Ladies and gentlemen, thank you for standing by. Welcome to the Q4 2016 earnings call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session. If you wish to place yourself in queue for questions at any time, please press star then one on your touchtone phone. You may remove yourself from that queue by depressing the pound key. I will now turn the conference over to your host, Dave Ricks. Please go ahead, sir.
Thank you, and good morning. Thanks for joining Eli Lilly and Company's fourth quarter 2016 earnings call. I'm Dave Ricks, Lilly's President and CEO. Joining me on today's call are Derica Rice, our Chief Financial Officer. Dr. Jan Lundberg, President of Lilly Research Laboratories. Enrique Conterno, President of Lilly Diabetes and Lilly USA. Dr. Susan Mahony, President of Lilly Oncology. Chito Zulueta, President of International Business. Jeff Simmons, President of Elanco Animal Health. Dr. Tony Ware, who's the Interim President of Lilly Bio-Medicines, and of course, Kristina Wright, Chris Ogden, and Phil Johnson of the investor relations 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 a number of factors, including those listed on slide three and those outlined in our latest Forms 10-K and 10-Q filed 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 it's not sufficient for prescribing decisions. Before discussing key events for the quarter, I'll start with a summary of our progress since the Q3 earnings call using our strategic objectives framework. Starting with grow revenue, in Q4, we generated worldwide revenue growth of 7%, which was driven by 9% volume growth in our pharmaceutical business, led by our new products. Prices declined 1% in Q4. On our strategic objectives, expand margins, total operating expenses as a percent of revenue declined over 400 basis points compared to Q4 of 2015. While our non-GAAP gross margin percent, excluding the effect of FX on international inventory sold, was essentially flat.
Under the heading of sustaining the flow of innovation, here in the U.S., in our collaboration with BI, the FDA approved and we began promotion of a new CV indication for Jardiance. We launched our long-acting insulin, BASAGLAR. In Europe, the European Commission approved LARTRUVO for soft tissue sarcoma. Finally, on deploy capital to create value, we completed the acquisition of Boehringer Ingelheim's U.S. Animal Health vaccine business. We announced an agreement to acquire CoLucid Pharmaceuticals, which will add a promising molecule for acute migraine to our late-stage pipeline. We announced an increase of 2% in our quarterly dividend, and we repurchased $300 million of stock. We expect to make continued progress in 2017, and we remain on track to achieve our midterm goals for each of our strategic objectives.
Now let's move on to slide five for a more detailed review of the key events that occurred since our last earnings call. New product launches continued. As I mentioned, in collaboration with Boehringer Ingelheim, we received FDA approval of the new CV indication for Jardiance in December. It launched in January, right after the mid-December launch of BASAGLAR. Our initial sales were largely due to stocking, but we are pleased with initial feedback from customers. We also launched LARTRUVO for advanced soft tissue sarcoma in both the U.S. and Europe, and the product is off to a strong start. While in Japan, we secured the price listing for TALTZ in mid-November and launched the product for both psoriasis and psoriatic arthritis. We are in the process of opening accounts and completing hospital formulary reviews. While it's very early, initial feedback and IMS data are positive.
In the animal health space, along with Aratana, we announced that GALLIPRANT, a first-in-class product for dogs for the management of pain and inflammation associated with osteoarthritis, is now available to veterinarians here in the U.S. On the regulatory front, we made significant progress. We received conditional marketing authorization from the European Commission for LARTRUVO to treat adults with advanced soft tissue sarcoma. Also in Europe, we received a positive opinion recommending approval of baricitinib for the treatment of moderate to severe active rheumatoid arthritis. In collaboration with Boehringer Ingelheim, we received multiple regulatory actions on the Jardiance family of products. A number of these actions were related to the EMPA-REG OUTCOME trial. The U.S. FDA approved of a new indication for Jardiance to reduce the risk of cardiovascular death in adults with type 2 diabetes and established cardiovascular disease.
We were also pleased that the ADA issued updated diabetes treatment guidelines shortly after the FDA approval. In Europe, the European Commission approved an update to the Jardiance label, including data on the reduction of the risk of CV death in patients with type 2 diabetes and established CV disease. The U.S. FDA also approved updates to the labels of SYNJARDY XR, and GLYXAMBI to include data on the reduction of the risk of CV death in patients with type 2 diabetes and established CV disease when treated with empagliflozin. Similarly, Europe's CHMP recommended an update to the SYNJARDY label to include data on the reduction of risk of CV death in patients with type 2 diabetes and established CV disease when treated with empagliflozin.
Separate from actions related to EMPA-REG OUTCOME, the FDA approved SYNJARDY XR, a tablet containing empagliflozin and metformin extended release for the treatment of adults with type 2 diabetes. The European Commission approved GLYXAMBI, a single pill combining Jardiance and Tradjenta for the treatment of adults with type 2 diabetes. Finally, here in the U.S., the FDA extended the NDA review period for baricitinib, and we now expect regulatory action early in Q2. Moving to slide six, there was one significant data readout in Q4. We were disappointed to announce that the EXPEDITION3 trial of solanezumab in patients with mild dementia due to Alzheimer's disease did not meet its primary endpoint. Since the solanezumab update we provided on our guidance call, we made the decision to terminate the EXPEDITIONPRO study of solanezumab in prodromal Alzheimer's disease.
After careful review of the data from the EXPEDITION3 study and given the overlap in patient populations between EXPEDITION3 and EXPEDITIONPRO, we did not find sufficient scientific evidence to support the hypothesis that solanezumab would demonstrate a meaningful benefit to patients with prodromal Alzheimer's disease. In addition, the decision has been made to continue two ongoing public-private partnership studies in earlier stages of AD, the A4 study in pre-clinical AD and the DIAN-TU study in dominantly inherited AD. In other news, the U.S. Court of Appeals for the Federal Circuit upheld the district court's decision that the ALIMTA vitamin regimen patent is valid and would be infringed by the generic challenger's proposed products. If the patent is ultimately upheld through all remaining challenges, including intellectual property review proceedings, ALIMTA would maintain U.S. exclusivity until May 2022.
We announced completion of the acquisition of BI Vetmedica Inc.'s U.S. feline, canine, and rabies vaccine portfolio, which also brings a fully integrated manufacturing and R&D site and several pipeline assets. The acquisition diversifies Elanco's U.S. companion animal portfolio by adding vaccines for a range of common conditions. We also announced an agreement to acquire CoLucid Pharmaceuticals for $960 million. When closed, this will add lasmiditan, a potential first-in-class non-vasoconstrictive migraine treatment to our pain management pipeline. We believe this potential treatment for acute migraine complements our growing pain portfolio, specifically galcanezumab, which is in development for migraine prevention. Along with AstraZeneca, we announced a worldwide agreement to co-develop MEDI1814, an antibody selective for the Aβ42, which is currently in phase I trials as a potential disease-modifying treatment for Alzheimer's disease.
In oncology, we announced an expansion of our existing immuno-oncology collaboration with Merck to add a new study for our LARTRUVO with Merck's KEYTRUDA in patients with previously treated advanced or metastatic soft tissue sarcoma. We also announced a partnership with Express Scripts to allow people who use Lilly insulin, in particular those who have no insurance or those who are in the deductible phase of their high deductible insurance plans, to purchase product at a 40% discount using mobile and web platforms hosted by Blink Health. In December, we announced a 2% dividend increase, bringing our quarterly dividend to $0.52 per share. During the fourth quarter, we distributed over $500 million to shareholders via the dividend, and we paid $300 million for share repurchases. Now I'll turn the call over to Phil for a discussion of our financial performance during the quarter.
Slide seven summarizes our presentation of GAAP results and non-GAAP measures, while slide eight provides a summary of our GAAP results. I'll focus my comments on our non-GAAP adjusted measures to provide insights into the underlying trends in our business, so please refer to today's earnings press release for a detailed description of the year-over-year changes in our fourth quarter and full year GAAP results. Looking at the non-GAAP measures on slide nine, you can see that Q4 2016 revenue increased 7% compared to Q4 2015, reaching $5.8 billion. Gross margin as a percent of revenue is essentially flat at 77.4%. The effect of foreign exchange rates on international inventory sold resulted in a benefit to both this year's and last year's quarter, with the benefit being slightly larger this year.
Excluding this FX effect, our gross margin % decreased by 20 basis points, going from 75.7% in last year's quarter to 75.5% this quarter. Total operating expense unchanged compared to Q4 of 2015. Each of the component parts of total operating expense, marketing, selling, administrative expense, and R&D expense were also unchanged. In marketing, selling, administrative expenses, higher spending to support new products offset by lower spending on late-life-cycle products. In R&D expense, recall that in Q4 2015, we had about $135 million in late-stage termination charges for basal insulin peglispro and evacetrapib. While in Q4 this year, we had about $75 million in charges related to the EXPEDITION3 study. Excluding these charges, R&D expense grew 5% to higher late-stage clinical development costs.
Other income and expense was income of $16 million this quarter, compared to the $45 million reported last year. Our tax rate was 17.9%, an increase of 4.4 percentage points compared to the same quarter last year. This increase was primarily due to the inclusion in Q4 last year of the full year 2015 benefit for certain U.S. tax provisions, including the R&D tax credit. This was partially offset by a higher net discrete tax benefit in this year's Q4, which included a tax benefit of approximately $40 million related to the early adoption of the new accounting standard for stock-based compensation. At the bottom line, net income and earnings per share both increased 22%. We achieved this significant earnings growth by delivering high single-digit volume-based revenue growth while keeping OpEx flat.
Slide 10 contains non-GAAP adjusted information for all of 2016, while Slide 11 provides a reconciliation of reported and non-GAAP EPS. You'll find additional details on these adjustments on Slides 25, 26. Now let's take a look at the effect of price rate and volume on revenue growth. On Slide 12, in the gray highlighted row at the bottom of the table, you'll see the 7% revenue growth I mentioned earlier. The effect of foreign exchange on revenue growth was minimal this quarter, and our worldwide revenue growth on a performance basis also rounded to 7% and was driven entirely by volume. By geography, you'll notice the U.S. pharma revenue increased 16%, driven almost entirely by volume as well. Trulicity was the main driver of U.S. volume growth, with meaningful contributions also coming from Humalog, GLYXAMBI, and Jardiance.
As cited in our press release issued earlier this morning, we benefited this quarter from a $130 million favorable adjustment related to changes in estimates, rebates, and discounts primarily related to Humalog. From a growth rate perspective, this was partially offset by the gross net benefit experienced in Q4 2015. The decline in EU-CAN revenue of 9% was driven by the negative effect of price, to a lesser extent, unfavorable foreign exchange movements, lower volume. On a constant currency or performance basis, EU-CAN revenue decreased 7%. This decrease was driven primarily by lower volume and price for Cymbalta and ALIMTA, partially offset by the uptake of new products, including Trulicity, CYRAMZA, BASAGLAR, and Jardiance.
In Japan, pharma revenue increased 9% in total, driven by a 13% benefit from a stronger JPY and, to a lesser extent, increased volume, partially offset by a 7% negative price effect from the latest biannual price cut. On a constant currency basis, Japan pharma revenue decreased 4%. This performance decline was attributable to the entry of generic alendronate this past June. Excluding Zyprexa, pharma revenue in Q4 grew 9% on a constant currency basis, led by CYRAMZA with meaningful contributions from Cymbalta and Trulicity. Turning to emerging markets, revenue this quarter was unchanged as the negative effect of FX was offset by higher volume. On a performance basis, emerging markets revenue increased 3% as growth in CIALIS, HUMALOG, Trulicity, CYRAMZA, BRILINTA, and Jardiance were partially offset by lower sales of ALIMTA and HUMULIN.
This quarter, our pharma revenue in China decreased 4% due to FX, while revenue increased 1% on a constant currency basis. Turning to animal health, this quarter worldwide revenue increased 3%, while excluding the effect of foreign exchange increased slightly higher at 4%. U.S. revenue growing 2% and OUS revenue growing 5%. The U.S. increase was driven by new companion animal product launches, while the OUS increase was primarily driven by higher food animal revenue. On Slide 13, you'll find the same price, rate, and volume analysis, but for the full year. As we've done in recent quarters, let's now take a look at the drivers of our worldwide volume growth on Slide 14. As I mentioned earlier, excluding FX, our worldwide revenue grew 7% this quarter, driven by an 8% increase in volume.
Our new products, Trulicity, CYRAMZA, Jardiance, Taltz, BASAGLAR, LARTRUVO, and PORTRAZZA, were again the engine of our worldwide volume growth. You can see that these products drove 8.9 percentage points of volume. Our mealtime insulins, HUMALOG and HUMULIN, in total contributed nearly two percentage points of volume growth. Our animal health products contributed 40 basis for volume. Due primarily to declines outside of the U.S., resulting from a loss of exclusivity, ALIMTA trimmed 1.5% from volume growth, while loss of exclusivity for Zyprexa, Cymbalta, and EVISTA provided a drag of just over 2%. Let me turn the call over to Derica.
Thanks, Phil. As in prior quarters, I'll start by sharing some color on our new product launches. As you can see on the graph on Slide 15, our new products generated over $700 million in revenue this quarter, led by Trulicity and CYRAMZA. This represents over 12% of our total worldwide revenue, up from 10% last quarter. As Phil mentioned earlier, these products drove 8.9 percentage points of our worldwide volume growth this quarter. Trulicity performance continues to be strong. Here in the U.S., we're excited that our new brand share with endocrinologists, which we view as a leading indicator, is now comparable to Victoza. In addition to our strong performance, we're also benefiting from growth of the class, with the U.S. GLP-1 market growing nearly 30%.
As I mentioned last quarter, in many OUS markets, we're seeing uptake comparable to that seen with the early uptake of Victoza. CYRAMZA continues to grow globally, driven largely by Japan, where we're seeing early strong growth and early adoption in gastric cancer, and more recently have begun to see uptake in lung and colorectal cancer. OUS markets now account for nearly two-thirds of our worldwide CYRAMZA sales, and we look forward to continued growth in these markets. U.S. CYRAMZA sales declined this quarter. Moving to Jardiance, we continue to see strong uptake, with our new to therapy share with endocrinologists at 35%, exceeding INVOKANA. As mentioned earlier, in December, we received FDA approval of the CV indication, and the ADA also updated its diabetes treatment guidelines. As we stated in the past, we expect these two milestones to be catalysts for the growth of Jardiance and the SGLT2 class.
We continue to see rapid uptake of TALTZ, which launched in the U.S. in April last year and has served as a catalyst for continued growth of the IL-17A class of psoriasis. We're pleased that our new-to-brand share of market with dermatologists, a proxy for use in psoriasis, already exceeds that of ENBREL and COSENTYX. On BASAGLAR, we launched here in the U.S. in mid-December. The $16 million in U.S. sales we booked were largely due to initial stocking. Physician feedback has been positive so far, and we look forward to providing a more detailed uptake on our next earnings call. In the fourth quarter, we also launched LARTRUVO for soft tissue sarcoma, with product becoming available in the U.S. in late October. Our Q4 U.S. sales of $11 million were largely driven by demand.
In Europe, LARTRUVO was approved in mid-November, and we booked initial sales during December in Germany and Austria. Finally, we continue to see strong uptake of IO agents in first-line non-small cell lung cancer affecting use of Portrazza. Now, moving to slide 16, you'll see the changes in foreign exchange rates had a minimal effect on our Q4 2016 results. Growth in non-GAAP EPS was 22%, including the effect of FX, and 19% in constant currency terms. For the full year, FX provided a slight drag on our financial results. Specifically, revenue grew 6% with FX and 7% in constant currency terms, while non-GAAP EPS grew 3% with FX and 7% in constant currency. Moving on to our pipeline update. Slide 17 shows our NME pipeline as of January 18th. Over the past three months, most of the movement has been in phase I.
You will see the phase III attrition of solanezumab for mild Alzheimer's disease with the A4 study and preclinical AD now reflected as the lead indication for solanezumab. You'll also see a red symbol in phase I reflecting our decision to stop development of Aβ Fab PEG . Several assets entered phase I, including the addition of the Aβ42 specific antibody from our expanded collaboration with AstraZeneca, and the entry of a BACE inhibitor for Alzheimer's disease, two diabetes molecules, and one molecule in both cancer and immunology. One other update. You may have seen Adocia's press release last Friday announcing that we decided to return the ultra-rapid insulin we've been developing together. We have an alternative ultra-rapid insulin in development that could begin phase III testing before the end of 2017, consistent with the information on our 2017 key events slide.
In our near-term pipeline on slide 18, you'll see two U.S. approvals in the Jardiance family, the CV indication for Jardiance, as well as the once-daily combination of Jardiance and metformin. As mentioned earlier, you'll see attrition of the solanezumab ExpeditionPRO study in patients with prodromal AD. Turning to slide 19, let's recap the recent progress we've made on the key events we projected for 2016. Since our last call, we added check marks for the European approval of LARTRUVO for soft tissue sarcoma and in collaboration with Boehringer Ingelheim, the U.S. approval of the CV indication for Jardiance, the European update of the Jardiance label to reflect the EMPA-REG OUTCOME data, and the European approval of GLYXAMBI for type 2 diabetes. Finally, you'll see a check mark to reflect the EXPEDITION3 readout. Slide 20 shows potential key events for 2017.
Even though we're only a few weeks into the year, we have had a number or a few key events occur already. Importantly, as Dave mentioned earlier, the United States Court of Appeals for the Federal Circuit upheld the district court rulings that the ALIMTA vitamin regimen patent is valid and would be infringed by the generic challenger's proposed product. Early this month, we closed the acquisition of BI's U.S. feline, canine, and rabies vaccine portfolio. You'll also see that we've added an entry for the CoLucid acquisition, which we hope to close this quarter, as well as an entry to reflect Merck's recent announcement that the U.S. FDA granted priority review with an action date in May for Merck's sBLA submission for KEYTRUDA in combination with ALIMTA and carboplatin in first-line metastatic non-squamous non-small cell lung cancer based on the KEYNOTE-021G data.
Turning to our 2017 financial guidance on slide 21, our expectations for 2017 are largely unchanged from when we originally issued our financial guidance in mid-December. You'll see that our non-GAAP line item guidance remains the same. We have adjusted our GAAP financial guidance, specifically the tax rate and EPS, primarily to reflect the estimated charge related to the pending acquisition of CoLucid Pharmaceuticals. As usual, we listed the FX rates assumed in our guidance for the EUR, the JPY, and the GBP. In aggregate, current spot rates are modestly worse. However, FX rates have not moved enough to cause us to change our 2017 guidance. We're just one month into the year, and we'll monitor rates going forward, as well as underlying business trends, to determine what changes, if any, are appropriate to our 2017 guidance when we provide our quarterly update.
Before we go to the Q&A session, let me briefly sum up. As we exit 2016, our growth prospects are coming to sharper focus. We have significant opportunities to drive growth over the balance of this decade on the product launches currently underway, with three more new product launches possible before the end of 2018. This should allow us to deliver innovation to patients that fundamentally changes expectations for the outcomes they can achieve, to deliver value to the healthcare system and to create value for our shareholders and other stakeholders. Our management team will be focused on execution to realize the potential of these opportunities.
We'll be focused on launching new products with excellence, reloading our late-stage pipeline from inside and outside our walls with assets of equal or greater value than our graduating class, driving increased productivity across our enterprise to expand our operating margins and create investment capacity, and investing in the core drivers of our business, talent, scientific capability, and technology platforms to ensure our future growth prospects. While policy and environmental uncertainty are high, we see our innovation strategy to drive volume growth through new brands as both valuable and durable. In my 26 years with the company, I can't remember a more exciting time. This concludes our prepared remarks. I'll turn the call over to Phil to moderate the Q&A session. Phil?
Great. Thanks, Derica. We'd like to take as many callers as possible, so we do ask that you limit your questions to two or a single question with two parts. Thanks in advance for your collaboration with the request. Kevin, can you please provide the instructions for the Q&A session? We're ready for the first caller.
Thank you. Once again, please press *1 for questions. You may depress the # key to remove yourself from that queue. Our first question is from the line of John Boris, SunTrust. Please go ahead.
Thanks for taking the questions. Dave, a lot of fanfare this morning on CNBC regarding your meeting with Donald Trump. He obviously highlighted tearing down regulation, improving the tax outlook, and also obviously a focus was on price. Does, after this meeting, President Trump understand the level of discount that's going on within DoD, VA, that Medicaid is getting products for free, Medicare Part D hasn't broken the budget? What would happen under ACA if it goes away, the greater than $100 billion that the industry's contributing out of its SG&A line as a tax, would that go away? Second question, you did put out a release early on reorganization, obviously cut one head to streamline decision-making, but there seemed to be a greater emphasis on China, especially in light of you having run the operations there.
Will you be changing any of your reporting going forward?
Questions, Dave, both those are for you.
Sure, yeah. Thank you, John. Yeah, we had a good meeting with the President this morning. It was a broad-ranging discussion. He touched on several of the issues there in your question, in terms of innovation. The President was very interested in understanding how our business works and what the opportunities are to further grow the American innovative engine in the biopharmaceutical industry. Of course, we talked about taxes and how that could be a positive catalyst for more investment and growth in the U.S. industry. We talked about regulation. I think he made some comments on camera about that. He's interested in finding ways to reduce and streamline regulation, both at the FDA side, but also in healthcare markets that the government plays a role in. Then, of course, we did speak about pricing.
On that last point, I think we all understand the concern he's raising, and of course, others are, that consumer out-of-pocket costs seem to be growing and growing faster than other payers in the system, and how we can do a better job as an industry of getting discounts through to consumers, particularly those in high-deductible plans and government programs.
We did not get into elaborate policy detail in terms of the U.S. pricing environment, I think there'll be time for that later. I left the meeting with some confidence that the people who we'll be working with closely as legislation moves forward have a good grasp of those facts. Your second question was repeal of ACA and the taxes the industry pays. Of course, we haven't seen any specific legislation here. I think the industry said it was basically $100 billion over 10 years that would have been paid into cover ACA. That's both in terms of the unspecified fee and other concessions in the original 2009 package. I'd be reluctant here to get into specifics on that because we haven't seen the specifics on the repeal, or for that matter, any pay-fors in the replace.
We're preparing for all those scenarios and working closely with policymakers, as well as other parts of the industry on good policy that can promote consumer-driven choice and more broadly available medications in these uncovered populations or in the current ACA populations. Final question, I think, was on the reorganization. In the first week of the year, we did announce a reorganization which removed actually several senior management jobs, really to flatten the organization and make sure our executives are as close to the markets that matter and the launches that matter as we go ahead. That was a primary goal, was really to emphasize the importance of these new product uptakes and having our business unit presidents squarely focused on those and making sure that there's a clear line of sight to the customer for them.
We also want to improve our proximity to China, as you mentioned, particularly for drug development where we can do more, I think, to speed up our innovation into that market, which has an undeniable long-term opportunity for the sector. We also asked Enrique to take on a broader scope of responsibilities, including payer and so forth, hosting responsibilities for the major markets. That's already announced and rolling out, I think aligns clearly with our stated priorities.
Our next question is from the line of Mark Schoenebaum, Evercore. Please go ahead.
Hey, guys. Thanks for taking the question. First, thanks to Phil and the whole organization for helping out my team while I was gone. I really appreciate that. I'd like to ask one business question and one kind of science question, I suppose. The business question is Sanofi's biosimilar Humira. Can you just give us an idea of your expectations for market entry, timing of market entry, and what your plans are to mitigate that? I thought that would be helpful as that gets a little closer. Number two, I noticed you said on the call today, I think if I heard you right, you're halting the prodromal trials on solanezumab. That was interesting to me because I'd be curious, given that you guys are one of the smarter Alzheimer's companies, I'd be curious to know what your current thoughts are on the A-beta hypothesis.
Was the failure of solanezumab a failure of the molecule, and/or was it a failure of the A-beta hypothesis? Is A-beta behind Alzheimer's? With the halting of the prodromal trial, I assume you don't believe it was simply the patient population enrolled, but therefore that leaves molecule-specific issues and the hypothesis in general. I'd love to hear you talk on that. Thank you so much.
Thanks for the question, Mark. Dave, if you'd like to take the first one. I did get some feedback that there might have been a little bit of echoing, so we'll mute here in the room as you provide your response. Jan, if you'd like to lead off by answering the second question on our view of failure of solanezumab in the mild Alzheimer's population. Tony, feel free to complement his answer as well. Over to you, Dave. I think the question was related to biosimilar, I think Mark said Humira from Sanofi, but I'm not aware of a biosimilar Humira program at Sanofi.
Humulin. Humalog.
HUMALOG, yeah. Okay.
Sorry, my bad.
Yeah. Maybe Enrique can handle that one.
We, of course, are prepared for that event. We have, in a certain way, the fortune of launching a biosimilar glargine in Europe and now a follow on insulin glargine in the U.S. That's great preparation in itself because now we're going to be on the other side of that. We are thinking how to best ensure that HUMALOG can continue to be an extremely strong franchise for Lilly. I won't discuss our specific plans, but I would say that we're very well prepared.
Great. Thanks, Enrique. Jan?
Well, the amyloid beta hypothesis and the connection to Alzheimer's disease has a strong evidence from genetics where if you have too much amyloid in your brain, you get early Alzheimer's disease, and also the opposite. If you have less amyloid beta production than by mutations in the APP in the BACE1 cleavage site, you also seems to be protected from dementia. How do you translate then these genetics into realities of pharmacological treatment in an aged patient? Here there are a variety of approaches that have been used. It's also a key one here to think about.
If you have an antibody with access to brain 0.1% through the blood-brain barrier, how can you compare that result then to, for instance, an oral BACE inhibitor, which some of them go 100% into the brain and are, I think, more likely to have a marked effect than on the free amyloid beta.
The question is clearly then, how early do you have to treat? I think we should recognize that even if you have mild Alzheimer's disease, your brain has been accumulating amyloids for decades, and you almost have maximum amyloid in your brain already. I think there could be two components here. Like I say, did solanezumab really enter the brain enough to affect amyloid beta? I think our biomarkers like amyloid PET didn't really change very much by solanezumab, nor did the actually tau then changes, which are more related to neurodegeneration change. From that standpoint, we didn't see any objective measures, I think, that we changed the amyloid content in the brain nor then neurodegeneration. Is this against or does this prove that the amyloid hypothesis is wrong? My view is it's too early to say. We need to wait for even more powerful agents.
The next in turn are the oral BACE inhibitors, which are more likely, I think, to have an even stronger effect on the amyloid-beta in the brain. In addition then, we need to look at the earlier stages of Alzheimer's.
Thank you.
Anything to add?
Yes, Mark. I think our view on the prodromal trial is that when we saw the results of EXPEDITION3 in the patients with mild Alzheimer's disease, which of course were disappointing, when we look at the patients with prodromal, these are not as distinct clinical divisions as you might think. There's a great deal of overlap between these two populations, and we felt within any given visit, a patient could be on one side of that or another. We felt as if that hypothesis had been tested, that those patients were close enough that the prodromal trial would be unlikely to be successful. As you point out, and as per Jan's remarks, there are three differences, three potential variables here. There's the clinical stage we just talked about. There's the overall A-beta hypothesis itself, then there's molecule-specific aspects as well.
Those are the three sliders on the equation that we need to try to figure out.
Thanks so much.
Kevin, if we can go to the next caller, please.
Next is from the line of Tony Butler, Guggenheim. Please go ahead.
Yes, thanks very much. A single question though for Derica. It relates to gross margins, Derica. Certainly as the seven newer products that you call out have made an increasing contribution, as you noted, 12% in the quarter to overall revenue, one might expect gross margins to be able to move higher. I guess I'd love for you to comment on the pushes and pulls there, and more importantly, how you think about that as that contribution exceeds 12%, certainly for the calendar year, even beyond 2017. Thanks very much.
Sure. The good news is there's no substitute for top-line growth. Having the 7% revenue growth or in the quarter, the new products driving almost nine percentage points of volume-driven growth is tremendous, and really the kudos goes to the team in pulling that off. When you get to the gross margin percent, you did not see the improvement you may have been expecting. That's really driven more by mix. In the quarter, you did see as, for example, on our insulin business, where you'll see as it gets more weight and we have negative pricing in that regime, that becomes a drag on our gross margin percent. For now, insulin still is our largest product until the other new products catch up. What you really saw in the quarter was more of a mix effect.
Thank you, Derica.
Kevin, if we can go to the next caller, please.
Okay, our next question's from the line of Chris Schott, J.P. Morgan. Please go ahead.
Great. Thanks very much. Just two questions here. First, can you talk about business development priorities? You recently announced an interesting but relatively small deal, but bigger picture, a question for Dave. When you think about how Lilly has historically approached business development, should we think about a similar approach under your leadership, or are there any differences in how you're thinking about business development, relative to your predecessor? Second question was coming back to Alzheimer's and BACE. How are you thinking about your BACE program and your molecule relative to Merck's program? Are there any important similarities or differences we should keep in mind as we consider potential read-across from the Merck phase III data later this year? Thanks so much.
Questions. Dave, if you'll answer the question on BD priorities. Feel free, since you're obviously very aware of this space, to make an initial comment on the AstraZeneca BACE program we have and the other BACEs that we're developing and relative to the Merck program. Jan or Tony, feel free to chime in as well. Dave?
Sure. Thanks, Chris. In terms of business development, I don't see a change in our general approach, which is what we've said for a while, which is we see value in deploying capital on business development where we can really complement our core therapeutic areas, where we're looking at acquisitions or licensing transactions that can bring products into the portfolio to drive growth for the future.
To do that with a lot of discipline on value. That's what I think we've been saying for years. I do think as we enter this phase coming up where in our therapeutic areas, there appear to be attractive alternatives for investment outside the company as well as inside. We've got a key period to make decisions on advancing assets into phase III over the next year and a half or so, as Derica had mentioned. We need to look at both sources of innovation, and we'll do that. The CoLucid transaction, which is one we just announced, I think is a good example of that.
I think the rate may be different based on our circumstance as we're growing the company and have perhaps more opportunities to move assets into phase II and phase III, but the criteria really isn't different from how we've thought about this in the past. On the Alzheimer's BACE inhibitors, I think we've talked about this for a while, but the Merck program has two distinct studies. The first one is kind of a classic first-generation type design in the sense that they have a mixed, mild, and moderate population and no requirement to have amyloid present to be in the study. We know from prior studies like this, whether it be Lilly or other sponsors, you can end up with 20%-30% of the patients who actually don't have Alzheimer's disease.
In addition, for the reasons Jan mentioned earlier, later probably not better in terms of effect size. The Lilly program with AstraZeneca and the later Merck program have those features built in. We have two studies with AstraZeneca. If Merck, I think, has a positive signal of any sort, I think we'd feel good about that in terms of BACE inhibitors as a target. If there's no signal, I think we'll have to do some thinking. That's kind of how we are looking at that upcoming readout. Maybe Tony or Jan could add to that.
No, I don't have anything additional. I think you highlighted the differences between them. We have two studies. The lead study has both patients with MCI and prodromal and mild Alzheimer's disease, the earlier phases in them. The second study that we entered phase III on are patients with mild Alzheimer's disease. In every case, we have verified the amyloid going forward. We have a single endpoint, which is a cognition endpoint, which also differs from the Merck program. They have more of a classic, as Dave says, dual or co-primary endpoint for the first study, then they've announced that the primary is the CDR Sum of Boxes for the second study.
If I may add then, both the Merck and the AstraZeneca BACE are not selective for the BACE1 versus the BACE2 enzyme. We have two other BACE compounds also in clinical development. In phase II, we have our so-called BACE1 inhibitor, which is low dose. It's a highly potent 100% brain penetration, which means that you have less peripheral overexposure in a way than to get the brain effect and potentially functionally less active on BACE2. We recently then also entered for the first time, I think now, a selective BACE1 inhibitor into clinical development. That agent then avoids depigmentation, which you see then in experimental animals during tox studies.
Great. Thanks, Jan.
kevin, if we can go to the next caller, please.
Next is from the line of Andrew Baum, Citi. Please go ahead.
Hi. A couple of questions, please. Would you care to characterize the magnitude of financial impact from potential dual-eligible reform? Alternatively, provide us the delta in percentage terms between net prices for Medicare and Medicaid. Second, you recently recruited Levi Garraway and Christi Shaw within R&D and SG&A respectively. Could you outline what their mandates are, particularly in relation to building your immuno-oncology franchise, which obviously is not where ideally you would like it? Many thanks.
Andrew, thank you for the questions. Dave, we'll just take that second one first. Do you want us to answer here in the room the question on the dual eligibles?
Yeah, that makes sense. Andrew, thanks for the question. We have brought in two senior executives recently. We're excited by both their willingness and excitement to join the company, but also what they can add probably in the very short term. Levi is joining Susan Mahony's team, really taking the role that Richard Gaynor had. He's got all the clinical phase oncology portfolio and obviously brings a great skill set to do that. I think in terms of immuno-oncology, he's got expertise in that field, among other fields of oncology, and it's probably difficult to say too much about what we hope he'll do. I think clearly it's a competitive field, and having a new look at what we're doing, how we combine products, how we could potentially accelerate our efforts in certain areas is something that we're hoping Levi can help us with.
Kristi is a commercial person. She started her career at Lilly, most recently ran Novartis' U.S. business. She's coming into the job I was in, which is a go-to-market and drug development job at running Lilly Bio-Medicines. I think she's a strong, diverse talent that I think is really an industry veteran who understands the U.S. market extremely well.
To pull her onto the team. We made that move, and I think it's going to be great to have her. She starts April 1, so you'll start to see her on the road there in Q2.
Great. Thank you, Dave. Andrew?
In regards to your question regarding the dual eligibles, the best way that I could probably characterize that is that the impact of that would be on the order of magnitude on the industry of the Affordable Care Act, is how you should be thinking about it.
Yeah. It's been a few years, Andrew, probably four or so years ago, I think the Congressional Budget Office had estimated the cost of moving dual eligible and low-income subsidy folks from the Medicare price into Medicaid. They had estimated that about $110 billion, $115 billion cost to the industry over a 10-year period, very similar to what the expected cost is of the ACA. We have not said if the Lilly exposure to that kind of a proposal would be greater or lesser than what the ACA cost is, we have said in the past that the ACA 2011 through 2015 was running on the order of magnitude of $500 million to $550 million a year on average as far as the cost to Lilly to create a rebate as well as the pharma. If that helps at least give you some order of magnitude.
Kevin, if we can go to the next caller, please.
Yes, that's Gregg Gilbert, Deutsche Bank. Please go ahead.
Thanks. First for Enrique. In the past, Enrique, you flagged a concern about SGLT2 new patient starts slowing. What are your latest thoughts on that subject now that you have the label and the updated guidelines? Perhaps you can give some color beyond just the scripts. Then my second question is for Jeff. Can you give us some flavor around your outlook for the key parts of your business for 2017 and what some of the pros and cons were in the fourth quarter? Thanks.
I'll go to you and then go to Jeff.
We are clearly very excited about the new label for Jardiance in the U.S. and the new treatment guidelines for type 2 diabetes published by the ADA. We've launched now this new indication in early January, and we are thinking, I'll be honest, pretty big about the opportunity that we have in front of us given the indication that we have. For us to be successful, the class has to grow, or more specifically, Jardiance has to grow. We think of that not just as we think about what is the Jardiance share in the SGLT2 class, but what is the overall share that Jardiance could get when we think about people with type 2 diabetes, and in particular in the segment where Jardiance is indicated for cardiovascular risk reduction, which is in people with type 2 diabetes and established cardiovascular diseases.
You can imagine that is as much as 30% of people with type 2 diabetes. A very significant opportunity. It is too early to comment given that we have basically the first week of scripts, which is the first week that basically we launched the product. I expect that we will see the uptick, and we will see this in terms of new patient starts right away.
Thank you. Dave?
Jeff?
Greg, on the animal health business, as you know, in Q4, Elanco revenue increased 4%. We saw the growth start to come back. This was driven by companion animal growth from new product launches primarily, also I think some expanded partnerships and distributors around the globe as we continue to increase our footprint. Operating margins also, I would state, expanded to 24% in Q4. That's in comparison to 19% a year ago. We continue to make progress on integrating our recent acquisitions, and we anticipate further improvement as we go into 2017. As you look at our strategic agenda, I think a few key things in 2017. First, the completion of the BI acquisition. It's integrated. We're taking orders. The teams have all been trained. We'll see 6% growth come from that in 2017.
As Dave mentioned, we launched GALLIPRANT in the U.S. in coordination with Aratana. This will expand our portfolio in companion animal therapeutics. We'll continue to see our base business expand through innovation, even on the food animal side, as well as just execution and bringing the value of the capabilities that we've gotten from the acquisitions through. Some of the external factors we see moderating and stabilizing as you look at Latin America and dairy. In summary, I would say our margin improvement will expand to that mid-20s as we've mentioned and look to see our growth will return to grow in our base business to the mid-single digits, mostly in the second half of the year. Then again, have the BI acquisition growth come through as well.
Thanks.
Great. Thank you, Jeff. Kevin, if we can go to the next caller, please.
Next question is David Risinger, Morgan Stanley. Please go ahead. Your line is open, sir.
Great. Thanks. Sorry. I had you on mute there. I have two questions. First, Dave, if you could comment on how the meeting with President Trump concluded and next steps we should expect from the administration. Then second, I was hoping a member of the team could comment on the abemaciclib phase III readout timings ahead. Thank you.
Great, Dave. Thank you for the questions. Dave Ricks, if you'll answer the first part of Dave Risinger's question. Absolutely, we have Susan Mahony here who can address your second question, Dave.
Yeah, thanks, Dave.
As I said earlier, we had a positive and broad-ranging discussion, and I was impressed with the President's appreciation for what our industry is, which is really a crown jewel of American enterprise in the sense we invent things, we can change lives in terms of healthcare outcomes, but also are a great employer and source of economic growth, jobs, and exports. We touched on lots of things, tax, regulation, as well as the healthcare repeal/replace discussion. There's a number of follow-ups that were cited that'll be happening through staff and then on the Hill with key members of Congress. The specifics on timing and so forth, I'm not at liberty to share here, but I was encouraged overall by the sense, A, that there will be changes made, likely rapidly.
Most of those will involve the legislative branch, and that there will be follow-up with the White House to make sure we're making progress as we go along. There's not too many specifics I can share in terms of exact timing. Just overall, I think it was productive to engage the President, educational for both sides, and I think we can go forward and really look at enacting policies that can both help the industry, but also healthcare in the United States.
Great. Su?
Yeah, sure. With regards to abemaciclib readouts, we're anticipating getting the MONARCH 2 data and having that readout the first half of this year. With regards to, and that's the fulvestrant study, the MONARCH 3 phase III, we should have an interim the first half of this year. Our base plan, as we've said previously, is that we would continue through to the final, which we could see the end of this year.
Thank you, Sue Mahony. Kevin, if we can go to the next caller, please.
Next caller, Jami Rubin, Goldman Sachs. Please go ahead.
Thank you. A question for you, Dave Ricks. Do you see the opportunity to improve the company's operating margin goals? I think that, if memory serves me right, three, four years ago, you really set out a goal to achieve SG&A and R&D at 50% or lower. Again, that was set up three, four years ago, maybe even longer. I'm just wondering if you see opportunities to either update that goal you set for 2018, or where you see it going. The reason why I bring it up is, yes, you had a real high-quality quarter this quarter, but you could've massively beat as expenses came in line, even at the midpoint of your guidance, both SG&A and R&D were at the very top of your guidance. For the full year, your operating margins were 21.7%. I think that is the absolute bottom of the industry.
Can you talk about with your, driven by your new pipeline, the sort of magnitude of potential improvement that you see for operating margins? Are there structural impediments such as mix effects that will keep margins below industry average? How should we think about it over the next three to five years? Thanks.
Okay. Thanks, Jami Rubin. Over to you, Dave Ricks.
Sure. Thanks, Jami Rubin. Great question, one we're spending a lot of time on as well. Of course, right now, we're working against the prior goal you cited, which is to get our SG&A and R&D total operating expenses as percent of sales to 50% or less in 2018. That's the near-term goal we're very focused on. We've reiterated that again in December. That's obviously an improvement over where we are today and what we're reporting for 2016. I would highlight, although we're at the high end of the ranges in terms of our guidance for the quarter on expenses for R&D and SG&A year-over-year, good progress in Q4, we did have some one-time items in Q4 which adversely affected that.
I think my overall perspective on this question is that we have multiple ways to improve the operating margins of the company. As we launch new brands and grow the top line, that's clearly one. I think if we can really repurpose investment behind those priorities and maintain a lower growth rate, in some cases, much lower growth rate in the middle of the income statement, we can deliver tremendous leverage on the bottom line. I mean, you can see that in Q4, putting aside the street estimates, what kind of leverage is available in the business. We're aware of where we stand in the industry. I think we're not a single-product company or close to it like some of the comparables, even approaching our size. That breadth, I think, does have an inefficiency built into it. It has other advantages.
We run a global operation. We want to be a global company, not just a multi-market company. That has an implication. By and large, I think your question is can we improve beyond what we've set out in 2018? I'm personally focused on delivering on the 2018 commitment, and then we'll likely set a goal beyond that for improved operating margins toward the balance of the decade.
Thank you.
anything?
Sure. Jami, this is Derica. Just to maybe add a little bit of color to Dave's comments. Recall that the guidance that we provided said we'd get to 50% by 2018. We also, on that same guidance, going back to last summer in our July earnings call, we said that we would improve our gross margins between then and the end of this decade. Our starting point was around the mid-70s for gross margin. That implies that at least at a minimum, by 2018, our operating margins will be at least 25% or greater. If OpEx is 50% of our revenue line. Today, our gross margins around 75%, or said differently, our COGS is around 25%.
If we get to 50%, we maintain or improve on the 25%, that implies that the floor and operating margin you should be looking at in 2018 is a minimum of 25%. Dave's point is that's where we said we will get to by 2018. We've never said that we will end there, that that was the end goal. That was the intermediate goal. There's still progress to be made.
Thanks, Jami, for the question. Kevin, if you can go to the next caller, please.
That's Tim Anderson, Bernstein. Please go ahead.
Well, thank you. A couple of questions. One is a higher level payer question. Do you think that the relationship between drug companies and PBMs will come under more government scrutiny as it relates to rebates? Kind of a thought exercise, from your perspective, would it be good or bad for drug companies to have that whole rebate process potentially go away? Second question is on ALIMTA. You noted that that is the chemotherapy drug being used in KEYNOTE-189. How does the trajectory of ALIMTA change from where it is today if that trial is positive, or if the Merck regimen gets early approval in May on the phase II data they filed on? What does your 2017 guidance assume? Could there be upside in 2017 and also beyond 2017?
Thank you for the question. Dave, if you'd like to take the first question that we received on scrutiny of the relationship and the business relationship with PBMs and pharma companies, then over to Sue with a question on ALIMTA in combination with KEYTRUDA.
Sure. Thanks, Tim. I think a lot is written about that question. To be honest, we have good relationships with all the major PBMs. Of course, it's a business transaction, and we're on opposite sides of the table. They do their job very well. They negotiate hard for rebates and discounts for their customers, most of which are large commercial plans or Part D. We do our job, which is to sell the value and try to maintain formulary position. There's always tugs and pulls in that, and products are listed and de-listed. Overall, I'd say we have a good relationship with the PBMs. Of course, there's only one major pure play PBM at this point.
Express Scripts and Lilly have a good relationship, and we announced this Blink Health partnership as an example of that, innovating together to try to solve some of the payment problems. I think hypothetically, if we didn't have rebates, would I worry long-term about our future? My answer is no. I think we're in the business of making innovative products that help patients. We need to do that in a way that creates value in the healthcare system. How we get paid for that value, there's probably lots of ways. As you know, in international markets, many places where we have productive and profitable businesses, we don't have PBMs or anything like it, we don't have rebates, we do just fine.
I think because of the breadth of our portfolio, because of our new product mix, because of the company's focus on volume growth across several key markets, I think as Derica has said in his comments, we have a durable strategy going forward should there be some big disruption, which I'm not sure I see right now. I think on either side of that, our model would work well. Enrique can add anything to that, maybe the ALIMTA question to Sue.
Enrique, or?
No, nothing on that side as well.
Sue, on ALIMTA?
Tim, let me answer the ALIMTA question. Clearly, we can't give guidance with regards to a product. That said, we are very pleased to see the data from KEYNOTE-021G, and also the fact that the FDA have accepted this for filing with the PDUFA date, as you know, in May. We're also looking forward to the phase III data, which again, we should see that in September time. I think, with regards to what this means for ALIMTA's been under pressure, particularly in the second-line setting, with IOs coming through in the first-line setting very little at this point.
This data is the first data that shows that adding an IO agent to ALIMTA carbo combination shows not only a good overall response rate, which I think we saw a doubling response rate PFS of about 30 months, but also although the survival data wasn't different between the two arms, we saw pretty good survival both at the 12-month and the 24-month mark, which I think it was a 72% versus the 75% of patients survive at that point. I think, we're excited by the data, and it is the first chemo combo, and I would say the only chemo combo with KEYTRUDA, or any IO agent. We await to see what the other data shows this year with the other trials that have got ongoing, and maybe next year too, with the IO combos and the chemo combos.
Clearly this, in my view, can do no harm to how people see ALIMTA. It is the standard of care in first-line setting, We continue to see that this is additional data that adds to the multiple trials that we've seen with improved overall survival with ALIMTA.
Great. Thank you, Sue. Kevin, we can go to the next caller.
That's Steve Scala of Cowen. Please go ahead.
Thank you. I have two questions. Can you provide any perspective on the reasons for the delay in the baricitinib PDUFA? That's the first question. The second question is, what should we conclude about Lilly's 2017 guidance in light of the fact that I believe Lilly has exceeded the top end of the initial EPS guidance range in each of the last six years? Thank you.
All right, Steve, thank you for your question. We'll go to Tony Ware for the first question on the baricitinib NDA review here in the U.S., and then over to Derica for your second question on guidance. Tony?
Thanks, Steve. In any regulatory review, the FDA submits various information requests, we respond to those as well as we can. The FDA makes a determination once they receive any of these information requests as to whether the additional analyses that we have provided, and that's what they are is new analyses of the data that they already have, are sufficiently complicated so that it would extend the time that they would require to review the application. That determination's made entirely by them, and we don't have much insight into the rationale for that. I want to point out that they did not ask us to do more studies, which is an important point. That's about really all I can say definitively.
I would point out, of course, that this application in the wide world of applications that we send to them, it would be on the more complex side. It's five phase III studies. There are different endpoints, different patient populations, different comparators, and different doses in some cases about that. The fact that it would take them a little longer to take a look at this medicine than some of the other applications, I think shouldn't be too surprising. I'm optimistic that we will get to a good place with the FDA, and that we will be able to meet the new date in April.
Great. Thank you, Tony. Derica?
Regarding your question pertaining to guidance, having been in this job for a while, it's been a wonderful ride. If you look at the last few years, we have exceeded our guidance in some of those years. In 2016, we actually came in on the lower end of our guidance, if you think about the range that we provided. It's not always true that we've exceeded. When I think about 2016 performance, what we really are encouraged by, and I am, is the way we ended the year with very strong revenue performance. Driving eight or almost nine full percentage points of growth from our new product launches is very much living up to the expectation that we had set when we provided our outlook for the YZ period.
Having achieved that, it does give us opportunities, as Jami was saying in her earlier questions, to work on the middle of the income statement to improve our margins. Given the way that we finished the year, I'm highly encouraged about our prospects for 2017. I think our guidance is very reasonable. I think our ability to achieve the range of 405 to 415 in EPS is very much within our grasp, and it implies that we're going to take those top-line trends, and we're going to translate that into about 300 basis points of OpEx through sales ratio improvement. That's what we're going to be focused on, and I think Dave summed it up well when we were all out at the J.P. Morgan conference together.
Launch with excellence, improve our margins through productivity, you'll continue to hear us talking about in 2017 as well is how we're advancing our pipeline. That is something I want to make sure we don't lose sight of because that's what long term continues to make this engine grow.
Thanks, Derica. Kevin, next caller, please.
Next is Seamus Fernandez, Leerink. Please go ahead.
Great. Thanks for the question. Just a couple here. For Enrique, can you talk a little bit about the opportunity to continue to expand your margins within the Lilly Diabetes business, particularly in the wake of or in the midst of the arms race pullback that you're seeing from competitors with regard to the field force? I think on your update conference call on the promotional efficiency of the business, you stated that no additional sales reps had been added despite the significant increase in the number of products in the portfolio. Just wondering if you see more opportunity as you continue to grow that business for additional leverage. The second question is more broadly for Dave and maybe to some degree, Enrique, given your new role.
Can you guys talk a little bit about the willingness to utilize your relationships with managed care, particularly in areas like IL-17 and with the TALTZ portfolio? Is now the right time to start to work those relationships or accelerate them? Do you see similar opportunities for those types of interactions on the Lilly Oncology side of the business? Just one final question. Dave, can you just give us a general sense of how you're thinking about business development on a go-forward basis? Do you see it more as partnerships or do you see it more as outright acquisitions?
I ask that question more in the wake of the decision to walk away from the partnership with Adocia, which again certainly was a surprise to that company who was a partner, and we've seen some questions raised with regard to how the partnerships have been executed in the past. It would be nice to know how you guys are thinking about the business development strategy going forward. Thanks.
Exactly, Seamus, the middle question you had about leveraging the relationships with the payers on TALTZ or oncology. Can you be a little more specific-
Yeah
on what you're looking for there?
Just a willingness to basically, whether you'd be willing to go to exclusive formulary access or utilize more aggressive discounting despite what are areas of strong potential growth for the industry and for the company in order to participate in that growth earlier.
Okay. Thank you for the clarification. Enrique, we'll lead off with the ability to expand margins in diabetes. Dave, then, if you'd like to comment on the second question on leveraging the relationship and how that might evolve with the payer group and your BD priorities, then we'll come back into the room. Sue, if there's anything you want to add to that middle question on the oncology front, please do so. Enrique?
Sure. We are indeed seeing a very significant opportunity to continue to leverage the income statement when it comes to diabetes. We have a very strong sales growth, which is driven by volume. As we have mentioned in the past, we're getting now some of the benefits from our technical agenda when it comes to diabetes on the manufacturing side. As we said, that is for us, is several percentage points worth of benefit that we are getting, and those benefits continue to accrue, and growth margins continue to improve. Finally, when it comes to SG&A, we are basically able to, with the commercial footprint that we have, support the broad range of products, including all of the products that we have recently launched. We do believe we have the right infrastructure to support continued growth without us having to add additional commercial infrastructure.
When we look at the number of people out there, we are a little bit below some of our competitors when it comes to diabetes, even post some of the reductions that we've seen from them. At the end of the day, we have to do what works for us, and I think the numbers speak by themselves, not only very good revenue growth, but we are basically gaining share across all of our products in all of the key geographies. It is a pretty good run that we're having right now.
Great. Thank you, Enrique. Dave?
Hi, Seamus. Well, first of all, in terms of specialty markets and leveraging our U.S. managed care presence, we have a great team. We've got strong relationships, not just with PBMs, but with other managed care entities. I think as a broad-based pharmaceutical company, it's an advantage when we're entering new spaces because we already have that payer connection. Both for immunology and oral oncology, that base will serve us well. Maybe Sue can add about abemaciclib, should we have positive data and be able to submit. But I think that's a strength of the company. Maybe what you're really asking is will we leverage the portfolio to drive more exclusive formulary coverage? I would just say, in general, that's not our aim.
I think we want to compete with as much open access as possible in as many classes as we can, because as someone launching new products, that's a policy position that makes sense for us. Of course, we have incumbent products too, but all things equal, we would prefer patients have access to as many brands as possible, and we compete based on the differentiation of our products. That's more or less what we try to do across the whole of the portfolio. On BD, I'm not exactly sure what you're getting at there. As I said earlier, it will be an important part of what we need to do going ahead to build out the portfolio and keep upgrading value within the portfolio, whether that be through licensing or M&A. We have a number of very successful licensing arrangements ongoing and in the past.
To name a few, of course, the Boehringer Ingelheim arrangement, Pfizer on tanezumab, AstraZeneca on BACE, even the partnering we've done with major oncology firms in terms of combination development with some of our assets. I think are all examples of Lilly's open for business on partnerships. There are some specifics around the ultra-rapid insulin, which I won't go into here, but I think all partnerships require a shared sense of what the future needs to look like, as well as a compelling profile of a product. When we have those things, we've done very well. If you have information to the contrary, I'd love to hear from you about it. Partnering will be a key part of what we do along with sort of that smaller M&A space, as I discussed, and I think it's actually a strength of the company.
Thank you. Comments on oncology from Sue?
No, I would just say it's the same as what Dave said. We'll compete based on the differentiation of the product, and clearly what the data tells us will help us to better understand what levers we pull across the whole of the marketing mix.
Thank you, Susan. Kevin, next caller, please.
Next is Marc Goodman, UBS. Please go ahead.
Hi. First question is, you had mentioned that there was a $130 million adjustment, mostly HUMALOG. Can you just tell us what was the actual number for HUMALOG, and what were the other products that were impacted? Then second, help us understand just the way that the revenues. I understand the partnership with BI, but you have Jardiance and Tradjenta. I'm just looking at the way that the U.S. numbers have progressed throughout the year. They seem to be bouncing around. Just give us a sense in the fourth quarter versus the third quarter, was there anything unusual going on? Was there any stockings? Jardiance really ramped up a lot. You see Tradjenta coming down a lot. Probably much more than what trends would tell you on script trends. Just maybe you can just help us understand some of the dynamics there. Thanks.
Okay, thank you for the questions, Mark. We'll go to Derica for your first question, and then over to Enrique. Derica?
Hi, Mark. You're correct. We did have a $130 million gross net benefit in the fourth quarter. We've said is that a good portion, sizable portion of that is attributable to Trulicity, we have not provided the absolute numbers behind it or any of the other products affected.
Enrique?
Sure. When it comes to Jardiance and Tradjenta revenue in the U.S., we do see numbers in the diabetes category move a bit based on the estimates for rebates and discounts. This is not just an item for Lilly, it's an item for any company in the diabetes space, given the sizable rebates that are paid to payers. In this particular case, it is Boehringer Ingelheim that basically does the contracting and the estimation. In the case of Jardiance, we saw a slight benefit in the fourth quarter. In the case of Tradjenta, we basically saw a negative impact in the fourth quarter. The negative impact probably closer, in terms of Lilly revenue, nearly probably $20 million. We expect to see that type of volatility when it comes to the diabetes product.
What we'll try to look at is really longer term, what are some of the trends that we basically see from a volume perspective and also from a pricing perspective.
Great. Thank you. Kevin, if we can go to the next caller.
Next is Jeff Meacham, Barclays. Please go ahead.
Afternoon, everyone. Thanks for the question. For Dave, another policy question. Was there any discussion today in your meeting with President Trump on the role of PBMs and the role they play in the pricing equation? Do you feel like this could be a bigger part of the drug pricing conversation going forward? On the galcanezumab phase III, some data from your competitors, namely Amgen, when you look at that, what would you think is the line for a clinically meaningful benefit? Finally, with the CoLucid deal, you'll have a range of products. What do you think in this space, more broadly, is still fertile ground for innovation? Thank you.
Great, Jeff. Thank you for the questions. Dave, obviously the first one we'll pass over to you, feel free if you want to comment on either of the following two, both Tony probably and Jan may be able to add some color here in the room as well. Dave?
Yeah, thanks. Thanks, Jeff. In terms of PBM specifically, that wasn't a centerpiece of the discussion with the president. Of course, PhRMA recently put out some work just to put some facts into the picture in terms of what the total drug spend is in the nation and how much of that is innovative, generic, or going into the channel, if you will. I think it's available on their website if you want to look at it. That was referenced in the meeting. I think it always does surprise people that fully a third of spending in the U.S. is not going to manufacturers, but going to other entities. I think the president was interested in that. Mostly we discussed how to get value to consumers who, particularly in the ACA plans or in high-deductible plans, have limited formularies.
They think they bought insurance and they have limited coverage or are paying a lot of out-of-pocket costs and how to address that situation. PBMs themselves weren't mentioned specifically, we did discuss sort of channel partners broadly, but more as an educational point. In terms of CoLucid, I'll start there. Obviously, that fits in well with our existing interest in pain and migraine specifically. It is an abortive treatment, so people take that when they're experiencing or about to experience a headache. I think it has the key benefits of potentially being labeled for use in patients who have cardiovascular risk factors, which is a major issue with triptans, the major class in that setting, and will fit hand in glove with our promotional, commercial, and medical efforts, even future clinical efforts with our potential antibody galcanezumab for preventing migraine.
I guess the question on effect size, I can defer to Tony on that in terms of what we hope to see vis-à-vis Amgen.
Hi. Regarding the CoLucid or the lasmiditan, we're encouraged by this as a novel mechanism. There hasn't been a new mechanism to really stop a migraine that's ongoing for many years now. Nearly 7 million people in the United States take a prescription medicine for that, and a lot of them don't get better, and as Dave points out, a lot of them could potentially benefit if they didn't have cardiovascular disease. In fact, there was a recent survey by the American Headache Society said 22% of the patients currently taking triptans actually have what would be considered a cardiovascular contraindication. I'm sure these aren't bad doctors. I'm sure it's patients that really are so desperate that they are willing to take the chance. We think that there's a lot of room for innovation for that.
Of course, with the novel mechanism, the phase III study that was carried out by CoLucid showed that many of those patients had already had a poor response to triptan, but nonetheless responded well when they received lasmiditan. We're encouraged, and we think that this is a significant innovation for this. For galcanezumab, if we look at our data for phase II, we're encouraged by the data that we've seen, and we hope to see the same thing for phase III. There we saw 70% of the patients had at least a 50% reduction in migraine days. We had nearly a third of the patient had no migraine days whatsoever, and these are patients, of course, that have, in some cases, dozens of migraines a month.
This is a big difference in terms of whether people can go to work or can take care of their kids, and a lot of meaningful benefits for this. If we end up in the sort of range that we saw in phase II, we'll be very pleased.
Great. Thank you, Tony. Kevin, we'll take one last caller before having Dave wrap up the call today.
That's from Richard Purkis, Piper Jaffray. Please go ahead.
Hi. Thanks for taking their question. Just given Trulicity's really strong performance, could Enrique and maybe Jan just run through thoughts on how they see the upcoming competition from Novo Nordisk semaglutide? How they view its retinopathy data and just hopes for the REWIND study.
Sure. Thank you for the question. Enrique, if you want to lead off, and Jan-
Sure. We are very excited about the growth of Trulicity. We're having a great sequential growth, both driven by the overall strength and the health of the GLP-1 class, but also because of the shared growth, with Trulicity. I was just reviewing our latest data, and Trulicity now nearly has a 36% new to brand share, in the GLP-1 class as of last week. It's a really outstanding performance by the team. Overall, for us, continued class growth is probably the most important factor. We're excited maybe I can provide some color because we recently started reaching additional prescribers as of late last year, basically in the last quarter. We've seen significant continued adoption by new prescribers. That basically speaks to continued growth as we look ahead for this product.
We do look at the competitive environment, and we do look at the semaglutide as a potential competitor in the near future. They do have good efficacy data and a number of trials, including a head-to-head against Trulicity. They also have reported an increase in retinopathy that was significant as part of one of their trials. We need to see at the end of the day what their full label will be. We are, of course, very prepared, but we really like our chances.
thoughts on the REWIND study and the timing for that?
Well, REWIND, we recently had an interim readout. We were basically told that the study will continue as planned, which basically means that we're looking at 2019 for the readout of the cardiovascular outcomes data for that study.
Great. Thank you, Enrique. We're almost at the top of the hour. Dave, we'll turn it over to you to close out today's call.
Thanks, Phil. We appreciate your participation in today's earnings call and your interest in Eli Lilly and Company. Driven by new product launches, Lilly is entering a new growth period. The combination of top-line growth and margin expansion over the balance of the decade provides a compelling thesis for investors. I look forward to keeping you informed of our progress, and please follow up with our IR team if you have questions we've not been able to address on today's call. Have a great day.
Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day.