth. This quarter, U.S. revenue declined 14%. As a reminder, COVID-19 antibody revenue in Q1 of 2022 totaled approximately $1.5 billion compared to zero in Q1 of this year. When excluding revenue from COVID-19 antibodies, U.S. revenue grew 19%, driven by robust volume growth for Mounjaro, Verzenio, Trulicity and Jardiance. We experienced a net price decline of 5% in the U.S. for the quarter, driven primarily by Humalog and Trulicity. As we move into the second half of 2023, we expect U.S. pricing headwind versus prior year will ease considerably driven by Mounjaro access and saving cards dynamics. Europe continued its steady growth trajectory with revenue in Q1 growing 8% in constant currency, driven primarily by volume growth for Verzenio, Trulicity, Jardiance and Taltz. Volume in Europe increased 13% in Q1. For Japan, Q1 revenue increased 7% in constant currency as the base period impact of generic competition to Cymbalta and Alimta waned, and we continue to see strong robust growth in our newer medicines led by Verzenio and, to a lesser extent, Jardiance. Moving to China. Revenue declined 1% in constant currency with volume growth of 19% offset by net price declines. Volume growth was driven by Verzenio and, to a lesser extent, increase in shipments of Olumiant. Price declines were largely driven by Humalog, which was added to the volume-based procurement scheme in Q2 of last year. Revenue in the rest of the world decreased 9% in constant currency, driven by the sales of rights to Cialis in Taiwan and Saudi Arabia for $95 million in Q1 of 2022, partially offset by growth in Verzenio, Mounjaro and Jardiance. Slide eight shows the contribution to worldwide volume growth by product category. As Dave mentioned earlier, we have evolved a prior product categorization from key growth products, which included 10 key products launched since 2014 to now focus on 2 categories, the first called new product and the second called growth product. The new product categories led by Mounjaro and also includes Jaypirca, and we expect to expand to include new products in the coming months and years. The growth product category is made up of select products that have been in the market for several years with continued exclusivity. As you can see, the new and growth product categories contributed over 20 percentage points of volume growth for the quarter, which was largely offset by the previously mentioned decline in COVID-19 antibody revenue. While the lack of revenue from COVID-19 antibody will be a headwind to growth throughout the year, the most substantial impact was in Q1. As I mentioned earlier, in Q1 2022, we realized approximately $1.5 billion of revenue from COVID-19 antibodies, representing 75% of the $2 billion sold in the full year 2022. Slide 9 provides additional perspective on the trends and specific highlights across our product categories. I'll speak more about Mounjaro shortly, but first, let me highlight the continued outstanding performance of Verzenio, which saw worldwide sales growth of 60% in Q1 as the long-term monarchE follow-up data shared at the San Antonio Breast Cancer Symposium last December and the recently expanded label support continued uptake in adjuvant breast cancer. Verzenio is now the standard of care in its Category 1 NCCN listed for high-risk adjuvant breast cancer. Jardiance also continued its outstanding performance with worldwide sales growth of 38% for the quarter. In Q1, we were pleased to announce that based on the results of the Phase III DYNAMO trial, the FDA accepted the supplemental New Drug Application for Jardiance for children 10 years and older with type 2 diabetes. And lastly, we continue to be encouraged by the strength of Trulicity's performance in a growing and dynamic incretin market. Worldwide sales of Trulicity grew 14% in Q1, anchored by the product's robust efficacy and safety profile, coupled with the convenient and easy-to-use device. Looking more holistically at Trulicity and Mounjaro together, U.S. revenue for these two products grew 59% in Q1 2023 versus Q1 2022. Moving to Slide 10. Let me share some commentary and context on Mounjaro's performance for the quarter. We are pleased with the positive momentum over the course of Q1 as it means more patients with type 2 diabetes are realizing the substantial benefits of treatment with Mounjaro. While the trajectory of prescription growth shifted following our actions in Q4 to reinforce the intended use of Mounjaro savings program by type 2 diabetes patients, we have continued to see a positive overall trend. Our focus is on driving new-to-brand growth while continuing to expand access. In Q1, we initiated our first Mounjaro direct-to-consumer TV campaign, and we continue to steadily build access from Mounjaro for type 2 diabetes. As of April 1, access stood at just under 60% for patients with type 2 diabetes across commercial and Part D. We estimate that the percentage of paid scripts for Mounjaro in Q1 was just over 55%, up from approximately 40% in Q4 2022. As a reminder, we define paid scripts as those prescription outside the $25 non-covered co-pay cards but inclusive of the $25 covered co-pay card. Looking forward to Q2 and the rest of the year, we expect continued improvement in access in the proportion of paid scripts and in new-to-brand prescription. On Slide 11, we provide an update on capital allocation. In Q1 2023, we invested $2.7 billion in our future growth through a combination of R&D expenditures, business development outlays and capital investments. In addition, we returned just over $1 billion to shareholders in dividends and repurchased $700 million in stock. Slide 12 represents our updated 2023 financial guidance. Starting with revenue, we are increasing the revenue guidance range by $900 million to now be in the range of $31.2 billion to $31.7 billion. Since announcing our 2023 financial guidance in December, the U.S. dollar has weakened against most major currencies. We have updated our full year revenue outlook based on recent spot rates. This FX update is driving approximately $650 million of the $900 million increase in our revenue guidance. The remainder of the increase is attributable to underlying business performance. Our guidance for gross margin as a percent of revenue remains unchanged. In terms of operating expenses, we are increasing the range of marketing, selling and administrative costs by $100 million to reflect our updated exchange rate assumptions. This results in an updated range of $7 billion to $7.2 billion. We are also increasing the range for research and development expenses by $100 million, driven by updated exchange rate assumptions and investments in our late-stage portfolio. This results in an updated R&D range of $8.3 billion to $8.5 billion. We have incorporated IP R&D charges that have been incurred or realized as of the date of earnings, which totaled $105 million. Consistent with prior quarters, we have not included any IP R&D charges associated with potential or pending business development transactions. Additionally, the recently announced agreements to sell the right of our linsepene portfolio and have not been included in guidance. Each transactions will be factored into our financial guidance after it closes. Other income and expenses and tax rate guidance remain unchanged. Based on these changes, we are raising our full year reported EPS guidance to now be in the range of $8.18 to $8.38 per share and raising our non-GAAP EPS guidance to be in the range of $8.65 to $8.85. Now I will turn the call over to Dan to highlight our progress in R&D.

David Ricks :

Thank you, Dan. Before we go to Q&A, let me briefly sum up our progress to start the year. Our core business, which excludes COVID-19 antibody revenue, grew 10%, driven by Mounjaro, Verzenio, Trulicity and Jardiance. This growth was achieved despite headwinds related to pricing, to generic erosion of Alimta in the U.S. and a moderated but still negative foreign exchange impacts. In the coming quarters, we expect the impact of COVID-19 antibody revenue in the prior periods will ebb, while our new product and growth product categories of medicines will drive continued revenue growth and meaningful operating margin expansion. While the quarter was not without some challenges, which I am confident we'll overcome, we made meaningful advances in our pipeline, including the approval of an expanded label of Verzenio, the first approval of mirikizumab in Japan, submission of tirzepatide for obesity in the EU and positive results from our second Phase III trial for tirzepatide in obesity. We also demonstrated leadership to improve insulin access and affordability for millions of Americans. Lastly, we returned approximately $1.8 billion to shareholders via the dividend and share repurchase. We remain committed to both executing on the significant opportunities before us and to continuing the important and often difficult work to discover, develop and bring to market innovative medicines to address some of the greatest areas of unmet medical need. Now I'll turn the call over to Joe to moderate the Q&A session.

Operator:

[Operator Instructions] The first question today is coming from Seamus Fernandez from Guggenheim.

Daniel Skovronsky :

Yes. Thanks, Seamus. I'll start sort of on the data expectations and how it might fit in and maybe Anne will add some things on commercial opportunity. So I think we had very compelling data in Phase II, 32% slowing of disease progression. If in Phase III, we can replicate those kinds of results, this will be a very important and meaningful drug. I know it's interesting for investors to sort of speculate on competition between 2 different pharma companies. It's not exactly how I think about it. I think there's a huge opportunity here for patients. The challenge is not really about competition. It's about how do we help the medical system better identify patients, diagnose them and move them into treatment regimens, of course, requiring reimbursement. I think the two drugs, however, have some important differences. Dunanumab targets specifically amyloid plaques. We think that's the relevant species to hit in Alzheimer's disease. I think we were pretty confident about that in the past, probably the solanezumab data, which targeted just soluble adds even more confidence to that statement. As a result of hitting just amyloid plaques, that allows us to have fixed duration dosing regimens as an option for patients. Let's see how the data turn out. But I expect that many patients will be able to stop dosing even as soon as 12 months. That's a big difference than being prescribed a drug that you might have to take the rest of your life. And I think that could be exciting and important for patients. So lots of ways for donanemab to win. I think the most important thing, though, is showing consistent strong efficacy like we did in Phase II and then getting this drug approved and bringing it to patients. Anne, what do you have?

Operator:

The next question is coming from Terence Flynn from Morgan Stanley.

David Ricks :

Thanks, Terence. I'll go to Mike for those questions on branding strategy considerations and then any update on RTP.

Operator:

The next question is coming from Chris Schott from JPMorgan.

David Ricks :

Thanks, Chris, for the 2-parter there. Mike, we'll go to you for the first part around bigger picture in the incretin market and category growth and how we're thinking about that and then the second round, use in patients with diabetes versus none.

Operator:

The next question is coming from Colin Bristow from UBS.

David Ricks :

Okay. Mike, you can go ahead and cover these points kind of general gross to net thoughts and trends and then Colin's question about potential use of a priority review voucher.

Operator:

The next question is coming from Evan Seigerman from BMO Capital Markets.

David Ricks :

Thanks, Evan, for the question. Mike, we'll go back to you balancing commercial potential with potential stress to the system. Thoughts?

David Ricks :

Yes. Maybe just to add, I think the latest data from the Medicare Trust is that we're spending about $1 trillion a year as a country on obesity-related complications and comorbidities. I don't think we always do a very good job of thinking about buying pharmaceuticals as an investment and future savings in our health. Maybe we do better when it's acute like COVID. I think we spent tens of billions on COVID therapies and didn't question it as much. But here's -- I think even in the most rosy forecast, we're not going to sell $1 trillion of obesity drugs. So the question is more like, over time, can we demonstrate that treatment today reduces cost downstream? We're highly confident that, that will be a multiple of 5x, 10x savings for whatever people invest in the medicines. We have to prove that. That's our job as an innovative company is to do the outcome studies that demonstrate that. I think our competitors are doing the same thing, and that will be good for the field. And as I've said before, it's hard to imagine by the end of this decade that everyone doesn't just accept that pharmacologic treatment for overweight and obesity should be the standard of care, and it will save this health care system trillions of dollars over time. So that's our position and we need to fight for that position. We also need to do the work. And right now, we are talking about weight loss numbers, not outcomes. But that data is coming soon, as early as next year for tirzepatide.

Chris Shibutani :

With and thinking about its safety tolerability profile, I think we have a base level of precedent data that sort of frames expectations for what the ARIA rates are, including last fall when you have the head-to-head for -- where I think there was some relative improvement, recognizing that there's difference in patient populations. Now that you're doing this study, there's aspects of this where you have dosing intervals that include placebo. You also talked about using blood-based biomarkers. Can you help us frame expectations for what would be a meaningful differential? Should we have baseline expectations that reflect more of the prior data? Or is there really room to improve? And when you think about all of these MRI and blood-based biomarkers, how much is this going to be sort of logically natural relative to how patients are cared for? Or is this also going to require some threading in of new ways that patients are managed, which I know that you're investing tremendously in? But just help us with the logic of results from these studies like TB6.

Daniel Skovronsky :

No. Thanks, Chris. I'm glad you raised this. It's a topic that we think a lot about. Probably just starting with maybe correcting a misperception in the field around ARIA rates, I think we don't really know what asymptomatic ARIA means is sort of an incidental finding on an advanced brain scan. We don't want to over-index on that. We want to focus on symptomatic ARIA. And symptomatic ARIA rates, that's what the patient experiences is adverse is a range from sort of 5% to 10% or less across the class. We don't understand all the factors that could cause 1 patient of symptomatic ARIA and another patient to have a symptomatic ARIA, which we see is not a problem. That's what we want to understand better in this study. Are there things that we can see on baseline MRIs or on blood biomarkers that might predict who's going to have those symptomatic ARIAs? And then are there adjustments to dosing that you could have in those patients so they can still get the benefit of the drug without getting the symptomatic ARIA? I don't see this as a study where there's a positive outcome or a negative outcome. It's not a binary thing here. What it's going to do is add to our understanding of how best to identify patients and how best to change dosing in patients who have the highest risk that overall, that should lead the field to have more comfort using these drugs, the entire class of drugs probably in more responsible ways.

Geoffrey Meacham :

Congrats on the data. Just have a couple of related ones for Dan. On SURMOUNT-4, I know we don't have data yet but are there lessons to be learned commercially about the rebound effect once you discontinue tirzepatide? And just wasn't sure what your thoughts of on continuity of therapy in the real world. And the second one is that when you think about tirzepatide development in other settings like sleep apnea, et cetera, there are a lot of indications that you could still go after but haven't officially announced When you look outside of diabetes or obesity, what is the criteria for selecting tirzepatide development versus, say, the oral versus GGG, et cetera?

Michael Mason :

Yes. On the commercial side, as we launch into the chronic weight management market for tirzepatide, we'll be very upfront with payers and health care professionals and consumers that this is a chronic disease and a chronic medication that needs to be adhered to long term. When you look at how this product works, one of the most important aspects of it is that it controls and reduces appetite. When someone tries to gain -- to lose weight via diet and exercise, as someone is successful in losing weight, the body actually works against that and tugs it the opposite way by increasing the appetite. That's why these agents, tirzepatide does work because it does reduce the appetite. So while on therapy, we anticipate that the appetite will be lowered and maintained. And then if stopped, then the appetite will increase. Now this is something that unlike most drugs, you don't know if you stop taking like a statin or something else, you don't really feel any effects. We do think that, that will be a noticeable effect that will begin soon after stopping therapy even before you start seeing weight gain. So I think we think that will be an important kind of signal for a patient to understand that this is a chronic disease and needs to be treated long term. As it goes into the -- maybe 1 other aspect on the additional indications, we talk a lot about access and the need for in order to get access into Part D. And obviously, that will be an important thing overarching. But these additional indications are important for the senior population. Complications run with living with obesity, and they emerge into complications when you reach Medicare like type 2 diabetes, like sleep apnea and like heart failure. And so we believe these are important indications to study because we think these are important health conditions. But also commercially, we think this is important because this will help us get access for these really important complications that are really important to the senior population. So commercially, we think these are really important. Thanks for the question.

Umer Raffat :

I have a question on drug pricing, especially as it relates to Mounjaro. A, what's your expectation on net price per patient beyond the first year on Mounjaro? And I realize the compliance as well as maintenance pricing would be considerations. And secondly, in a scenario where Ozempic and Trulicity are in the IRA basket in 2027, should it be our base case that there would not be an impact to the non-Medicare book of business? And would it not impact other members in the class like Mounjaro? I feel like it's not super clear. I'd be curious about your thoughts.

Michael Mason :

Yes. No, good question. I mean, on net pricing, we have 1 price point for Mounjaro. We have flat pricing across the dosing form so people can feel free to find the right dose that works for them at the same price. That will be the same price for new starts, it is for people on maintenance to treatment.

Operator:

The next question is coming from Tim Anderson from Wolfe Research.

David Ricks :

Thanks, Tim, for the really good question. I'll hand over to Ilya Yuffa, our President of Lilly International to weigh in on that.

Joe Fletcher :

Thanks, Ilya, and thanks, Tim, for the question. Running low on time, so we'll try to get through as many questions as possible. Paul, next question.

Steve Scala :

I appreciate that data presentation is key to fully answering the question, but what opportunities are still available to Verzenio in the adjuvant setting now that we have seen the top line of NATALEE? It would be easy to conclude NATALEE is a significant risk to Verzenio adjuvant use and that Verzenio adjuvant use will decline. What other scenarios would you like us to consider? And what aspects of NATALEE would you like to highlight?

Jacob Van Naarden :

I'm not sure I agree with your framing, I'm not sure we agree. The NATALEE success is not really a surprise to us. We said publicly, we expected it to be positive. We frankly thought it would be positive actually at the last interim analysis at the end of last year. Just by way of reminder, we studied Verzenio in the adjuvant setting, given for two years, specifically in a high-risk population, which is a population that we and I think physicians agree is the 1 that really requires intensification of therapy. And now Verzenio is the standard of care in that setting. We don't really expect that to change actually. We have mature follow-up on our data as last presented at San Antonio in December. We have a Category 1 NCCN listing for Verzenio in the setting. I think Verzenio's role in high-risk adjuvant endocrine positive breast cancer is pretty clear. We seem to hear a lot of noise about ribociclib in intermediate risk population, a population that we didn't study, a population for whom I think the risk benefit is a little bit more questionable. And to the extent that the data we see at ASCO provides a role for that drug in that setting, sure. That's fine. That really doesn't pose any threat to the forecasted opportunity for Verzenio in the high-risk setting where we still remain very confident in its prospects.

David Risinger :

So congrats on all the updates. I just wanted to get your take on NOVOS, Wegovy-SELEcT cardiovascular outcomes trial and potential implications. So I think expectations are that the efficacy could be modest. Could you comment on that scenario and then also comment on the scenario that the trial surprisingly fails?

Daniel Skovronsky :

Thanks, Dave. Maybe some of those questions are better addressed to Novo. I think based on passing an interim without stopping early, you can sort of put an upper limit on how good the efficacy could be. But we don't know exactly what that will be. I expect I think most people reasonably expect the trial will be positive. We know that weight loss has so many benefits, including cardiovascular benefits, and that's likely to be demonstrated in a large clinical trial. No idea what the number will be here, the stats or anything like that. But I'll be surprised if weight loss doesn't translate into benefits. We, of course, have our own studies going both in the type 2 and diabetes population and in the obesity population. We'll look forward to those outcomes.

Kerry Holford :

Two questions, please. First from mirikizumab. Can you provide any more detail on the specific issue the FDA has in manufacturing that when you expect to refile whether you would anticipate a Class 1 or 2 responders and indeed whether you take to launch in the U.S. this year. Secondly, a question for Anat on [indiscernible]. So you've announced two divestments here in quick succession. Just interested to see, is there anything specifically driving this? Are there any additional noncore assets that you're seeking to monetize? And then as you divest your priorities for the use of cash? Clearly expecting to say internal R&D investments. But I'm wondering, too, if we can expect any more external R&D investment.

Patrik Jonsson :

Thank you very much, Kerry. As Dan stated earlier, the CRL did not cite their concerns in regards to the clinical profile of miri, but only certain aspects of the proposed commercial manufacturing process. And generally, we don't disclose the details about timing of our interactions with the FDA. But I can say that we are working very closely together with the FDA today to address the questions and also discussing the details of the next steps to understand the time line. But we remain very confident to launch miri as first-in-class in ulcerative colitis also in the U.S. In the meantime, I'm extremely happy with the launch of the approval in and a positive opinion by the European regulatory body. And we are looking forward to launches outside the U.S. as early as late Q2.

Operator:

The last question is coming from Mohit Bansal from Wells Fargo.

Joe Fletcher :

Thanks, Mohit. I'll hand it to Dave for that question, and then we'll round out.

Operator:

Ladies and gentlemen, this does conclude our conference for today. This conference will be made available for replay beginning at 1:00 p.m. today running through May 11 at midnight. You may access the replay system at any time by dialing (800) 332-6854 and entering the access code, 802917. International dialers can dial (973) 528-0005. Thank you for your participation. You may now disconnect your lines.

Joe Fletcher:

Thank you, Lois. Good morning, and thank you all for joining us for Eli Lilly and Company's Q4 2022 Earnings Call. I'm Joe Fletcher. And joining me on today's call are Dave Ricks, Lilly's Chair and CEO; Anat Ashkenazi, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific and Medical Officer; Anne White, President of Lilly Neuroscience; Ilya Yuffa, President of Lilly International; Jake Van Naarden, CEO of Loxo at Lilly; Mike Mason, President of Lilly Diabetes; and Patrik Jonsson, President of Lilly Immunology and Lilly USA. We're also joined by Mike Sprengnether, Kento Ueha and Lauren Zierke from 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 several factors, including those listed on slide 3. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Forms 10-Q and 8-K 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's not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, please note that our commentary will focus on non-GAAP financial measures. And now, I'll turn the call over to Dave.

Anat Ashkenazi:

Thanks Dave. Slide 6 and 7 summarize financial performance in the fourth quarter and full year 2022. I'll focus my comments on non-GAAP performance. As Dave mentioned, we're pleased to report 10% growth for our core business in Q4 on a constant currency basis, driven by strong volume growth. A couple of notable items affected year-over-year comparisons. The first is COVID-19 antibody revenue in Q4 2022, which compared to the prior year declined 96% from approximately $1.1 billion in Q4 2021 to $38 million in Q4 2022. Biptimozumab is currently not authorized for emergency use in any US region and we continue to expect no COVID-19 antibody revenue for 2023. Second is the continued foreign exchange headwinds compared to 2021, which resulted in a 45-basis point dampening of revenue growth in Q4. Key growth products grew by 21% and accounted for 70% of our revenue this quarter. For the full year 2022, revenue excluding revenue from COVID-19 antibodies grew 2% or 5% on a constant currency basis. Our non-GAAP gross margin was 80.5% in Q4, an increase of approximately 440 basis points, primarily driven by lower sales of COVID-19 antibodies, partially offset by lower realized price and increased expenses due to inflation and logistics costs. Total operating expenses declined 1% in Q4, lower acquired IPR&D and development milestone charges were largely offset by higher marketing, selling, and administrative expenses and higher R&D expenses. Marketing, selling, and administrative expenses increased 3% in Q4, primarily driven by costs supporting the launch of new products and indications, partially offset by the favorable impact of foreign exchange rates. R&D expense for the quarter increased 5%, driven by higher development expenses for late-stage assets, partially offset by favorable impact of foreign exchange rates. Operating income declined 7% compared to Q4 2021, driven by lower revenue, partially offset by lower operating expenses. Operating margin for Q4 was 27.4%, which includes a negative impact of approximately 330 basis points attributed to acquired IPR&D and development milestone charges. Full year operating margin was 27.8% an increase from 26.8% in 2021. Our Q4 effective tax rate was 7.3%, bringing our full year 2022 effective tax rate to 10.3%. As we shared during our guidance call in December, we had assumed that the 2017 Tax Act provision for requiring capitalization, amortization of research, and development expenses for tax purposes would be deferred or repealed by Congress in late 2022. However, no legislative action was taken related to this provision, which resulted in a lower effective tax rate for 2022 versus the guidance range previously shared. In addition this provision did increase our tax payments in 2022 by approximately $1.2 billion. At the bottom-line earnings per share declined 4% in Q4 and increased 7% for the full year. On slide eight, we quantify the effect of price rate and volume on revenue growth across key geographies. This quarter US revenue declined 10%. Excluding revenue from COVID-19 antibodies, revenue grew 11% in the US. The swap volume-driven growth was led by Verzenio, Mounjaro, and Jardiance. Net price was flat in the US this quarter. For the full year, the net price decrease of 3% in the US was in line with our expectation. Moving to Europe. Revenue in Q4, increased 8% in constant currency driven primarily by volume growth for Jardiance Trulicity and Verzenio. We remain encouraged with the momentum of our business in Europe. In Japan, revenue in Q4 decreased 6% in constant currency. Revenue growth in Japan continues to be negatively impacted, albeit less so than in prior quarters by decreased demand for several products that have lost patent exclusivity including, the Alimta and Cymbalta. We expect to return to growth this year, as we scale key products and launch Mounjaro. In China, revenue grew 2% in constant currency, as continued volume growth was mostly offset by lower realized prices for Humalog, as a result of the volume-based procurement process and for products listed on the NRDL as well as by COVID-19 disruption. Revenue in the Rest of the World increased 11% in constant currency this quarter, driven by approximately $130 million of onetime revenue associated with the sales of the company's right to Alimta in Korea and Taiwan. As shown on Slide 9, our key growth products continue to drive robust worldwide volume growth, contributing 15% points of volume growth this quarter. As mentioned previously, the decline in COVID-19 antibody volume, was substantial in Q4 2022 and was largely offset -- and largely offset volume growth from key products. While we will face similar prior period headwinds from COVID-19 antibody revenue through the first three quarters of 2023, our long-term growth prospects are underpinned by our innovative pipeline and key growth products including Mounjaro. Slide 10, further highlights the contributions of our key growth products. This quarter these brands grew 21% or 27% in constant currency generated $5.1 billion in sales and made up 70% of our total revenue. While Lilly's incretins portfolio understandably generates high interest, we continue to see tremendous growth both in percentage and absolute terms, for other key products including Verzenio and Jardiance. Verzenio sales in the quarter grew 100%, driven mainly by the edge of an indication. Jardiance sales grew 42% and the product retains the leadership position, in a competitive market globally. Demand for our incretins portfolio remains strong both for Trulicity globally and Mounjaro in the US, and we remain focused on bringing additional capacity online to meet this robust demand in upcoming launches. In terms of supply, as mentioned in our guidance call in December, given strong demand for incretins products. There have been intermittent delays at wholesalers and pharmacies and receiving certain doses levels of Mounjaro and Trulicity in the US. We continue to update the FDA on the situation, and the FDA has been posting to his website details regarding affected doses and expected timing. To meet this rapidly growing demand across our incretins business, we have announced plans to add additional, substantial capacity in the years ahead. The most proximal of these efforts, is our RTP side North Carolina where progress continues as planned and we look forward to the start of production later this year. Moving to Slide 11. Mounjaro's strong launch uptake continues, underpinned by differentiated efficacy profile, and positive customer experiences. For Q4, approximately 75% of Mounjaro's new therapy starts, are patients new to the type 2 diabetes injectable incretins class and further 10% of switches from Trulicity. As we mentioned in our Q3 earnings call in early November, we took actions in Q4 to reinforce the intended use of the Mounjaro savings program, by type 2 diabetes patients. We indicated at that time that these actions could negatively impact new prescription volumes, but were not expected to impact net revenue. As anticipated, we believe the new prescription volumes beginning in late November were impacted by these actions with some week-by-week volatility driven by end of year seasonality. We continue to build payer access for Mounjaro for type 2 diabetes. As of January 1st AXIS [ph] stands just over 50% for patients with type 2 diabetes across commercial and Part D. Regarding the percentage of paid scripts. For Q4 we estimate the percentage of paid script from Mounjaro to be approximately 40% with paid script defined as those prescription outside the 25 non-covered co-pay cards, but inclusive of the 25 covered co-pay card. As we expand payer access, the proportion of paid scripts should continue to increase. On slide 12, we provide an update on capital allocation. In 2022, we invested $9.6 billion to drive future growth through a combination of R&D expenditures, business development outlays and capital investment. In addition, we returned approximately $3.5 billion to shareholders in dividends and repurchased $1.5 billion in stock. Our capital allocation priorities remain unchanged and are oriented towards achieving our strategic deliverables of top-tier revenue growth and speeding life changing medicines to patients. We do this through investments in our current portfolio to drive new launches, investment in our manufacturing capacity in our future innovation through R&D and business development. And we returned capital to shareholders through dividend payments and share repurchases. Slide 13 provides an updated 2023 financial guidance. The only change we've made from the guidance we provided in December is to update our effective tax rate, which result in an updated EPS range. During December guidance call, we shared that the effective tax rate for 2023 would be approximately 16% based on the assumed deferral or repeal of the tax provision requiring capitalization of R&D. Since this provision was not deferred or repealed in 2022 and given the uncertainty around if and when such action will take place in 2023, we have updated our tax rate from 16% to approximately 13%. This update to our effective tax rate results in new EPS range of $7.90 to $8.10 on a GAAP basis and $8.35 to $8.55 on a non-GAAP basis. Regarding FX rates there has been a general weakening of the dollar since we set our initial 2023 financial guidance last year. However, we're not adjusting guidance for FX changes at this time as we're only one month into the year and FX markets can be quite volatile. As I shared in December, the most significant headwind in revenue growth in 2023 versus 2022 will be the impact of COVID-19 antibody sales. This year-over-year comparisons will be most pronounced in Q1 2023 given that we had $1.5 billion of COVID-19 antibody sales in Q1 2022. To a lesser extent the loss of exclusivity of Alimta in the US in Q2 2022 will also impact year-over-year growth in the first half of 2023. Still the midpoint of our 2023 revenue guidance range represents roughly 7% of growth or 50% growth for our core business excluding COVID-19 antibodies. This year holds tremendous promise for us to help patients as we execute on the current wave of potential launches while maintaining our commitment to invest in and progress future innovation. We expect this ongoing focus on disciplined execution and investment will help drive top two revenue growth through 2030. Now, I will turn the call over to Dan, to provide an update on our pipeline.

Dave Ricks:

Thanks Dan. Before we move to Q&A, let me summarize the progress we made during 2022. We delivered strong revenue growth in our core business, propelled by our key growth products. We launched Mounjaro for patients with type two diabetes, while advancing and expanding our development program for tirzepatide, including the start of the SURMOUNT-MMO outcome study and the initiation of a rolling submission for chronic weight management. In 2022, we submitted regulatory applications for important pipeline products like mirikizumab, pirtobrutinib and lebrikizumab. And in 2023, we've already received approval for Jaypirca and are poised to advance donanemab in the regulatory process assuming positive data from the TRAILBLAZER-ALZ-2 Phase III study. In addition, we continue to invest in our pipeline, our capacity, our capabilities and our people. Finally, we returned $5 billion to shareholders via the dividend and share repurchases. And for the fifth consecutive year, announced a 15% dividend increase for 2023. With continued growth in Mounjaro and our key products, including Verzenio, Jardiance and Taltz, we expect our core business revenue to grow by mid-teens in 2023. We are energized by the launch opportunities before us this year and no strong launch execution is key to our long-term success. Taken together, we believe that we are well positioned to deliver top-tier revenue growth through at least 2030 and to deliver on Lilly's mission to make life better for people around the world. So now, I'll turn it over to Joe to moderate the Q&A session.

Operator:

Thank you. [Operator Instructions] Our first question is from Colin Bristow from UBS. Please go ahead.

Dave Ricks:

Thanks, Colin. We'll go to Mike for the first question on gross to net and price for Mounjaro and then hand over to Dan for kind of broader obesity mechanistic commentary. Mike?

Dan Skovronsky:

Thanks, Colin for your question on future mechanisms for treating obesity. I can assure you we're not done innovating on behalf of people with obesity. There's a lot we can still do. I think keep your eyes open for more to come from Lilly labs on incretins and related types of mechanisms, but also broadly interested in a variety of new non-incretins-based mechanisms. You specifically asked about one mitochondrial uncoupling but there are several others, I think that also have promise for patients. I just sort of put a note of caution though treating obesity we need to have a very high bar for the types of medicines we develop, remembering that this is a chronic often lifetime disease and highly prevalent population. We need medicines that first and foremost are extremely safe and really highly well tolerated for patients. So that's what we're looking for in future mechanisms.

Operator:

The next question is from the line of Chris Schott from JPMorgan. Please go ahead.

Dave Ricks:

Thanks, Chris. All right. We'll go to Mike for the question about Mounjaro price kind of over time and how it might compare to Trulicity. And then to Anne on your donanemab question about activity that would occur to ramp up HCP education. Mike?

Dave Ricks:

Thanks, Mike. Anne?

Joe Fletcher:

Thanks, Chris for the questions. Lois, next question?

Seamus Fernandez:

Great. Thanks for the question. So Dan, I wanted to ask you if you could talk a little bit about where you see the oral GLP-1 space developing and how your product is likely to be positioned. A little bit of this I think is also what you think the unmet need is outside of where the, sort of, very robust weight loss that we see from Mounjaro is. And then just an add-on to that how do you see the oral market developing in terms of other potential agonists? Is that something that Lilly is pursuing and hoping to further develop combinations there as well? Thanks.

Dan Skovronsky:

Thanks, Seamus. I'll get started. Maybe Mike wants to add on some of the marketplace questions. But clearly obesity is a huge problem in the US and around the world. I think 100 million Americans potentially with obesity and reaching one billion people around the world pretty soon. That's probably not a market that even all of the interested companies could address solely with injectables. So just given the scope of the problem around the world we're going to need orals. Ultimately it's our goal to have orals that can match the safety tolerability and efficacy of injectables. I think our oral GLP-1 is our first attempt in this space and has really good prospects for meeting that initial goal. But then noting of course that the injectables are going to get better over time and the orals will catch up as well. The second part of your question was how do the orals catch up. And I think you're sort of alluding to an obvious issue, which is right now our oral GLP-1 and other orals in the space are single mechanism, single incretin agonists. I think, we've seen with great drugs like Trulicity and competitive products what single agonist against GLP-1 can achieve. It's not as good, I think, as what can be achieved with dual agonism for tirzepatide or hopefully even triple agonism with GGG. And so you can bet, we're working on oral solutions that can bring additional incretin activity to patients in a pill. Nothing ready to disclose today but we're working hard.

Operator:

Next question is from the line of Geoff Meacham from Bank of America. Please go ahead.

Joe Fletcher :

Great. Thank you, Geoff. So we'll go to Dan for the question on SURMOUNT-4 and duration of tirzepatide and then to Mike on the question of how the prescriber base from Mounjaro compares to Trulicity.

Mike Mason :

Yes, no hard data yet on that. But qualitatively what we hear is what patients who've used Mounjaro, what they like and what they realize once they start using it is that it really does reduce the appetite, and they enjoy the benefits of reducing appetite. It helps them lose their -- lose weight and stop being as consumed as much during today about 80%. And we do know that when -- what we heard from our investigators and our studies is that when people stop taking Mounjaro that their appetite goes back to the level, it was before. So that's something very noticeable something that a patient values from taking the therapy and then when they stop the therapy, they then see this reversed. And so we do believe that people are going to stop, and see if they can lose weight if they can great. But I do think that they're going to see a very powerful signal very quickly to reinforce going back on the product. So I do think that will help reinforce the chronic use of tirzepatide for type two diabetes, and eventually for obesity if we get approved. The question on Trulicity. Mounjaro if you look at Mounjaro's use right now and compare it to how many customers are using that versus Trulicity at this time, it's a lot broader population than we saw with Trulicity is because the market is a lot bigger a lot more people are riding the treatment. If you compare Mounjaro to the number of Trulicity riders today there are more people riding Trulicity just, because it's been on the market longer. They've gone through the adoption curve and Trulicity has better access, access and especially in Medicaid that drives additional prescribers to use that. So overall I'd say the Mounjaro is within the universe of the doctors who write Trulicity at this point.

Operator:

The next question is from Tim Anderson from Wolfe Research. Please go ahead.

Joe Fletcher:

Thanks, Tim, for the question. We'll go to Dan for this.

Joe Fletcher:

Thank you. Lois, next question.

Terence Flynn:

Hi. Thanks so much for taking the question. Maybe a two part one for me. I guess first on Mounjaro manufacturing. I was just wondering if you can tell us if the FDA has completed the inspection of your new North Carolina facility yet. And then the other question relates to tirzepatide for obesity. I was wondering if you've had any initial payer conversations yet, and if you're planning to use a priority review voucher for that filing? Thank you.

Anat Ashkenazi:

Terence, to your question on the RTP side North Carolina, it's progressing on schedule as we had planned. We can't comment on specifics on the FDA interactions, but we're expecting that site to start producing this year and it's progressing towards that goal. I will mention important to think about -- when we talk about RTP, I think because of the proximal nature of when this site is going to come online. Obviously, this is the next large node that's going to come online in terms of capacity for incretins portfolio. But we are making substantial investments beyond RTP. So, we've announced a second site in North Carolina, very large site in Concord, when we've announced the expansion of the RTP site additional sites in India – or north of Indianapolis and a site in Ireland. And as we look at our capital investments in manufacturing sites this year alone, it's probably the largest we've ever had doubling what we had in 2022. We're looking at about $3.3 billion of investment just this year. So we're looking at substantial expansion of capacity really across the globe to support not just Mounjaro obviously, but the rest of the portfolio and we have visibility into what's coming as well as the fact that, as we've talked about before we have several products that are part of the same manufacturing network, and the same auto-injector platform. So that helps us kind of build that capacity across the Lilly portfolio.

Mike Mason:

Yeah. I think a good thing to focus on is access and obesity. I mean you look at the massive size of the obesity market 110 million people in the US, 650 million people globally but you really see that the historically that the obesity market has really been slow to develop. And it's really because the treatments haven't been adequate. So, the kind of – the question we had going into this market, was if a safe and efficacious treatment was developed would consumers and health care professionals and payers be interested in using it? Well, based on what we've seen in the marketplace over the past year and on a market research it's clear that consumers and health care professionals will adopt an efficacious safe anti-obesity medication if patients can have access to it. So it does come down to payer access, and we're highly focused on doing that. Noble recently stated in their call that 40 million Americans have access to obesity and the way, they talked about it what's payer access and employers opting into that. So if that's where we're at today that would be a great starting point for access. We're deep into conversations with payers to understand the market and all that. Access discussions haven't started yet, but will shortly. But our focus long term is to improve access for diabetes medications. We are investing significantly to demonstrate the potential health outcome benefits, where people using tirzepatide, who live with obesity. We're also investing in Phase III programs for people, who live with obesity and sleep apnea, or heart failure and they should unlock large segments access for people who live with obesity in commercial and we hope Part D. In addition, in my career, I've seen the power of consumer interest in helping to improve access for medication. And what we've seen over the last year is that, people who live with obesity are highly engaged and willing to do much access effective treatments. They will have an important walls with employers and the congressional representative advocate for access. So, while I think it will take time to establish our ultimate actions goal, I'm more encouraged than ever are potential unlock the obesity market and help a lot of people. So I'm encouraged, but obviously a lot of work still to be done.

Operator:

The next question is from Steve Scala from Cowen. Please go ahead.

Joe Fletcher:

Thanks Steve. I'll go to Anat for the question on the tax rate assumptions, and then I'll go to Dan for your LP little a question.

Dan Skovronsky:

Okay. I'll start with the LP little a question. We have two LP little a programs, so maybe the easiest one to comment on first is the oral program. This is a first-in-class I think, probably the only one in clinic here. An oral medication against this target is really a huge feat of molecular engineering. I'm super excited to see the data from this molecule developed and obviously, the market opportunity for an oral drug for such a widespread condition is very important. In terms of the siRNA, you're right to note that a competitor is ahead of us and really just starting the CVOT study. It's a long road to get these drugs to market with outcome studies are needed here to show the benefit. I probably don't get into our differentiation strategy. But, of course, we have some ideas here and we'll move as quickly as possible. I don't see this as a winner take all space.

Operator:

The next question is from Louise Chen from Cantor. Please go ahead.

Joe Fletcher:

Thanks Louise. Mike, do you want to chime in on that around the minimum amount of relative risk reduction we'd expect in an outcome study for obesity?

Joe Fletcher:

Thanks Louis for the question. Lois, next question.

Joe Fletcher:

Dave are you there? Okay. Looks like we don't have Dave or he's on mute. Lois, next question.

Chris Shibutani:

Thank you. If I can ask a question on Mounjaro and the interplay with Trulicity. You've commented in the past that in terms of patients on Mounjaro, it has been about less than 10%. That seems to be a little bit higher now. Can you share any thoughts and observations about how you see this progressing on the forward through this year?

Mike Mason:

Okay. Yeah, I mean on that nothing has changed over what we had talked about earlier that less than 10% of our scripts we get four Mounjaro comfort Trulicity. That hasn't changed over time. It's still a little bit less than 10%.

Joe Fletcher:

Lois, next question.

Umer Raffat:

Hi guys. Thanks for taking my question. There's been a heightened investor focus I feel along the Phase III primary endpoint for donanemab now. And I wonder if there's been any incremental interactions and/or agreement with FDA on the primary endpoint for Phase III. The question I get a lot from investors. And also how are you thinking about this upcoming Phase III? If there were to be a scenario where the MMRM on CDR doesn't agree with ADAS on a patient analysis? Thank you.

Dan Skovronsky:

Yeah. Thanks. Clearly I think there's a lot we can learn from competitor readouts here. And so looking at lecanemab data in our eyes, I think it actually further validates an endpoint like ADAS. If you just look at the forest bot for example there's a lot more homogeneity in effect on an endpoint like ADAS versus CDR Sum of Boxes. So we feel more confident I would say than ever before that endpoint like that is the right way to go. On the other hand I think the -- you could take the position that since lecanemab hit CDR Sum of Boxes people might say, well then it's achievable and you guys should do it too. So there's some pushes and some takes there. But on the whole still feeling good about ADAS as a primary outcome. When you ask though what happens if you hit one outcome and not the other. That's surely a difficult situation to be in. We want to understand why that happened. If that were to happen where the irregularities in CDR Sum of Boxes that could explain it what did the rest of the secondaries look like. Always best to hit all of your outcomes in a clinical trial. Feeling that you want to hit your primary in as many secondaries as possible. So let's wait and see.

Operator:

That question is from Mohit Bansal from Wells Fargo. Please go ahead.

Joe Fletcher:

Dan, do you want to talk a little bit about remternetug?

Joe Fletcher:

Thank you, Mohit, Next question.

Evan Seigerman:

Hi, guys. Thank you so much for taking the questions. While much of the discussion on Medicare coverage in Alzheimer's, we know that Medicare really doesn't pay for obesity drugs. Can you just talk about your efforts to help Medicare patients get coverage for obesity drugs including, potentially Mounjaro if approved. Maybe add some parameters around, what that additional population could look like from a revenue opportunity perspective. Thank you.

Mike Mason:

Okay. Sure. Yes, good question. I mean, it's going to take less late action in order to allow diabetes medications to be covered on Medicare Part D. So there is the Treat and Reduce Obesity Act. The acronym for that is TROA. And there's a large growing bipartisan support for TROA, a little over 100 congressmen, senators, people senators are behind the program. And it's growing more and more support across Washington. We're eager to see an advanced list process. It would be great for the company country. America needs to take action and drastic reduce the number of people in the DC and this oscillation would be an important step for this goal. We'll support the translation and continue to work, to advocate for it.

Operator:

The next question is from Trung Huynh from Credit Suisse. Please go ahead.

Joe Fletcher:

Thanks Trung for the question. Mike over to you again comment on these recent guidelines that were put out.

Joe Fletcher:

Thanks Mike and thanks Trung for the question. Lois, next question.

Carter Gould:

Great. Thank you for taking the question. I guess one for Anat. Back in December, you highlighted austerity measures in Europe as a potential risk. At that time that was a bit of a unique position. We hadn't heard that from many companies since that time. We've heard kind of similar messaging from some but not all. And apologies if I missed it I don't think I heard anything today on this front. So, I know it's only been sort of 45 days or so since you made those comments, but any advances in sort of how you're thinking about this? And any specific products or countries we should think about that impact? Thank you.

Ilya Yuffa:

Yes, I appreciate the question. There have been a number of markets in Europe that have taken some austerity measures, partially due to Ukraine crisis and energy crisis and inflation in Europe. We have seen Germany, France, obviously, the UK, voluntary system we think is broken and so we exited that. And so we -- there are some austerity measures in there. We've contemplated that into our guidance for 2023. And the overall impact is modest relative to historical declines in price in prior years. We expect that to continue to be in that mid-single-digit decline in price in Europe.

Operator:

The next question is from Andrew Baum from Citi. Please go ahead.

Joe Fletcher:

Thanks, Andrew for the wide-ranging question on diabetes. I'll hand over to Mike first to talk about your question regarding potential impact of the IRA on access for GLP-1. And then the second question around how oral GLP might fit in given the stickiness of some of the older diabetes medications. Mike?

Joe Fletcher:

Thanks, Mike. And Lois, I think we have one final question in the queue. So let's go to the last question.

Robyn Karnauskas:

Great. Thanks for taking my question. I was just thinking more about some of the launches that are coming up but I know the maybe a little bit out. But for Mirikizumab and I always get this wrong, sorry. But for UC, can you just talk a little bit about given how much promotion there's been for [indiscernible] as you move into also Crohn's with data reading out soon. Like how do you see like competing in that market? Can you start launching? Do you have to be DTC heavy because it seems like they're very prominent. Like what about the launch dynamics. And then second for lebrikizumab the same question here. Atopic dermatitis is getting pretty crowded. What kind of pushes and pulls might you need to use to get quicker uptake in atopic derm? Thanks.

Patrik Jonsson:

Thank you very much. Well, overall we feel very good with the data we have seen on mirikizumab. If we look at the 52 weeks, we have more than 50% clinical remission and we see statistical and clinically meaningful improvements across both clinical, symptomatic, endoscopic and histologic endpoints. What I think is important that if you look at the patient populations with ulcerative colitis, we saw the same results across the bionaive and the bio failure patients. So I think we're extremely well positioned for the launch here. We also demonstrated on a factor but it's extremely important for patients or agency. More than 40% of patients were either completely or almost our urgency at week 52. So therefore, we believe we have a first-in-class asset here that probably initially will be used mainly second line for those that haven't responded appropriately to TNFs and similar. But we believe that long-term, we are positioned for a first-line placement in treatment of ulcerative colitis. And yes, so the outlook for mirikizumab. It's exciting from a competitive landscape perspective, we don't have bad to have data. But if we compare the data we have seen so far, we believe that mirikizumab compares very favorable both versus what's currently in the marketplace as well as what's in the pipeline with other companies across JAK inhibitors S1Ps and other IL-23s as well. So exciting to launch mirikizumab the first half of this year. When it comes to lebri, I think actually, we are uniquely positioned to really upgrade the expected outcomes of patients with atopic dermatitis. We have here an asset that is actually targeting the most relevant cytokine when it comes to treating atopic dermatitis, IL-13 and it does that with a high binding affinity, high potency and a slow off rate. And I think that probably explains the data that we have seen so far. We're extremely pleased with the Phase III data, and we sold more than 80% of patients achieving skin clearance at Week 16, maintaining that at Week 52, but also very importantly, statistical and clinically meaningful improvements across both each, which is probably the most disturbing factor for patients with atopic dermatitis, sleep and quality of life. And we saw similar results across both the Q2W and Q4W formulation. We actually believe that lebrikizumab has the potential to become a first-line biologic. It's important to have in mind that we announced the submission at the Q3 earnings call, and we expect that traditional regulatory pathway. Yes, we will not launch until most likely Q4 of 2023. But a lot of excitement from both health care providers and tier community as well on the payers to get leverage to the market.

Dave Ricks:

Great. I think that's the last question. I appreciate the questions across the portfolio. And we appreciate your participation in today's earnings call and your interest in our company. 2022 was another productive year for the company, and we generated strong financial results and delivered important pipeline progress in each of our core therapeutic areas on behalf of the patients we serve. We aim to continue our momentum in 2023 and execute on the meaningful launch and pipeline opportunities that we have ahead of us. So thanks for dialing in, and please follow up with IR, if you have questions that we didn't get to you today. Have a great day.

Joe Fletcher:

Thank you, Lois, and good morning. Thank you for joining us for Eli Lilly and Company's Q3 2022 Earnings Call. I'm Joe Fletcher, Senior Vice President of Investor Relations. And joining me on today's call are Dave Ricks, Lilly's Chair and CEO; Anat Ashkenazi, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific and Medical Officer; Anne White, President of Lilly Neuroscience; Ilya Yuffa, President of Lilly International; Jake Van Naarden, CEO of Loxo@Lilly; Mike Mason, President of Lilly Diabetes; and Patrik Jonsson, President of Lilly Immunology and Lilly U.S.A. We're also joined by Mike Sprengnether, Kento Ueha and Lauren Zierke 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 several factors, including those listed on Slide 3. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Forms 10-Q and 8-K 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, please note that our commentary will focus on non-GAAP financial measures. Now I'll turn the call over to Dave.

Anat Ashkenazi:

Thanks, Dave. Before I review the financial results for Q3, let me highlight a change in how we expect to communicate our acquired IPR&D and development milestone charges. In mid-October, we filed an 8-K with the SEC to provide investors earlier clarity on the impact from acquired IPR&D and development milestone charges for Q3. In future quarters, we generally expect to provide this information for quarterly updates on our Investor Relations website. Now moving to our results. Slide 6 summarizes financial performance in the third quarter of 2022 and I'll focus my overall comments on non-GAAP performance. A few notable items affected year-over-year comparisons in Q3. Foreign exchange rates had a roughly 430 basis point impact on revenue this quarter as Q3 revenue grew by 2% or 7% on a constant currency basis. We recognized $86 million of revenue related to a sales collaboration agreement for the rights to sell and distribute Mounjaro in Japan; we experienced the first full quarter impact of Alimta's U.S. Fed expiry; and the increase in sales of COVID-19 antibodies and the decrease in sales of Olumiant for the treatment of COVID-19 impacted our results. When excluding revenue from Alimta, which is now off patent across the EU, Japan and the U.S., COVID-19 antibodies and Olumiant for the treatment of COVID-19, revenue grew 9% for the quarter or 14% in constant currency, highlighting solid momentum for our core business. Gross margin was roughly flat year-over-year, the impact of lower realized prices and increased expenses due to inflation and logistics costs were offset by favorable product mix, including the impact of lower sales of Olumiant for the treatment of COVID-19 and the favorable impact of foreign exchange rates. Total operating expenses increased 1% this quarter. Growth in marketing, selling and administrative expenses and R&D expenses were largely offset by lower acquired IPR&D and development milestone charges that reduced operating expense growth by nearly 350 basis points. Marketing, selling and administrative expenses increased 2%, primarily driven by the increased cost associated with the launch of Mounjaro, partially offset by the favorable impact of foreign exchange rates. R&D expenses increased 6%, driven by higher development expense for late-stage assets, partially offset by the favorable impact of foreign exchange rates and lower development expenses for COVID-19 antibodies. Operating income increased 6% in Q3, primarily due to higher gross margin partially offset by higher operating expenses. Operating income as a percent of revenue was 28.9%, which includes a negative impact of approximately 90 basis points attributable to the acquired IPR&D and development milestone charges. Our Q3 effective tax rate was 10.7%, a decrease of 360 basis points compared to the same period in 2021. This decrease was primarily driven by the favorable tax impact related to the implementation of the 2017 Tax Act. At the bottom line, earnings per share increased approximately 12% this quarter to $1.98 per share. Acquired IPR&D and development milestone charge and a negative impact of $0.06 in Q3 2022 compared to $0.17 in the same period last year. On Slide 8, we quantify the effect of price, rate and volume on revenue growth. This quarter, foreign exchange movements primarily related to the weakening of the euro against the U.S. dollar, decreased revenue by 4%. Moving to our performance by key geography. This quarter, U.S. revenue grew 11% driven by volume growth of 15%. Excluding revenue from Alimta, COVID-19 antibodies and Olumiant for the treatment of COVID-19, revenue in the U.S. increased 20% driven primarily by key growth products. U.S. volume growth was partially offset by a net price decline of 4%, driven primarily by lower realized prices for Humalog due to segment mix and the list price reduction for insulin Lispro injection. Moving to Europe. Revenue grew 11% in constant currency, driven primarily by volume growth for Trulicity, Jardiance, Verzenio and Taltz. We are encouraged by the momentum of our business in Europe and expect continued growth as the impact from the patent expiry for Alimta, which lost exclusively in June 2021, received from base period comparison. For Japan, Q3 revenue decreased by 2% in constant currency. The growth of our newer medicine and revenue related to a sales collaboration agreement for the rights to sell and distribute Mounjaro in Japan was more than offset by the continued impact of declines in off-patent products, primarily Cymbalta and Alimta, which both face generic entry in June 2021. We expect a return to growth in Japan beginning in 2023 as we continue to scale our key growth products and the impact of patent expiration subsides. In China, revenue declined 10% in constant currency as we continue to be impacted by the Zero COVID policy measures. We're also seeing the impact of increased competitive pressures for Tyvyt from local competitors with NR DLXs. In addition, we experienced the first full quarter of the pricing impact of volume-based procurement for Humalog. As we expect to maintain a high level of access for our innovative portfolio, we believe our volume should accelerate to drive net growth in the future. Revenue in the rest of the world decreased 6% in constant currency in Q3, primarily driven by customer buying patterns. The year-to-date growth of 8% in constant currency in this region is more representative underlying trends. As shown on Slide 9, our key growth products continue to drive robust waterwide volume growth. These products drove approximately 18 percentage points of volume growth this quarter and continue to underpin our current performance and future outlook. Slide 10 further highlights the contribution of a key growth product. This quarter, these brands grew 19% or 25% in constant currency, generated $4.6 billion in sales and made up 70% of our core business revenue. Products like Verzenio, Taltz in dermatology and Jardiance have outpaced competitors growth and are leaders in new-to-brand share of market within their respective classes. In the injectable incretin market, we continue to see significant opportunity for further class growth. In addition to Mounjaro successful launch in the U.S., Trulicity has continued to experience strong growth globally. To date, our incretin manufacturing production is ahead of our internal plan, and we remain focused on sustaining this performance. Strong demand for Trulicity, partially due to ongoing limited availability of competitive GLP-1, continues to challenge our ability to meet expanding demand in most international markets. In those situations, we're working hard to supply market demand will minimize an impact to existing patients, including communication in these markets not to initiate new patients on Trulicity. In the U.S., script volume remains robust. And while we build more capacity, wholesalers may experience intermittent restocking delays of Trulicity orders. Moving to Slide 11. We're pleased with the rapid uptake of Mounjaro in the first 4 months since launch. Approximately 70% of Mounjaro's new therapy starts are patients naive to the type 2 diabetes injectable incretin class and less than 10% for switches from Trulicity. We are progressing peer negotiations and have more than doubled the level of access to approximately 45% of total commercial and Part D lives. And as we expand access, the proportion of paid script should start to increase. Our focus is to make Mounjaro available for type 2 diabetes patients, and we intend to take actions designed to ensure access and supply for these patients. These actions may negatively impact prescription volume, but are not expected to impact net revenue. We have seen unprecedented demand for Mounjaro's type 2 diabetes launch in the U.S., bolstered by strong efficacy and a positive customer experience. Availability of competitor's incretin also is a key factor as we assess Mounjaro's demand and supply. To meet this rapidly growing demand across our incretin business, we have plans to add substantial additional manufacturing capacity. In 2023, we expect the RTP site in North Carolina to become fully operational and that capacity, coupled with additional actions and extensions in other sites, will result in doubling Lilly's incretin manufacturing capacity at the end of 2023. On Slide 12, we provide an update on capital allocation. For the first 9 months of the year, we invested $6.8 billion to drive our future growth through a combination of R&D expenditures, business development outlays and capital investments. In addition, we returned approximately $2.7 billion to shareholders in dividend and repurchased $1.5 billion in stock. Our capital allocation priorities are to fund our key marketed products and expected new launches, bolster manufacturing capacity, invest in our pipeline, pursue opportunities for external innovation to augment our future growth prospects and return excess capital to shareholders. Slide 13 is our updated 2022 financial guidance. Our full year revenue outlook now includes an additional $300 million of headwinds from foreign exchange rates since our previous guidance update for a total impact of roughly $1 billion of foreign exchange headwinds of revenue for the full year compared to our original guidance. Our outlook for gross margin, SG&A and research and development remains unchanged. Our guidance now includes acquired IPR&D and development milestone charges of approximately $670 million, reflecting total charges in the first 9 months of the year. We have not recognized material acquired IPR&D or development milestone charges to date in Q4. And this guidance does not include any impact from the potential acquisition -- for business development or acquisition in the remainder of the year, including pending acquisition of [indiscernible]. Our non-GAAP operating margins remain unchanged at approximately 29%. On a reported basis, operating margin is now expected to be approximately 26%, driven by the intangible asset impairment for our GBA1 Gene Therapy due to change in estimated launch timing. Our non-GAAP range for other income and expense remains unchanged. On a reported basis, other income and expense is now expected to be expensed in the range of $600 million to $700 million, reflecting the net impact of net losses on investments in equity securities during Q3 2022. Our tax rate and EPS in the first 9 months of the year includes a favorable impact of the provision in the 2017 Tax Act that requires capitalization and amortization of research and development expenses for tax purposes. Our financial guidance for the full year continues to assume this provision will be deferred or repealed by Congress, effective for the full year 2022. Assuming this deferral repeal occurs before the end of the year, we expect our Q4 non-GAAP tax rate to be approximately 22%, which includes the cumulative tax impact of immediately expensing research and development costs for the full year 2022. If this provision is not deferred or repeal effective this year, then we would expect our reported and non-GAAP tax rate to be approximately 10% to 11%. Based on these changes, we have lowered our reported EPS guidance by $0.46 to now be in the range of $6.50 to $6.65 per share and lowered our 2022 non-GAAP EPS guidance by $0.20 to be in the range of $7.70 to $7.85. The $0.20 reduction in our non-GAAP EPS range is driven by the negative impact of foreign exchange rates as well as the $0.06 impact from the incremental acquired IPR&D and development milestone charges in Q3. Now before I turn the call over to Dan, I'd like to provide a few thoughts on the pushes and pulls across the P&L as you begin to think about next year. Starting with revenue, we're confident in the growth outlook of our core business. We expect to build on the positive momentum across our pre-growth products, including the continued strong launch of Mounjaro and launches of new products. While we anticipate that initial revenue from our next wave of potential launches will be modest in 2023 with only partial year revenue, we do expect the donanemab, pitubrutinib, mirikizumab and lebrikizumab will serve as additional catalysts for continued growth. In 2023, we will see the full year impact of the Alimta's patent expiry in the U.S., where new generics have eroded Alimta sales starting mid-Q2 and we anticipate a low single-digit headwind from foreign exchange rates. As for revenue from COVID-19 antibodies, we will continue to make bebtelovimab available for purchase. However, the demand for these therapies will depend not only on COVID-19 case counts but also on evolving variants and available therapies. We continue to believe that COVID-19 antibodies will not be a major driver for long-term growth for Lilly. We will invest in our future as we advance promising R&D opportunities, expand our manufacturing capacity and support the potential launch of multiple new products. Assuming inflation persist, we expect to see that impact in 2023 as well. Also, we will be making a significant investment in one of our most important assets, our talented workforce, through increases in compensation that are partially due to inflation pressures, but also to ensure we have the right capabilities to deliver on the promise of our future growth. While these investments will slow our operating margin expansion in 2023, they are critical to maximizing pipeline and new launch opportunities to help sustain top-tier revenue growth and operating margin expansion over the mid- to long term. We look forward to sharing more details on our 2023 guidance call on December 13. Now I'll turn over the call over to Dan to highlight progress in R&D.

David Ricks:

Thanks, Dan. Before we go to Q&A, let me briefly sum up the progress we've made in the third quarter. We continue to grow our recently launched medicines, including Mounjaro's strong U.S. launch. At the same time, we continue to advance our pipeline, progressing towards potential launches for 4 new medicines by the end of next year, while also internally and externally investing in our early-stage pipeline and discovery capabilities. With the progress we've made, we remain confident in our long-term growth prospects. Now I'll turn the call over to Joe to moderate the Q&A session.

Operator:

[Operator Instructions]. The first question is from Chris Schott from JPMorgan.