Thank you for joining us for the Lilly Q3 2024 Earnings Call. I will now hand it over to Joe Fletcher, Senior Vice President of Investor Relations. Please proceed.

Thank you, Paul, and good morning, everybody. Thanks for joining us for Eli Lilly and Company's Q3 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 Chair and CEO; Dr. Dan Skovronsky, Chief Scientific Officer and President of Lilly Immunology; Lucas Montarce, 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. We're also joined by Susan Hedglin, Michala Irons, Mike Sprengnether and Lauren Zierke of the IR team. During this 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.

Okay. Thanks, Joe. In Q3, Lilly continued to make progress across the business. We delivered strong revenue growth. We advanced and expanded our pipeline and we invested in new product launches and continued expanding manufacturing network. On Slide 5, you can see details of our financial performance and progress related to our strategic deliverables. Revenue grew 42% after excluding the impact of revenue from the olanzapine portfolio, which we divested in Q3 2023. New product revenue grew by over $3 billion led by Mounjaro and Zepbound. U.S. demand for Mounjaro and Zepbound has been strong and continues to grow as we expand both access and supply. U.S. sequential quarter-over-quarter prescription volume growth was 25% in Q3. All doses are available for order from Lilly in both the wholesale channel and LillyDirect Pharmacy Solutions. The launch of a single-dose Zepbound vials in the U.S. exclusively through LillyDirect's self-pay channel further expanded supply and access in the quarter. And finally, we remain on track to exceed the production target of at least 1.5 times the saleable doses of incretin medicines in the second half of this year compared to the second half of last year. We continue to see strong performance across the balance of our portfolio in oncology, immunology, and neuroscience. Excluding revenue from the olanzapine portfolio, the non-incretin growth of the company was 17% in Q3. We achieved several key pipeline milestones this quarter, including the approval of Ebglyss in the U.S. for the treatment of moderate-to-severe atopic dermatitis. The approval of Kisunla in Japan and Great Britain for the treatment of early symptomatic Alzheimer's disease. Disclosure of positive 176-week data from the SURMOUNT-1 Phase 3 study of tirzepatide in adults with pre-diabetes and obesity or overweight. And the recent presentation of positive data from the Phase 3 TRAILBLAZER-ALZ 6 study, evaluating different dosing regimens for donanemab. Our manufacturing expansion agenda remains a top priority. In September, we invested nearly $2 billion to increase our manufacturing footprint in Ireland. This brings the total commitments to build, upgrade and acquire manufacturing facilities announced since 2020 to more than $20 billion. And beyond this $20 billion commitment, we also announced a separate $4.5 billion investment to develop the Lilly Medicine Foundry. This first-of-its-kind facility will be dedicated to research and development for manufacturing process design and to develop high-quality investigational medicines for our clinical trials. It will be located in Lebanon, Indiana, a short drive from the corporate headquarters. This investment underscores our confidence in our pipeline and the urgency we bring to bring our innovative medicines to patients around the world. In August, we closed the acquisition of Morphic Therapeutics, adding oral integrin assets to our early phase immunology portfolio. And lastly, we returned over $1.6 billion to shareholders via dividends and share repurchases. On Slide 6, you'll see key events since our Q2 call, including the milestones I mentioned earlier and several other key updates.

Thanks, Dave. The Slide 7 summarizes our financial performance in the third quarter, which is highlighted by strong revenue growth across our new products as well as our non-incretin medicines. As Dave mentioned, revenue grew 42% after excluding the impact of revenue from the olanzapine portfolio and was primarily driven by Mounjaro and Zepbound. Revenue from our non-incretin portfolio grew 17% after excluding the impact of revenue from the olanzapine portfolio. Gross margin as a percentage of revenue increased to 82.2%. Gross margin primarily benefited from favorable product mix and higher realized prices, partially offset by the sale of rights for the olanzapine portfolio in Q3 2023 and higher manufacturing costs. R&D expenses increased 13%, driven by continued investment in both our early and late-stage portfolio. We recognized $2.8 billion of acquired IPR&D charges, primarily related to the acquisition of Morphic Therapeutics. Marketing, selling and administrative expenses increased 16%, primarily driven by promotional efforts supporting ongoing and future launches. Operating income increased to nearly $1.8 billion driven by higher revenue from new products, partially offset by operating expenses growth. The effective tax rate was 37.6%, reflecting the unfavorable impact of non-deductible acquired IPR&D charges. Other than the impact of acquired IPR&D, the underlying tax rate was consistent with previously provided guidance. We delivered earnings per share of $1.18, up from $0.10 in Q3 2023. And this includes a negative impact of $3.08 from acquired IPR&D charges.

Thanks, Lucas. Lilly R&D had another productive quarter. So let me begin by sharing some late-phase updates, including some exciting Phase 3 data that we shared at recent medical congresses. Starting with neuroscience. Yesterday, at the clinical trials in Alzheimer's Disease Conference, we shared positive results from our Phase 3 TRAILBLAZER-ALZ 6 trial, which evaluated different dosing regimens for initiation of donanemab treatments to understand their effect on ARIA-E. In this trial, we tested a modified titration, which shifted one vial of donanemab from the first infusion to the third. We designed this modified titration to achieve identical total dose of donanemab administered in the first three months as does our standard dosing regimen, but we hypothesized that the smoother increase in dose could result in less ARIA. We are pleased to see in this trial that indeed by pharmacokinetic analysis, we achieved equivalent cumulative exposure between the modified titration and the standard dosing regimen. And as a result, we achieved similar levels of amyloid plaque removal and phospho-tau217 reduction. Importantly, we also confirmed our hypothesis on ARIA and showed that the modified titration reduced the incidence of ARIA-E to 14% compared with 24% for those receiving the standard dosing regimen. We also observed lower frequency of symptomatic ARIA-E, lower radiographic severity of all categories of ARIA-E, and lower ARIA-E and ApoE 4 genotype carriers using the modified titration as compared to the standard dosing regimen. We plan to submit a supplemental DLA to the FDA in the coming weeks for this modified titration.

Thank you, Dan. Before taking questions, let me briefly summarize our progress in the quarter. We had strong revenue growth across both Mounjaro and Zepbound, as well as our oncology, immunology, and neurosciences medicines. Significant advancements in our pipeline included approval of Ebglyss for moderate-to-severe atopic dermatitis in the U.S., Kisunla for early symptomatic Alzheimer's disease in Japan and Great Britain, and positive data disclosures for Phase 3 studies of tirzepatide and donanemab. We are confident in Lilly's bright future. We have now launched in major geographies the cohort of medicines that we expect will serve as the driver of our growth through the balance of this decade. That is Mounjaro, Jaypirca, Omvoh, Zepbound, Kisunla, and Ebglyss. We expect these products, together with our already launched products will contribute to strong growth of the company in 2025. In addition, we plan to continue to scale R&D and step-up our investment across manufacturing and commercial to support the successful launches of these medicines to help even more patients next year. So now I'll turn the call over to Joe to moderate a Q&A session.

All right. Great. Thanks so much. Just to kick off the questions, can you just help bridge a bit from the 3Q sales we just saw reported to the 4Q implied results? It's obviously a substantial step up in sales. It sounds like part of this is you're now accelerating demand generation efforts given the improved capacity. But I was just hoping to get a little bit more color on exactly what those efforts are and how quickly you expect those programs can translate to an acceleration in prescriptions? Thank you.

Thank you very much, Chris. I think it's first important to emphasize that the overall performance and health of both Mounjaro and Zepbound are very strong. And then we saw a slightly accelerated growth in Q3 of more than 25% and also the market, the underlying market for both Type-2 and obesity continues to grow. And we took a more prudent approach than we anticipated in Q3, pretty much driven by the need to deliver a good consumer experience. That has been one of our triggers for any investments based upon the experience we faced in the first half of the year when a lot of the calls of our customer service center were about supply, actually more than 20%. We are now down to less than 1% of those being supply-related. So what we are doing right now is that we are investing heavily in our DTC effort, which we haven't done in the past, whilst supply allows us to invest strongly there, but it's not a demand issue. And similarly, we are fully leaning in on all the HCP promotional efforts, also providing samples in the marketplace to providers. So we remain very confident based upon the underlying trend in the marketplace today and also the growth of both Zepbound and Mounjaro in terms of TRx, NBRx, and TRx that we are after a good Q4.

Maybe just to add to that, thank you, Chris, for the question. When you look at the midpoint that I mentioned, 50% growth that we expect for the fourth quarter compared with the 42% is a step-up of 8%. When you remove the channel dynamics that we alluded to in Q2, the step-up of growth is very consistent throughout the quarters. So the acceleration and the drivers are the ones that Patrik mentioned. Maybe just to add to that, OUS as well, we continue to advance or engage new countries that we are going to be launching Mounjaro as well that will drive that part of that growth acceleration in the fourth quarter.

Hi everyone, thank you for the question. Regarding the volatility in the third quarter, Dave, you mentioned the sequential demand for prescriptions. Given that, why did we see such a significant decline this quarter? Investors are likely trying to determine whether the sequential trends indicate a possible easing in demand or if it's simply the irregularities of the rollout. Thank you.

Yes, maybe because it's kind of a macro thing you're asking there. But I think first of all, there is a lot of lumpiness in channel stocking. I think all the sell-side analysts on this call have probably struggled with that as we have, exiting Q1, we can recall that we had a number of our dosage forms on back-order, and we pretty much reached a NATR of supply in the wholesalers. That was kind of restocked in Q2 and then we saw a drawdown in Q3. I think what we really don't control and don't attempt to, but as a reality is that downstream customers from Lilly, wholesalers and retailers, are making their own decisions about which of the 12 different dosage forms they want to stock and at what level. There are some physical constraints to that; cold-chain capacity is constrained and their financial constraints, working capital that they're managing to. Those are their decisions to maintain their customer service levels. I think what we've done is sort of move our set point of how much stock we want to have on hand before we go initiate demand-stimulating activities, which we had more or less paused for Mounjaro in the first half and never started for Zepbound, remembering we launched in December of last year. So I think the in-market data, you guys can all read, and you see Geoff yourself, and we do see acceleration of both brands in Q3 over Q2 in actual consumption. And our estimate is that will continue or accelerate as we add U.S. stimulation to that demand, which, as Patrik said, we're going to begin doing here really mid-November in earnest. And ex-U.S. demand is another factor that affects sales and that too we moved out launches by about a quarter just to make sure we had enough buffer. So when customers want a prescription, they could get it filled reliably. And I think that's an important thing for us to keep that trust going forward. So at a macro-level, is there a demand problem here? No, actually. Is there a supply problem? No, although if we had unlimited demand, there would be. So we're carefully gating those two things together. As we escalate supply in Q4, which, as I mentioned, we're going to beat the 50% growth number, you'll see us grow our demand stimulation as well. And I think that's really about Q4, but even more about Q1 of 2025 and continuing acceleration there. So business is super-healthy. We feel good about where we are. Obviously, there was some choppiness this quarter, but I think underlying growth here is as strong as we would have hoped.

Hi guys. Thank you so much for the question and Joe, congrats on your new job. I want to touch on compounding. Given the headlines, do you believe that compounded drugs are impacting demand? And secondarily, how do you frame kind of the FDA's waffling on the shortage list as it relates to compounding? It seems that this has been a hot button issue, I'd love your perspective.

Well, thank you very much, Evan. I think as we all know, that is not one reliable source when it comes to quantifying the compounding market. We also know that it's opaque and mainly cash and there are probably reasons to believe that some of those patients are off-label. So from our perspective, we actually don't estimate there to be a huge financial impact of compounding on our business. But our major concern here has been driven by safety, but thousands of people in the U.S. are getting medicine that is not approved by the FDA for quality, safety or efficacy purposes. So that has been our concern, and we are mainly leaning in now, as we said earlier, to drive demand in the U.S. marketplace for patients with obesity and Type-2 diabetes.

Yes, I mean, I can't really speculate too much what's going through the FDA's mind, but I think other commentators have mentioned that the longer this goes on, the more risk they have to their own regulatory framework. And so, my guess is the FDA is concerned about that and they want to win this case and they're putting their ducks in a row to do so.

Thanks. My question is actually on how you feel the compounding situation could be resolved by the availability of an oral small molecule that can be provided at substantial scale? It seems like this is the easiest and most straightforward answer to the compounding crisis. Once that occurs, does it make sense with that availability regardless of product that the agency would move to resolve the crisis? Or is this a product-by-product situation such that if Novo can't get their house in order in that context that we'll end-up with having this compounding issue just draw out over time? Thanks.

Yes. Well, I mean in the long run, of course, there's a potential 1 billion customers on the planet. And I think we've said, I've said that probably the only way that a big chunk of those are served well is with oral products because of the production system efficiencies there versus parenteral filling of proteins. So it's important. Of course, we're in the lead there and we want to see our orforglipron be successful, but we need the data and then submission and launch would put that sometime like less than 2 years from now. But I wouldn't characterize compounding as a crisis. It certainly isn't one for us. I think the problem is people are being harmed and duped, right? And so that's kind of what we'd like to see stop. But as Patrik said, we don't really see a financial impact on Lilly of compounding. I think that as an industry, we should probably be worried that if this grows and is allowed to continue, then it sort of creates this back to our generic world. But as I said, I think the FDA wants to stop that for good reasons, for public safety reasons and they'll do that.

Great. Thank you very much for taking my question. Maybe if I can ask the demand question and supply question differently. So now you will be starting some demand generation activities in the later half of the year. How are you thinking about the access side of it, do you think that there is some convergence between access demand generation and supply into 2025 because we are hearing that some of the payers are restricting it even more now? So would love to understand your thoughts on access side given that you are probably have done the negotiations at this point?

Yes. Maybe just a few comments on Mounjaro. Prior to moving into Zepbound, I think with Mounjaro, we have really good access and it's 93% and I think pretty much where we need to be across commercial and Medicare. In terms of Zepbound, I think we've made progress in record time here, close to 90% commercial access and we continue to see improvement in terms of employers opting. You're correct, we heard stories about some employers opting out, but the major trend is actually in favor of opting-in to the anti-obesity medications. So we are definitely north of the 50% and I think we will have some new data in the first part of 2026 since both the employers are making those decisions effective one-one in the new year to come. So I think we are very, very optimistic in that part of our business, but we're also continuing to make progress in terms of access for Medicaid. And just since we connected last time, we have gained six incremental states for Medicaid and most recently effective 10-1, we have California and Massachusetts. So big states are now covering more than 30 million lives, and we expect to continue to make progress in that space.

Sure. Overall, we have seen significant progress on our launches OUS. We have both access for Type-2 diabetes where in some of the markets like U.K., Germany, and Japan, and we're seeing some good progression of our share in those markets where we're already seeing leading share of market in new patient starts in those places. Of course, we need to continue to develop access in other markets. And then on the chronically management side, we feel good about the prospects of adding countries to drive access. At the same time, there's also developed self-pay markets like the U.K., UAE, and Saudi, where we're already seeing significant progression of our share and penetration where we actually have leading share of market in TRx in these markets. And we continue to focus on both developing the self-pay, but also increasing access for both Type-2 diabetes and chronic weight management over time.

Great. Thanks for taking the question. I was just wondering I know you've already framed out kind of where supply would be for the second half of this year. Again, as we look out to 2025, can you give us an early read on how your supply capacity efforts have been progressing and how we should think about the amount of new capacity, especially on the auto-injector side that you can bring on for 2025? Thank you.

I can start, let me just jump in. I mean, we will have a chance to lay out that as we did this year in our guidance call in early February. But qualitatively, you can see the flow of our investment and CapEx into this space and you could kind of go backwards three years or so and expect the capacities we announced then to be coming on full line in that timeframe and then rolling that forward. So of course, we made an announcement this year and those are a couple of years away from having full impact. But if you go back to '21, '22, '23, we are working hard to bring those online and expect good growth next year. So I think Lucas mentioned, we're seeing acceleration in demand, but that means acceleration in supply during this year and we expect strong growth on the total for next year and we'll lay out the details if we get into the guide call.

Hi guys. Thanks for taking my question. Maybe just to spend one more minute on the inventory dynamic in the quarter. I'm trying to think out loud, could the launch of cash-pay single vial option via LillyDirect have impacted channels' interest in filling out their inventory given how those launch is going? And/or were there any changes in your incentives or fees to the distributors that could have impacted it? Thank you very much.

Well, overall, we launched LillyDirect self-pay just a month ago. Not we are pleased with the uptake, but we also realized that it takes some time for the healthcare system to adopt the self-pay in their EMR systems. But so far, I would say that the impact of TRx has been quite limited and would be defined as being at the low-single to single-digit level. We expect Lilly Direct self-pay though to be a very important channel to grow new therapy starts moving forward, but not significant in Q3.

Thank you so much. For a product with a seemingly unlimited market opportunity, what appears to be great market awareness and persistent supply shortages, DTC for Zepbound really shouldn't be necessary, particularly now. DTC, in my experience usually signals concern about patient volumes, awareness or competition. So the question is, if DTC were not instituted, what would be the trajectory of Zepbound over the next, say, 12 months would consensus be achieved? And if competition is the concern, are you getting ahead of CagriSema data due out soon? Thank you.

Yes, you know, I think we are comparing a very different market, the first half of '25 versus the second half of 2025. We faced some significant supply constraints, and it wouldn't be responsible for us at that point in time to drive any major DTC investments and just provide consumers with a bad experience at the pharmacy level. We have much more confidence now in terms of the supply moving forward. And this is not a demand issue problem. It's actually just a supply opportunity, and we want to drive up that consumer awareness. So while we're doing extremely well, we just need to have in mind that the penetration in terms of obesity is just at the low single-digit level, 4% to 5%, and there is still a huge stigma. So what we can do here to drive patient activation is going to serve us very well moving forward.

Yes, thanks very much. A number of my questions have been asked. So with respect to peresolimab, I'm hoping that you could just provide a little bit more color. You mentioned that it was dropped due to the benefit-risk ratio, but do you see any specific safety problems? And what is your view of the opportunity to develop another PD-1 agonist for INI disease in the future? Thank you.

Good. Thanks for your question, David. Yes, I mean peresolimab is a really interesting mechanism for us and we were excited when we saw the Phase 2a data. It was a small number of patients, but had a relatively profound effect on RA symptoms, particularly in patients who had failed the previous biologics. So we sought out to replicate that in a larger Phase 2b study. Unfortunately, when we came to the end of that study, the benefit-risk that we've seen in the Phase 2a study was not fully borne out in Phase 2b. So just based on the overall profile, which includes both the efficacy and the safety of the drug, we decided not to pursue that. As to your question on a follow-on PD-1 agonist, we don't have one that we're pursuing right now. So that's all I'll say about that. And I think, of course, we'll look forward to presenting the full data package at a future meeting. Thanks Joe.

Thank you very much. My question actually on Verzenio, please. So your competitor in this space, Novartis, Kisqali recently received a broad approval in early breast cancer, which obviously includes the high-risk patient group. So I would just be interested to hear you speak about your expectations for market-share evolution in that space, how you protect your position with Verzenio in the high-risk setting? And then also if you can talk to the impact of IRA that you expect on that brand as we move through Part D reform next year and whether or not you expect the drug to be on the negotiation list for 2027? Thank you.

Yes, happy to take it. Thanks for the question. Our position and expectation here around market share with respect to the adjuvant setting for Verzenio versus Kisqali hasn't really changed sort of pre-approval versus now. I think we have a very robust clinical data package with a lot of follow-up on our dataset, which is critically important for prescribers and a 2-year regimen where patients can finish their adjuvant therapy and move on with their life, hopefully remaining recurrence-free. That's a pretty compelling proposition. It has been, and I think is recognized as such in a variety of treatment guidelines that for the high-risk population, the monarchE patient population prefer Verzenio over Kisqali as standard-of-care. Those expert guidelines have weighed in over the past couple of months. I don't expect that to change materially. Of course, with a new market entrant, the percentage of patients in the setting who get any CDK4/6 inhibitor as adjuvant therapy could go up and that would benefit us and I expect that there will be some patients for whom Kisqali is a more appropriate choice, but I don't expect it to be a significant shift in our overall market dynamics. And of course, the node-negative population is not where we're indicated and not where we're used and that's a story for them to tell. On the second part of your question around Part D reform, it will have an impact. Of course, there's a push and pull here on the amount we have to contribute for catastrophic coverage being a downside, and of course, the co-pay cap, out-of-pocket cap on patients, and particularly in Medicare where that could be a tailwind on the brand. I think it's hard to know exactly where that will net out. It probably nets out sort of in the neutral range. I don't think it will end up being a headwind or a tailwind sort of in totality, but we have to see how that shakes out. On the last part of your question around negotiation list, I don't want to speculate on that. I don't think we have enough information yet given the evolving nature of all of the different medicines that could be up for negotiation to actually say one way or another, which ones will be there just yet.

Great. Thank you very much. Lucas, welcome to these calls. Just curious, there's a little bit of a tension point between the thought of what the operating margins and I know Lilly uses a very unique and specific precise calculus for that. With most people longer-term forecasting at least amongst the sell-side approaching high 40s percent. And I believe some of your commentary suggested that perhaps that would not be where you would aim for. Can you just maybe clarify for us your view, your take on where you think the operating margin trajectory would go under your purview?

Yes. Sorry. Thank you, Chris, for your question and thank you for quoting me about this new ratio, the gross margin minus OpEx divided by revenue is quite a lengthy ratio. But just going to your question in the short run you see that we have grown our ratio in the last few quarters as we have been having this cycle of significant growth trajectory and we are starting to ramp up our investment both in SG&A and R&D. That effect will continue for sure for getting into the fourth quarter of the year that is including as part of our guidance. And what we expect to see moving into 2025, going into your question is we do expect to ramp up our demand generation activities in SG&A that will pay down into 2025, as well as we will scale our R&D. We talk about some of the assets on our portfolio that moves into Phase 2 and Phase 3 that will continue to play-out as we ramp-up those investments to drive long-term sustainable growth.

Hi, guys. Thanks for squeezing me in. So in your PR, you note favorable changes to estimates for rebates and discounts for Mounjaro. If you axe on our numbers, if you axe-out mid-single-digit destock, it does look like price has gone up for the year for that product. Also, Zepbound pricing looks pretty stable. So perhaps can you just talk about what you see in pricing evolution for the rest of the year, but also next year as you'll have potentially sleep apnea and have that on the label, which may mean that you go into more government settings? Thank you.

Yes, sure. And thank you for the questions. Going back to Mounjaro so far in the year, we kind of signaled throughout the year that once we were sunsetting last year, the co-pay program that we had that we will see that basically tailwind on the price year-on-year comparison that played out as what we expected. And the sunset, of course, takes again a little bit of time to see that playing out. So you see a little bit of that spillover effect getting into Q3. Getting into Q4, we don't expect to see major dynamics on that. And what you're starting to see basically in Q3 is what we project into the fourth quarter of the year.

Thank you very much for your perspectives on all those topics. I think that's a comprehensive view.

Thanks, Kerry. I appreciate your feedback. And just to wrap up, thank you everyone for your participation today. We look forward to seeing you at our upcoming investor events.

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 PM today, running through December 4 at midnight. You may access the replay system at any time. Thank you for your participation. You may now disconnect your lines.