Thank you for joining us for the Lilly Q2 2022 Earnings Conference Call. All participants are currently in listen-only mode. We will have a question-and-answer session later, and instructions for that will be provided. Your conference is being recorded. I will now hand it over to your host, Kevin Hern, Vice President of Investor Relations. Please proceed.

Thank you. Good morning, everyone and thank you for joining us for Eli Lilly and Company's Q2 2022 earnings call. Apologies for the hour delay. We had some technical issues on AT&T's side. So thanks for your patience. I'm Kevin Hern, Vice President of Investor Relations. 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 Jansen, President of Lilly Immunology and Lilly U.S.A. We're also joined by Mike Spring, Kenzie, and Warren Zirki of the Investor Relations team as well as Joe Fletcher, who will be taking over leadership of the IR team this month. 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.

Thanks a lot, Kevin. In Q2, we achieved a number of impactful pipeline milestones, including the approval and launch of Mounjaro in the U.S., the FDA submission and acceptance of donanemab as well as pertibrutinib and positive top-line results for lebrikizumab and EU and Japan submissions for mirikizumab. This pipeline progress underscores the breadth and depth of our exciting long-term outlook. Perhaps the headline story for Lilly in the second quarter was the launch of Mounjaro in the U.S., where initial uptake has been strong. We're hearing a great deal of enthusiasm from the field and we're excited about the potential for this new medicine to provide A1c and weight loss benefits to adults living with type 2 diabetes. We remain focused on gaining broad open access for Mounjaro and expect the full impact of this medicine for patients and our business to be realized over time as that access is achieved. Turning to Q2 financial results and progress on our strategic deliverables, we saw a relatively flat top-line performance in constant currency. As strong volume-driven growth for key products like Verzenio, Jardiance, and Trulicity was offset by lower prices as well as the Alimta patent expiry in key markets around the world and last year's sale of Cialis rights in China. Volume for this quarter grew a robust 10%. When excluding revenue from Alimta, the sale of Cialis rights in China and COVID-19 antibodies, revenue grew 6% compared to Q2 2021. In Q2, our newer medicines contributed 18% to volume growth and now account for 67% of our core business revenue which we believe, together with our robust pipeline is the most important indicator of the strength and durability of our growth outlook. Our non-GAAP gross margin was 79.8% in Q2, an increase of approximately 50 basis points compared to the prior year. Our non-GAAP operating margin was 20.5% which includes a negative impact of approximately 680 basis points attributed to acquired in-process R&D and development milestone charges. At our investment community meeting in December, we outlined 5 potential new medicines that could launch over the next 2 years which could serve as catalysts driving top-tier growth through the decade. There have been important pipeline developments since our Q1 earnings call for all 5, including the U.S. approval and launch of Mounjaro in type 2 diabetes and a positive CHMP opinion in the European Union. FDA acceptance and priority review designation for donanemab in early symptomatic Alzheimer's disease. FDA acceptance and priority review designation for pertibrutinib in mantle cell lymphoma for patients previously treated with a BTK inhibitor. Submissions for mirikizumab in ulcerative colitis in the EU and in Japan, positive top-line 52-week data for lebrikizumab in moderate to severe atopic dermatitis. And we also announced U.S., EU, and Japan regulatory approval for Olumiant in alopecia areata. Last month, we announced plans for a $2.1 billion investment in 2 new manufacturing sites here in Indiana to support increasing demand for existing products as well as demand for potential new medicines in our pipeline. This announcement followed Lilly's recent investments in new facilities in Massachusetts, North Carolina, and Ireland and will further expand Lilly's manufacturing network for active ingredients and new therapeutic modalities such as genetic medicines. These investments underscore our confidence in the growth of our portfolio and the company. Finally, we distributed nearly $900 million in dividends to our shareholders in Q2. On Slide 5, you'll see a list of key events since our Q1 earnings call, including several important regulatory, clinical, and COVID-19 antibody updates. As previously announced in Q2, we entered into an agreement with the U.S. government to supply 150,000 doses of bebtalizumab for approximately $275 million in an ongoing effort to provide COVID-19 treatment options for patients. Doses of bebtalizumab valued at approximately $130 million were shipped in Q2 and the remainder of that order will ship in Q3. Today, we are announcing that, in collaboration with the U.S. government, we intend to begin making bebtalizumab available for purchase by states, hospitals, and certain other providers through a sole distributor agreement. This will happen later this month which is prior to the anticipated depletion of the U.S. government's currently available supply. As we move from large ad hoc federal government purchases of COVID-19 antibodies to a broader set of purchasers, we will now integrate estimated sales into our forward guidance. As we have said previously, we don't see COVID-19 antibodies as a major long-term driver of growth for the company. Nevertheless, we will continue to do our part where we can to help fight the COVID-19 pandemic with the last monoclonal antibody treatment standing that neutralizes against the Omicron variant.

And now I'll turn the call over to Anat for a more detailed review of our Q2 results.

Thanks, Dave. Slide 6 summarizes financial performance in the second quarter of 2022. I'll focus my comments on non-GAAP performance. We had a few notable items impacting the year-over-year financial comparisons. Foreign exchange rates had roughly a 300 basis point impact on revenue this quarter as we saw Q2 revenue declined 4% or 1% on a constant currency basis. In Q2 of 2021, we sold our rights to Cialis in China, resulting in $170 million of one-time revenue impact. And this quarter, we also saw the full impact of the loss of exclusivity for Alimta in Europe and Japan, and have started to see the impact of multiple generic entrants in the U.S. When excluding revenue from Alimta, the sales of Cialis rights in China last year, and COVID-19 antibodies, total revenue grew 6%, highlighting the solid momentum for our core business in the second quarter. We expect that this growth rate will accelerate in the second half of the year. Moving on to gross margin as a percent of revenue, it increased 50 basis points to 79.8% in Q2 of 2022. This increase in gross margin was primarily driven by product mix and the favorable effect of foreign exchange rates on international inventory sold, partially offset by lower realized prices. The increase in logistics and manufacturing costs due to inflation had a modest negative impact on gross margin in Q2. Total operating expenses increased 14% this quarter, which, as discussed on our Q1 earnings call, are now inclusive of acquired in-process R&D and development milestone charges following guidance from the SEC. Acquired IP R&D and development milestone charges represented nearly 1,200 basis points of the Q2 OpEx growth. Marketing, selling, and administrative expenses decreased 4%, driven mostly by the favorable impact of foreign exchange rates. R&D expenses increased 8%, driven by higher development expenses for late-stage assets, partially offset by lower development expenses for COVID-19 antibodies. This quarter, we recognized acquired IP R&D and development milestone charges of $440 million or $0.46 of EPS primarily related to a charge associated with the buyer of substantially all future obligations that are contingent upon the development, regulatory, and commercial success of our mutant-selective PI3K alpha inhibitor. In Q2 2021, acquired IP R&D and development milestone charges were $43 million or $0.04 of EPS. Operating income decreased 32% in Q2, primarily due to higher acquired IP R&D and development milestone charges. Operating income as a percent of revenue was 20.5%, which includes the negative impact of approximately 680 basis points attributed to these charges. Other income and expense was expense of approximately $13 million this quarter compared with income of $5 million in Q2 of 2021. Our Q2 effective tax rate was 14.2%, a decrease of 10 basis points compared to the same period in 2021. This decrease was driven by favorable tax impact related to the implementation of a provision of the 2017 Tax Act related to the capitalization of R&D expenses, offset by the tax impact of nondeductible development milestones. At the bottom line, earnings per share declined 32% this quarter to $1.25 per share. The most significant driver of the year-over-year decline was the impact of acquired IP R&D and development milestone charges which had a $0.46 negative impact in Q2 of this year compared to $0.04 in Q2 of last year. On Slide 8, we quantify the effect of price, rate, and volume on revenue growth. This quarter, U.S. revenue grew 6%. Excluding revenue from Alimta, which declined significantly due to broad generic entry in May and COVID-19 antibodies, revenue grew 11% in the U.S. This volume-driven growth was led by Trulicity, Verzenio, and Jardiance. We experienced a net price decline of 8% for Q2, driven by lower realized prices for Humalog, Alimta, and Forteo due to higher rebated segments, making a slightly larger portion of the business, higher contracted rates, and the list price reduction for insulin lives for injection this year. Lower realized prices for Taltz were also a driver due to the impact of changes to estimates for rebates and discounts, largely driven by a favorable adjustment in the base period and to a lesser extent, continued pull-through of existing access. For the first half of 2022, the net price decline in the U.S. was 4%, and we continue to expect a mid-single-digit net price decline for the full year. Moving to Europe, revenue in Q2 grew 1% in constant currency. Excluding revenue from Alimta which lost exclusivity in June of 2021, revenue grew 12% in constant currency, driven primarily by volume growth for Trulicity, Jardiance, and Verzenio. For Japan, Q2 revenue decreased 22% in constant currency as our business there continues to be negatively affected by significant declines in off-patent products, primarily Cymbalta and Alimta, which both faced generic entry beginning in June 2021. Key growth products represented 69% of total revenue in Japan and grew 11% in Q2 on a constant currency basis. We continue to expect a return to growth in Japan beginning in 2023. In China, revenue declined 32% in constant currency, driven by the impact of the NRDL formulary access, resulting in lower realized prices, partially offset by increased volume for certain newer products, including Verzenio, Tyvyt, Trulicity, and Taltz. We also experienced a price decline for Humalog due to the impact of volume-based procurement. We expect improved access to continue to drive future volume growth, more than offsetting the price decline over time. With the latest COVID-19 outbreaks in China and subsequent protective measures intended to control the spread of the virus, we have seen lower volume than we otherwise would have expected in Q2, particularly for infused products. Revenue in the rest of the world increased 3% in constant currency, primarily driven by increased sales of key growth products. For the full year, we continue to expect mid-single-digit net price declines in each of the U.S., EU, and Japan and a double-digit price decline in China, resulting in worldwide net price decline in the high single digits. Our key growth products continue to drive robust worldwide volume growth, generating $4.3 billion in sales and making up 67% of our core business revenue. We continue to see further growth opportunities for these products. For example, we're extremely pleased to see the strong trajectory of Verzenio driven by the adjuvant indication, including recent acceleration in new to brand share of market. In the injectable incretin market, we see significant opportunity for further class growth as these medicines currently make up only 25% of total prescriptions in the U.S. branded diabetes market and have the prospect of expanding the market through earlier usage for glucose control and weight loss in the treatment of type 2 diabetes. Trulicity is experiencing accelerated demand in many international markets due to market growth and the limited availability of competitor GLP products in select markets. We are working to meet this increased demand, while also implementing actions in select countries to manage growth and minimize patient impact. This outlook for Trulicity is included in our guidance. Lilly is thrilled to have both Trulicity, which has the longest length of therapy of any GLP-1, and Mounjaro, which could offer a step change in innovation for the treatment of type 2 diabetes and other metabolic indications.

To send a message to another subscriber under the area code and phone number of that subscriber or press the stake to enter your own mailbox. Okay. Nothing has been selected to send a message to another subscriber under the area code and phone number of that subscriber or press the stake to enter your own mailbox. I'll continue and hopefully, everyone can hear. Nothing has been selected to send a message to another subscriber under the area code and phone number of that subscriber or press the stake to enter your own mailbox. When excluding revenue from Alimta, the sales of Cialis rights in China last year to send a message to another seroantibody under the area code and phone number of that subscriber or press the start normal...

Okay. Hopefully, you heard I will repeat my last intent. So when excluding revenue from Alimta, the sales of Cialis in China in Q2 of last year and COVID antibodies, total revenue grew 6%, highlighting the solid momentum for our core business in the second quarter. We expect that this growth rate will accelerate in the second half of the year. Moving on to gross margin as a percent of revenue, which increased 50 basis points to 79.8% in Q2 of 2022. This increase in gross margin was primarily driven by product mix and the favorable effect of foreign exchange rates on international inventory sold, partially offset by lower realized prices...

Yes, I can add a few comments on that. This study is for people diagnosed with diabetes. We want to test what the impact could be on the progression of diabetes if you put a product like tirzepatide on very early in the course of treatment. This will study putting patients who are naive or very early in their treatment versus standard of care. We think weight loss with the benefits of a GLP and GIP and improvement in beta cell function and insulin sensitivity could profoundly impact the disruption of type 2 diabetes. We’re very excited about this study and we’ve already started to see weekly injectables being used earlier in the course...

Thanks, Dan. Before we go to Q&A, let me briefly sum up the progress we've made in the second quarter. We're encouraged by the performance of our key growth products which now represent 67% of our core business. We expect to see this grow over time as we work to launch more innovative medicines like Mounjaro. Excluding the impact of acquired IP R&D and development milestone charges, we expect to see operating margin expansion from both revenue growth and driving further efficiencies in our business. We saw significant progress in our pipeline this quarter with the approvals of Mounjaro in type 2 diabetes and Olumiant in alopecia areata. We also saw progress on our next wave of potential growth catalysts with the FDA acceptance of donanemab as well as pertibrutinib and positive top line readouts for lebrikizumab and additional submissions for mirikizumab. Finally, we returned $900 million to shareholders via dividends and share repurchases. Looking to the future, we are confident in our long-term growth prospects as we are focused on developing groundbreaking therapies in areas of significant unmet need as well as driving exceptional execution for our recently launched medicines, so they reach patients who need them. Before we close, I’d like to comment as well. This is Kevin Hern's last call as Head of our IR team. And before I turn the call over to him to moderate the Q&A session, I’d just like to thank him on behalf of our shareholders, our board, and of course our executive team and employees. He’s done an outstanding job for the last 4.5 years, strengthening our relationships with the Street as well as being an ambassador to convey the company's messages to shareholders but also inform management about shareholder perspectives. We wish him the best in his new assignment transitioning to a leadership role in our U.S. commercial group. Now I’ll turn the call over to Kevin for his last Q&A session.

Thanks, Dave. I appreciate the kind words and I will certainly miss it. We’d like to hear from as many callers as possible, so please limit yourselves to two questions each. Louis, if you could share the instructions for the Q&A session, we’re ready for the first caller.

The first question will come from Geoff Meacham from Bank of America.

I have two quick questions. First, regarding Mounjaro, could you discuss the source of new starts? Are they new to GLP or do they have prior experience? Secondly, what are the expected payer dynamics looking into 2023? And for Dan, concerning tirzepatide, I understand your regulatory discussions are still in progress regarding obesity, but do you believe you can also utilize the safety database from diabetes and other indications when considering conditions like NASH and sleep apnea?

Thanks, Geoff. We'll start off with Mike on Mounjaro. And then Dan, if you want to comment on the regulatory for tirzepatide. Mike?

Yes, thanks, Geoff. We're really excited about the strong launch of Mounjaro. It's encouraging to see that 72% of Mounjaro's business is coming from new patients entering the incretin class, which is crucial for accelerating growth in this category. Since Mounjaro's launch, we've noticed an increase in class growth across total prescriptions, new-to-brand, and new treatment starts. Of the 28% of volume from switches, only 30% is from Trulicity and 70% is from other GLPs. This has allowed us to see growth in Lilly's incretin market share, indicating that we're building a solid foundation. New patient starts have boosted our Lilly share in the injectable market by 12% and new treatment starts by 10%. We're pleased to be growing both the class and our market share simultaneously.

Yes. Thanks, Geoff, for the question. You’re pointing out correctly that we intend to pursue a number of related indications for tirzepatide. Some of them have overlapping patient populations. Most of the indications we pursue have a base of patients that either have obesity as a pre-existing and sometimes causative condition such as obstructive sleep apnea or heart failure in people with obesity; other indications might be a mix of type 2 diabetes and obesity representing a large number of patients such as NASH. So where applicable, safety exposure from similar propositions can be used to support submissions. Of course, some of those programs are staggered in time. By the time we get efficacy data for those indications, we’ll have likely the rest of the tirzepatide program... but where we are today is quite a large and robust safety database from the entire COBAS program as well as the SME.

The next caller is Chris Schott from JPMorgan.

Just two for me. I guess just on the obesity opportunity. I guess, based on the feedback you've been getting on that SURMOUNT data, is there any change in terms of how you anticipate payers will approach obesity? I guess the heart of the question is, do you anticipate we're going to really need to see some of the cardiovascular morbidity mortality data before we can think about broad coverage for obesity medications? Or are you seeing payers potentially more interested in covering these type of products given some of the profiles that kind of emerged from that study? My second question was one for Dave. I guess, on just in healthcare reform. I know you love answering these questions. But I guess, as you guys have been so involved in this process, I would appreciate your thoughts on the latest bill we’re seeing and just kind of the impact you’d expect it to have in the industry and maybe a little more specifically.

Thanks, Chris. We'll go to Mike first and then on obesity, then Dave for healthcare reform.

Yes, great question. The SURMOUNT 1 data was phenomenal data for patients and physicians who treat obesity. I think there's a combination of effects that will affect employers and the government to increase access for obesity agents. One is the data we produce. The first data we're producing is weight loss as well as factors like lipids and blood pressure. The data we produce so far has been stellar. I think the better data we produce in SURMOUNT 2, through SURMOUNT 5 is just going to help us in the short term. Long term, we think there's a lot of comorbid conditions associated with obesity like CV and heart failure and sleep apnea, and the better data we support there will open up those indications which have overlapping conditions with obesity. We're excited about those trials and seeing that data as those trials complete. The more we can drive consumer interest in this puts pressure on employers and the government to be able to gain access. We're very bullish on the long-term prospects of the obesity market.

Yes Chris, thanks for the question. I think everybody on the call has a good grasp of what's in this package. Difficult to speculate on probabilities but certainly a lot higher than a month ago that something crosses the line. There may be some adjustments to this as they go through that parliamentary process and whatever changes might occur or still to come in the center in the house. But if what we're looking at passes, maybe that's your question. As you know, we've been for the Part D forms and we think they're good incremental changes, particularly capping annual out-of-pocket and getting rid of the donut hole concept. Unfortunately, they don't improve the concept of facing patient cost-sharing on net pricing which we were hoping it would. But by itself, we would support that. The CPI adjustment is not really an issue, as probably everyone on this call knows, there's already lots of CPI capping that goes on in the commercial marketplace. And with CPI being where it is now, list prices in the drug business are not nearly as fast as the rest of the economy. But the negotiation piece is a problem. I think in the short term, speaking for our company but probably the industry, it doesn't do much. They don't really start until '26 anyway. But in the midterm, there will be, of course, some products that will have attenuated life cycles. That will have to be factored in, but probably to me, the most damaging thing about it is it sends a signal to investors and capital allocators like us that small molecules and particularly small molecules in diseases that require stepwise development like cancer, where we start in late stages and work our way to adjuvant or even in some orphan conditions really aren't wanted, and are worth a lot less. We'll focus our resources on other areas of innovation. We've got plenty of those. I think that's really a miss for the patients that probably want better oral cancer drugs in the future and orphan disease drugs.

The next caller is Fernandez from Guggenheim.

Great. So just a couple of questions here. Dave, I was just hoping to get a little bit more color on the comment that you made there with regard to orals. How do you see that impacting your efforts to bring forward oral diabetes drugs? Is it more a benefit to complex oral therapies that aren't small molecules per se but perhaps a more peptide-oriented? I know you guys are working on some efforts along those lines. So just interested to know if the legislation would imply that as well from a small molecule perspective, we see a number of oral GLP-1s seeking to come to market at some point in time? And then separately, just on Dan, on the glucagon mechanism, I see BBG listed in 2 Phase II clinical trials, but mazetide, your oxyntomodulin product, is listed just in sort of the Phase 1 in diabetes. Wondering if you guys have officially made a decision to move forward with BG or if mazetide is still potentially in the mix as kind of your next-gen asset in the obesity space.

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

Yes, thanks, Seamus. I mean, I guess, to put a finer point on it, each project will have to be evaluated one by one. But I think you will probably see 10 years down the line, fewer small-molecule oral products developed in the industry than would have been otherwise the case if this bill passes. Again, that to me is the miss. There's still probably quite a bit of advantage in oral small molecules in large primary care indications, especially if we can come to terms and accept that weight loss will provide broader benefits for health, like reducing blood pressure for cardiovascular risk. Those products will be evaluated one by one, and big opportunities will advance and do well. They'll have attenuated life cycles in the government business, and that will have to be factored in, but we'll look at that.

Yes, you're right that we have two in clinical development: mazetide, which is our oxyntomodulin, and retitrutide, which is glucagon GLP-1 and GIP. You’re right that the ACG molecule is ahead in development that's in Phase II, and the oxyntomodulin is still in Phase I. I think they're both viable as next-generation weight loss products. But to be clear here, it's a very high bar; we're looking for a major step change above the really remarkable results we saw in SURMOUNT 1. I think they both have that potential, but we're going to need to see more data to know which goes forward to Phase III. Just like when we were doing Phase II on tirzepatide just a few years ago, we noted it had to show that kind of big step change to go forward to Phase III. If you hear us talk about the growth of these molecules going to Phase III, it means we saw that kind of a big step change.

Thanks.

Next caller is Louise Chen with Cantor.

So my first question for you was on the obesity product. Do you see any potential read-throughs from the NOVO SELECT study to tirzepatide? And have you given any color on how you want to structure your studies on an outcome basis for BC? And then secondly, it's been quiet on the Alzheimer's front but just curious if you have any updated thoughts on the market opportunity for donanemab, especially in light of some of these Phase III trials coming out at the end of the year.

Thanks, Louise. We’ll go to Dan for the question on the SELECT trial and then Anne for the question on Alzheimer’s.

Louise, thanks for that question. Of course, we always reach for our competitors' success in clinical trials. We want great data so we can have great drugs to help patients. I think the NOVO study passing the interim analysis without stopping the trial for efficacy is fine. There are significant differences between tirzepatide and semaglutide that we just have to remember, namely, different mechanisms, different degrees of efficacy on various outcomes, different trial designs, and different populations. So we don't change our design for our SURMOUNT MMO study. We remain excited and confident about our own study going forward. So the bottom line is we remain convinced about the mid- and long-term opportunity for donanemab and the Alzheimer's portfolio. Our focus right now is on the rapid availability of donanemab for the appropriate patients through the accelerated approval pathway and then reconsideration with Phase III data. We remain optimistic that with traditional FDA approval, CMS would not continue to limit coverage for on-label treatments. There’s a chance we could see mixed results in some readouts due to differences in the medicines and their trial designs. We have some unique design features in Trailblazer 2 and a medicine that demonstrates rapid and deep plaque clearance, so we won’t be discouraged if others miss their primary endpoints. In the near term, we have to acknowledge that patient access will be very limited under the current CMS and CD with accelerated approval. But what that does is really enables us to engage quickly with CMS following Phase III data and hopefully drive reconsideration at that point. It allows us to accelerate traditional approval through a supplemental BLA.

The next call is Terence Flynn from Morgan Stanley.

Two for me. I guess, Mike, you talked about aiming for long-term success with Mounjaro from a reimbursement perspective. So can you just maybe define that for us, put a finer point on it? Should we assume that means you're aiming for a net price above Trulicity ultimately over time? And then as we think about your ability to supply the market here, obviously, launch, you said at the high end of your expectations. No, I think you touched on this a little bit during your comments in terms of confidence in U.S. supply. But how are you thinking about the broader supply dynamics globally and then remind us of your flexibility to increase supply, if needed, over time.

Thanks, Terence. We'll go to Mike for both questions on Mounjaro, with access and price and then just global supply outlook.

Okay, thanks, Terence, for those questions. Long term, I think our goals there is obviously to optimize our net price but also secure broad access like we have for Trulicity. Those are our two goals. Obviously, we don't give specifics on our net price negotiations publicly. We're pleased with the progress. We're staying disciplined, trying to accelerate access before any new product launch. We have to be careful that you're not too aggressive; you get early access, but you pay too much for it. From a supply perspective, Mounjaro, as Anat said, we were planning for success. So we had a lot of different launch scenarios and consider this level of uptake. As Anat shared, we don't anticipate any supply constraints for the U.S. launch of Mounjaro. Our manufacturing team has been working around the clock for years to build manufacturing capacity throughout the supply chain. We have a number of sites that make this and they're optimizing our initial capacity on a daily basis. We have made investments to expand our capacity over the next several years. We have a new parental plant at Research Triangle Park in North Carolina that's coming online in 2023 and another one behind that in Concord, North Carolina. We're also building two manufacturing facilities to make active ingredients for Mounjaro and those will come online at a later time. We're planning for success and our manufacturing team is working around the clock to get as much past supply as possible.

The next call is Tim Anderson with Research.

On the outcomes trial for obesity, presumably, that's a cardiovascular outcomes trial with MACE as a primary endpoint? If so, what level of benefit will it be powered to show? Novo is designed to show 17%. On the head-to-head versus Novo's product in obesity, anything you can see on trial design, specifically primary endpoint and perhaps, most importantly, the timing of having results.

Thanks, Tim. We’ll go to Dan for the first question on SURMOUNT MMO and then Mike for the second question on the head-to-head trial with Novo for Costa.

Yes, thanks for that question, Tim. You're raising an interesting point. Implicit in your question is the observation that there are a lot of health benefits that come from losing weight. Obesity is a risk factor for a number of things, not just those that are traditionally measured in cardiovascular outcome studies or MACE studies. We've called this morbidity mortality outcomes MMO in obesity rather than CVOT. But beyond that, we intentionally haven't gotten into details about the primary endpoint or the powering assumption, so that is yet to be disclosed.

Yes. On the head-to-head versus semaglutide 2.4 milligrams, there's been no head-to-head trials comparing tirzepatide to semaglutide 2.4. We believe there’s a good opportunity to do that to demonstrate tirzepatide significant weight loss benefits and the totality of benefits it has for patients. Head-to-head studies are the gold standards. Every time we talk to healthcare professionals, they value and get a lot out of head-to-head studies. It informs their treatment. We think it's the right thing to do and we're pleased to do that. It's going to be a head-to-head study, comparing tirzepatide versus semaglutide 2.4 in people that have obesity and overweight with weight-related comorbidities. Other than that, we'll provide more on the design and the timeline at a later date as we get closer to posting it on clinicaltrials.gov.

Thanks, Mike.

The next call is Steve Scala from Cowen.

A couple of questions. First, Lilly mentioned in the prepared remarks a limited availability of competitor GLP-1s in select geographies. Can you be more specific on which geographies and the magnitude of the issue? And then a question for Dan. You must have been on the receiving end of many calls from DSMBs with interim updates on trials. For example, the trial of Trulicity in cardiovascular outcomes REWIND. The question is, what is the depth of the information exchange between DSMBs and sponsors at that time? For instance, if a study is continuing past an interim look, is the conversation only 3 words, study is continuing? Or is it more extensive? Or does it depend? And if it depends, what does it depend on? It would seem to me at least counterproductive for DSMB not to provide some guidance just from the vantage point of further development of the molecule.

Thanks, Steve. We're going to go to Ilya for the question on the supply and demand that we're seeing for Trulicity outside the U.S. and then we'll go to Dan for the second question.

Yes. Steve, thanks for the question. First, what we've seen is an accelerated demand for Trulicity in many of our international markets and there are probably 3 sources of that: one, great commercial success; two, we've been really successful in our diabetes portfolio in driving the growth and utilization of Trulicity; and three, we’ve seen in some select markets the amplified demand for Trulicity because semaglutide is not available in full extent in a number of markets. In terms of where we've seen volatility in where that is occurring and we're evaluating the local situation, it is quite dynamic, and we're ramping up as much as we can to meet this amplified demand. Some of these markets, we're managing some of the growth, and making sure we limit any kind of patient impact.

I understand where your question is going and we probably don't weigh in specifically on what others might do or see, but I'll tell you how we run DSMBs and how we think about them generally across the industry. There are a couple of principles at play here. First, of course, is independence. This is not something run by the sponsor, and that’s an important consideration for patient safety. We don’t see the data they see and we’re not privy to the discussions as a rule. The second is we do set rules in advance by which they should make decisions. Those could be very simple rules in some cases, like hitting statistical significance with a certain alpha on the primary endpoint or could be more complex rules looking for consistency across secondaries, a higher bar of efficacy on the primary. The recommendations that DSMBs get back to sponsors are often prespecified. We’ll tell the DSMB, if it meets these criteria, this is what you tell us. If it doesn’t, this is what you tell us.

Thanks, Dan.

The next caller is Umar Raffat from Evercore.

A couple of questions. First on Mounjaro: you uniquely have labeling requiring a second form of contraception during titration, which don't you think it will be affected following the recent Supreme Court overturning of Roe vs. Wade? How are you thinking about this? Is it potentially an acute for the product or perhaps additional pharmacological studies as the obesity indication rolls through? It does seem from the FDA review that there's a real pharmacologic concern rather than the first data here.

Thanks, Andrew. We'll go to Mike for the first question on Mounjaro labeling and the social climate, and then we'll go to Jake for the question on pertibrutinib.

Thanks, Andrew. I appreciate the question. Let me just reiterate: our label on Mounjaro advises women using oral contraception to switch to or add non-oral contraceptive methods for 4 weeks during initiation of the product and during the dose titration for each dose. Healthcare professionals are aware of this. Given the profound benefits of Mounjaro, this hasn't impacted at all HCP and consumer interest in Mounjaro. If you look at the data in the marketplace, we have data with IQVIA through July 22, which is just 5 weeks of full promotion, and Mounjaro has already reached 20% new brand share market. So we haven't seen this as an issue at all.

We submit requests for company-sponsored guidelines that align with the labeling indications we expect to receive. We will do this regarding BTK-pretreated relapsed/refractory mantle cell lymphoma as well. The NCCN and other guideline processes operate completely independently of us, so I cannot speculate on their decisions if they choose to extend beyond our labeled indication. We will only promote the product based on the labeled indication we have received.

Thanks, Jake.

The next caller is David Risinger from SVB Securities.

So my questions relate to Mounjaro, please. First, could you clarify the share gain percentages? I believe the comment was that Lilly’s combined Trulicity and Mounjaro share gained by 12 percentage points. I wanted to just understand what the starting point was and where the figure is today. And there was also a mention of new to treatment starts gaining by 10%. If you could provide the X to Y on that. And then based upon your current view of the very strong U.S. uptake of the product, to what degree is Lilly planning to gate its ex-U.S. Mounjaro launches due to the manufacturing supply constraints that you’re currently up against?

Thanks, David. We'll go to Mike for the questions around share gain and then Ilya for the questions around ex-U.S. launch.

Okay, Dave. Thanks. I'll give you more context for the percentages that we had earlier on in the call. We had our launch meeting the week after ADA, the week of June 14. We've been promoting kind of full on since then. We're comparing our new-to-brand volume and share at July 22 versus June 13 in the injectable incretin market. What we've seen since then is that Mounjaro's NBRx share has reached 20.5%. Trulicity's NBRx has declined by only 8.4 share points. So, that produces a net gain in the Lilly injected NBRx share of 12.2%. With new treatment starts, in the same time period, same market, we have a 10% overall Lilly injectable NBR share gain.

David, thanks for your question on the launch of Mounjaro outside of the U.S. and our thoughts around that. One of the key aspects of launching outside the U.S. is that it’s typical for most product launches across almost all therapeutic areas to have some lag behind U.S. launches, either due to regulatory approval and process or because of pricing and reimbursement. It can take up to a year to get reimbursement in a number of markets, so the volumes in that first year of launch are somewhat limited. We are encouraged by what we’re seeing in the U.S. launch of Mounjaro and are looking forward to launching Mounjaro outside of the U.S. while leveraging our commercial expertise and strength in diabetes across our markets outside the U.S.

David, to clarify your question about supply constraints, we do not anticipate any supply issues with Mounjaro in the U.S. Before entering a new market, we want to make sure we can fully support new patients. Given the unpredictable demand based on our competitors' actions, it's challenging to forecast our needs in any market a year from now. Our concern lies not with supply, but with the unstable demand situation. We want to understand this thoroughly before we start a launch. However, we have successfully launched in the U.S. and are committed to maintaining that supply.

The next call is Chris from Goldman Sachs.

Two questions. The first one, thank you for that information about the relative trend as far as where the source of patients were narrowing in on the question of what portion were actually switches from Trulicity. That was helpful, back of the envelope that sounded like about 10%. Is that about what you expected and where do you think that this will go? I'm asking, obviously, since we're relatively early stages of this launch. Second question would be about Verzenio, actually to bring up something that seems a little bit less focused upon but performance has been strong and logically would seem to be in the adjuvant setting. But could you speak to what you believe is driving this and what the outlook is for those trends that have thus far been delivering the strong performance there?

Thanks, Chris. We’ll go to Mike for the question about Mounjaro and then Jake for the question on Verzenio.

Yes, it’s a good question. I think we're getting what we expected. We thought we would see more new patients entering the class. That’s who we talk about with healthcare professionals, and that’s what we're getting. So we're not surprised by that; it's pretty typical to expect with new GLP launches. What we would expect when you have a new product like Mounjaro, especially with endocrinologists, is that they don’t always see naive patients. They have a good bolus of patients who are already on GLPs. When we talked to them about Mounjaro, they’re excited about the opportunity to actually switch some patients who are not performing or not at goal at their current GLP. Early on, you'll see a higher percentage coming from switches versus naive. Today, we have 72% that is naive. If you look at Trulicity, that's at like 88%. What I would expect is that percentage coming from switches will grow over time. We’re very pleased with both Trulicity and Mounjaro's performance since Mounjaro launched.

Yes, thanks for the question on Verzenio. We too are pleased with how it has gone so far this year. On the why, I think it largely comes down to the clinical data from the MONARCHY study itself. The data are demonstrable and when physicians and patients see them, they quickly want to integrate the drug into their practice. We think we’re seeing some share gains in the metastatic setting, particularly among physicians who historically used other CDK4/6 inhibitors. They’re gaining experience with Verzenio by utilizing it in the adjuvant setting and starting to use it in the metastatic setting where perhaps they hadn't before. That was part of what we hoped might happen, and we think we're seeing that happen a little bit so far this year. In terms of where we go from here, continue to interact with physicians who aren't aware of the MONARCHY data; that’s good and bad. It’s bad because there are patients who are appropriate for the medicine that should be on it. It’s good because it’s an opportunity to continue growing in the indication that we currently have. We’re hopeful that we have the opportunity to expand the indication for the enrolled trial population for MONARCH, and we’re awaiting that analysis of overall survival.

Chris, thanks for your questions.

Next call is Carna Gold from Barclays.

I guess, first off, can you talk about how pronounced the cash pay component was of the early kind of Mounjaro number? And then how you expect maybe that to evolve? And then separately, maybe coming back to the drug pricing question, what would appear to be Lilly being one of the main beneficiaries from lower out-of-pocket costs on that side, you think about improvements in compliance. So can you maybe help frame that impact or how compliance today differs in the U.S. versus perhaps other markets where those out-of-pocket costs are not an issue?

Great. Thanks, Carna. We'll go to Mike for the first question on cash pay and then Dave for the follow-up on drug pricing reform and the impact.

Carter, thanks for the question. On the cash pay side, we expect the percent of cash pay to follow our percent access in the marketplace. What we've seen so far, again, I reiterate what I said earlier, that we have both Part D and commercial access for Humana, Express Scripts on the National Preferred Formulary and Cigna. If you add that up, that's a little over 20% of the national lives. I think that's probably the best estimation of what you'll see with the cash pay.

Yes, Carna, you’re pointing out something I as I mentioned we would support as a freestanding measure of the Part D reforms that are in this reconciliation package for a bunch of reasons. One, it does, I think, more fairly distribute the burden of the industry pay for into Part D. Today, the way the donut hole math works, if you go back a couple of years, we had a lot of earnings calls where we had to describe that. There's a disproportionate contribution from the industry inside the donut hole, so commonly used medications like in diabetes and cardiovascular take a big hit on that. That gets smoothed out to ensure drugs that hit the catastrophic pay more and it's a balanced contribution independent of drug type, that's a good thing for companies like Lilly, that have more commonly used drugs. The other thing, that you’re pointing out and I think this affects a product like Verzenio for us primarily is patients who get thrown into the catastrophic have this uncapped 5% contribution today. We know that not only do patients discontinue, and you mentioned about compliance rates which are better in oral oncology in Europe than the U.S., for instance; but you’ll see more initiation. When physicians and their families screen themselves out of qualifying for an appropriate medication for themselves because of financial burden, they may go to chemotherapy instead of a more targeted therapy. This presents another way in which we can both improve healthcare in America but also the prospects for medicines at Lilly.

The next call is Kerry Holford from Berenberg.

To please. Firstly, on price, you’ve clearly cited low realized prices for a number of drugs this quarter, particularly in the U.S. wondering if you can speak to how that’s evolving in the GLP-1 market. Any particular step-up in Trulicity rebates since the Mounjaro launch? What are your expectations here going forward? Is it a trend with higher rebates and the negative channel mix noted by your competitor yesterday? So interested to get an email perspective here? And then a quick question for Anat. When do you anticipate having greater clarity on the possible repeal in the 2017 tax act?

Great. Thanks, Gary. We'll go to Mike for the question on anchored and market price trends and then Anat for the question on tax reform.

Yes. That’s a good question. I think naturally, payers will ask for additional rebates when a new product joins a formulary. This is part of our discussion of being disciplined and why you don't want to accelerate those discussions too rapidly. A net-net, I don't expect any step changes in GLP pricing as a result of Mounjaro launching; it is part of the national pressure intention and contract negotiations.

So on taxes, what we are seeing is we're seeing broad bipartisan support for repealing that change of capitalizing R&D expenses. This was evident in the recent Senate letter. This could come. We believe it will come through by the end of this year, most likely if I had to guess, I would say, towards the end of the year, potentially as part of a tech tender.

The next call is Mohit Bansal from Wells Fargo.

Maybe one question on the SELECT-EARLY study, the diabetic study. So maybe one for you, Dan. What do you really need to show, how long is the trial, and what do you need to show in terms of delta versus control to prove that it is beneficial in prediabetic patients? And wouldn’t oral GLP be a better drug for those patients?

Thanks, Mo. So Dan, the question on SURPASS early, the prediabetes study, and then whether oral GLP would be better there.

Yes, that's an early diabetes study. I don't think we've shared the study's design or endpoints yet. However, diabetes prevention is definitely an intriguing area. The FDA has specific guidelines for what is needed to support claims of diabetes prevention, and it's a challenging standard to meet. I believe the field will eventually determine which medications can effectively reduce diabetes risk before any drug receives that designation. This category of drugs, especially tirzepatide, shows a lot of potential in this regard. We presented data from SURMOUNT indicating that over 95% of participants who were prediabetic at the beginning of the study achieved normal glucose levels by the end. That's encouraging—it’s long-term data.

Yes, I can add a few comments on that. This study is for people diagnosed with diabetes. We want to test what impact could be on the progression of diabetes if you put a product like tirzepatide on very early in the course of treatment. This will study patients who are naive or very early in their treatment versus standard of care. We think weight loss with the benefits from GLP and GIP and the improvement could profoundly impact disruption of type 2 diabetes. We’re excited about it.

Thanks, Mike.

The next caller is Evan Siegelman with BMO Capital Markets.

So as part of the FDA acceptance of your accelerated approval filing for donanemab, have you gotten clarity from the agency if the iADRS scale is acceptable as an acceptable endpoint for full approval? And can you also talk about what you saw with the N3-PG4 to move it into Phase III?

Thanks, Evan. We’ll go to Dan for those.

Yes. First, on the accelerated approval application for donanemab, I think it may not be an opportunity to gain more insight about the acceptability of iADRS, as the primary endpoint in the Phase III study. It may not be an opportunity actually because the accelerated approval is not contingent on cognitive or functional benefits of donanemab which we saw in the Phase II trial. Instead, the accelerated approval is just simply contingent on demonstrating lowering amyloid levels. So I’m not sure we’ll get a deep discussion of that. As for remternatug, it’s a next-generation antiplaque or plaque-removing antibody designed to attack the same glutamate residue that donanemab goes after. We’ve seen its ability to clear plaques in patients. One potential liability of donanemab is antidrug antibodies. We’ve also noted that this molecule doesn’t have that issue. We think this is amenable to alternative dosage forms that could be more convenient for patients. We’ll be looking at that.

Thanks, Dan.

The next caller is Robin Kinesis with Tuas Securities.

The next caller is Colin Bristow with UBS.

And Kevin, thanks for all the great work. On business development, we had 2 deals announced today. Can you just give us your updated thoughts on BD areas of interest, deal size, and just what's the view you're getting from potential targets on their willingness to transact given the market backdrop? Then just on donanemab, what's your latest thinking? Have you had any interactions with CMS regarding how a single successful Phase III trial would be viewed in the context of reimbursement?

Thanks, Colin. I’ll invite Anat to weigh in on the BD question and then Anne for the donanemab question.

So on the business development side in terms of areas of interest, our areas remain unchanged from what we’ve had in the last several quarters, which is our core therapeutic areas. Looking at potential breakthrough innovations in those areas in different stages of preclinical and clinical development as well as areas of new modalities where we've talked about our expansions. We do look at what you’ve seen us do in the last 12 or 18 months. More earlier-stage opportunities where we can bring things into our pipeline to supplement our existing portfolio and add value as well as innovation in our core areas. Valuations may have changed in the last 6 months or so has not been a rate-limiting factor in pursuing BD opportunities. It’s really finding those breakthroughs. You asked about target engagement and whether those views have changed. We’re looking at partnerships or acquisitions, everyone wants to get to value, they want to get to a good spot.

So on donanemab, it’s our belief that the data package includes both the Trailblazer 1 and 2 should be sufficient to meet CMS as described as a high level of evidence in CD. Trailblazer 1 of course is the first disease-modifying Alzheimer’s trial to successfully meet its primary endpoint. If Trailblazer 2 also delivers that direct evidence of clinical benefit, we expect to engage with CMS to discuss that path quickly and generally to expand access. We have been engaging with CMS, and they have shown openness to continue to meet. CMS noted the promise of donanemab and they've shown a great deal of interest in understanding the Trailblazer 2 Phase III program. I think we'll have more clarity on timing of reconsideration. We're able to share that data with them next year and will discuss next steps.

Colin, thanks for your questions. We’ve exhausted the queue. Dave, for the close.

Okay, great. Thanks for joining us today. Apologies for all the technical challenges on the call; we'll get that cleaned up. We do appreciate your participation today and your interest in our company. Please follow up with our IR team, including Joe Fletcher, our new leader, if you have questions we did not address today on the call. Have a great day.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference service.