Eli Lilly and Company (NYSE:LLY) Q4 2022 Earnings Call Transcript

Eli Lilly and Company (NYSE:LLY) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Lilly Q4 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session, and instructions will be given at that time. And as a reminder, today’s conference is being recorded. I would now like to turn the conference over to our host, Joe Fletcher, Senior Vice President of Investor Relations. Please go ahead.

Joe Fletcher: Thank you, Lois. Good morning, and thank you all for joining us for Eli Lilly and Company’s Q4 2022 Earnings Call. I’m Joe Fletcher. And joining me on today’s call are Dave Ricks, Lilly’s Chair and CEO; Anat Ashkenazi, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific and Medical Officer; Anne White, President of Lilly Neuroscience; Ilya Yuffa, President of Lilly International; Jake Van Naarden, CEO of Loxo at Lilly; Mike Mason, President of Lilly Diabetes; and Patrik Jonsson, President of Lilly Immunology and Lilly USA. We’re also joined by Mike Sprengnether, Kento Ueha and Lauren Zierke from the Investor Relations team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations.

Our actual results could differ materially due to several factors, including those listed on slide 3. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Forms 10-Q and 8-K filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It’s not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, please note that our commentary will focus on non-GAAP financial measures. And now, I’ll turn the call over to Dave.

Dave Ricks: Okay. Thanks, Joe. 2022 as a year of strong pipeline and commercial performance for Lilly. We delivered top and bottom line growth in 2022 despite the impact of the Alimta LOE in the US and significant FX headwinds and delivered another remarkable year of pipeline progress. We began 2023 with multiple updates to our late-stage pipeline. In our Q2 2022 earnings call last August, we announced the filing of submissions for two assets with the FDA under an accelerated approval pathway, pirtobrutinib in mantle cell lymphoma and donanemab in early symptomatic Alzheimer’s disease. Last month, we received response from the FDA on both these assets. On January 19, we announced that the FDA issued a complete response letter for accelerated approval of donanemab due to the limited number of patients with at least 12 months of drug exposure.

There were no other deficiencies cited. We will continue to work with the FDA to evaluate the best pathway to make this potential treatment option available to patients and look forward to results next quarter for the TRAILBLAZER-ALZ 2 Phase III confirmatory trial, which will form the basis of donanemab’s application for traditional approval. We have consistently stated that, we would expect very limited uptake before CMS supports coverage. At the time we submitted for accelerated approval, we had hoped that there would be more movement from CMS to provide access to these medicines for people with Alzheimer’s disease. Unfortunately, this has not yet materialized. We maintain conviction that given the impact of this devastating disease and significant unmet need, positive confirmatory data and FDA traditional approval should be sufficient to support global reimbursement and patient access necessary for broad use of donanemab over time.

Also in the month of January, we received FDA approval for Jaypirca, the first and only non-covalent BTK inhibitor, for adults with relapsed or refractory mantle cell lymphoma after at least two lines of systemic therapy, including a BTK inhibitor. Jaypirca is a highly selective kinase inhibitor, is novel reversible binding mechanism and pharmacology may allow for extended targeting of the BTK pathway, following treatment with a covalent BTK inhibitor. We are pleased with the recent approval of Jaypirca and we remain confident in the long-term opportunity for donanemab. We also look forward to the potential launch of two of our immunology assets later this year with mirikizumab and lebrikizumab and of tirzepatide for obesity. This current wave of new launches along with the ongoing focus and progress in our next wave of R&D innovation underpins our long-term outlook to drive top-tier revenue growth and expand our margins over time.

On slide 4 you can see the progress we’ve made on our strategic deliverables. Excluding revenue from COVID-19 antibodies, revenue on a constant currency basis grew 10% in Q4 and 5% for the full year. Volume in our core business, again, excluding COVID-19 antibodies, grew 13% in Q4 and 12% for the year. This volume-driven performance was attributed to our key growth products, which grew 21% last quarter. For pipeline milestones, in addition to the recent FDA approval of Jaypirca, we have shared several important updates since our Q3 earnings call. Positive Phase 3 readout and FDA and EMA acceptance of the regulatory submission for Jardiance for adults with chronic kidney disease, the initiation of a rolling submission in the US for tirzepatide in obesity, and FDA granting a Fast Track designation for tirzepatide in obstructive sleep apnea.

We also continue to put our cash flow to work to create long-term value. In late January, we announced plans to invest an additional $450 million for expansion of our Research Triangle Park manufacturing site in North Carolina, to further augment our manufacturing capacity for the years ahead. On the business development front, we closed the acquisition of Akouos to expand our gene therapy capability and we entered into a strategic research collaborations with a focus on new modalities and technologies. Finally, we continue to return capital to investors. In Q4 we distributed nearly $900 million to shareholders via the dividend and we announced a 15% increase to the dividend for the fifth consecutive year. Moving to slide 5, you’ll see a list of the key events since our Q3 earnings call, including several important regulatory, clinical, business development and ESG updates we are discussing today or that were discussed during our guidance call on December 13.

One item I’d like to highlight is the collaboration we announced in December with EVA Pharma to deliver a sustainable supply of affordable high-quality insulin to at least one million people living with diabetes in low to middle-income countries, most of which are in Africa. This is an important collaboration with a local company to produce low quality — or low-cost high-quality medicines. Strengthening capacity and building self-reliance for insulin manufacturing within the African region will provide a more sustainable supply in the long term. With this agreement, Lilly will sell insulin API to EVA Pharma at a significantly reduced price and provide pro-bono technology transfer to enable EVA to formulate fill and finish insulin vials and cartridges.

We’re proud to be a part of this novel arrangement, which aligns with our 30×30 goal of improving access to quality healthcare for 30 million people, living in limited resource settings annually by 2030. Now, I’ll turn the call over to Anat to review our Q4 and full year 2022 results.

Anat Ashkenazi: Thanks Dave. Slide 6 and 7 summarize financial performance in the fourth quarter and full year 2022. I’ll focus my comments on non-GAAP performance. As Dave mentioned, we’re pleased to report 10% growth for our core business in Q4 on a constant currency basis, driven by strong volume growth. A couple of notable items affected year-over-year comparisons. The first is COVID-19 antibody revenue in Q4 2022, which compared to the prior year declined 96% from approximately $1.1 billion in Q4 2021 to $38 million in Q4 2022. Biptimozumab is currently not authorized for emergency use in any US region and we continue to expect no COVID-19 antibody revenue for 2023. Second is the continued foreign exchange headwinds compared to 2021, which resulted in a 45-basis point dampening of revenue growth in Q4.

Key growth products grew by 21% and accounted for 70% of our revenue this quarter. For the full year 2022, revenue excluding revenue from COVID-19 antibodies grew 2% or 5% on a constant currency basis. Our non-GAAP gross margin was 80.5% in Q4, an increase of approximately 440 basis points, primarily driven by lower sales of COVID-19 antibodies, partially offset by lower realized price and increased expenses due to inflation and logistics costs. Total operating expenses declined 1% in Q4, lower acquired IPR&D and development milestone charges were largely offset by higher marketing, selling, and administrative expenses and higher R&D expenses. Marketing, selling, and administrative expenses increased 3% in Q4, primarily driven by costs supporting the launch of new products and indications, partially offset by the favorable impact of foreign exchange rates.

R&D expense for the quarter increased 5%, driven by higher development expenses for late-stage assets, partially offset by favorable impact of foreign exchange rates. Operating income declined 7% compared to Q4 2021, driven by lower revenue, partially offset by lower operating expenses. Operating margin for Q4 was 27.4%, which includes a negative impact of approximately 330 basis points attributed to acquired IPR&D and development milestone charges. Full year operating margin was 27.8% an increase from 26.8% in 2021. Our Q4 effective tax rate was 7.3%, bringing our full year 2022 effective tax rate to 10.3%. As we shared during our guidance call in December, we had assumed that the 2017 Tax Act provision for requiring capitalization, amortization of research, and development expenses for tax purposes would be deferred or repealed by Congress in late 2022.

However, no legislative action was taken related to this provision, which resulted in a lower effective tax rate for 2022 versus the guidance range previously shared. In addition this provision did increase our tax payments in 2022 by approximately $1.2 billion. At the bottom-line earnings per share declined 4% in Q4 and increased 7% for the full year. On slide eight, we quantify the effect of price rate and volume on revenue growth across key geographies. This quarter US revenue declined 10%. Excluding revenue from COVID-19 antibodies, revenue grew 11% in the US. The swap volume-driven growth was led by Verzenio, Mounjaro, and Jardiance. Net price was flat in the US this quarter. For the full year, the net price decrease of 3% in the US was in line with our expectation.

Moving to Europe. Revenue in Q4, increased 8% in constant currency driven primarily by volume growth for Jardiance Trulicity and Verzenio. We remain encouraged with the momentum of our business in Europe. In Japan, revenue in Q4 decreased 6% in constant currency. Revenue growth in Japan continues to be negatively impacted, albeit less so than in prior quarters by decreased demand for several products that have lost patent exclusivity including, the Alimta and Cymbalta. We expect to return to growth this year, as we scale key products and launch Mounjaro. In China, revenue grew 2% in constant currency, as continued volume growth was mostly offset by lower realized prices for Humalog, as a result of the volume-based procurement process and for products listed on the NRDL as well as by COVID-19 disruption.

Revenue in the Rest of the World increased 11% in constant currency this quarter, driven by approximately $130 million of onetime revenue associated with the sales of the company’s right to Alimta in Korea and Taiwan. As shown on Slide 9, our key growth products continue to drive robust worldwide volume growth, contributing 15% points of volume growth this quarter. As mentioned previously, the decline in COVID-19 antibody volume, was substantial in Q4 2022 and was largely offset — and largely offset volume growth from key products. While we will face similar prior period headwinds from COVID-19 antibody revenue through the first three quarters of 2023, our long-term growth prospects are underpinned by our innovative pipeline and key growth products including Mounjaro.

Slide 10, further highlights the contributions of our key growth products. This quarter these brands grew 21% or 27% in constant currency generated $5.1 billion in sales and made up 70% of our total revenue. While Lilly’s incretins portfolio understandably generates high interest, we continue to see tremendous growth both in percentage and absolute terms, for other key products including Verzenio and Jardiance. Verzenio sales in the quarter grew 100%, driven mainly by the edge of an indication. Jardiance sales grew 42% and the product retains the leadership position, in a competitive market globally. Demand for our incretins portfolio remains strong both for Trulicity globally and Mounjaro in the US, and we remain focused on bringing additional capacity online to meet this robust demand in upcoming launches.

In terms of supply, as mentioned in our guidance call in December, given strong demand for incretins products. There have been intermittent delays at wholesalers and pharmacies and receiving certain doses levels of Mounjaro and Trulicity in the US. We continue to update the FDA on the situation, and the FDA has been posting to his website details regarding affected doses and expected timing. To meet this rapidly growing demand across our incretins business, we have announced plans to add additional, substantial capacity in the years ahead. The most proximal of these efforts, is our RTP side North Carolina where progress continues as planned and we look forward to the start of production later this year. Moving to Slide 11. Mounjaro’s strong launch uptake continues, underpinned by differentiated efficacy profile, and positive customer experiences.

For Q4, approximately 75% of Mounjaro’s new therapy starts, are patients new to the type 2 diabetes injectable incretins class and further 10% of switches from Trulicity. As we mentioned in our Q3 earnings call in early November, we took actions in Q4 to reinforce the intended use of the Mounjaro savings program, by type 2 diabetes patients. We indicated at that time that these actions could negatively impact new prescription volumes, but were not expected to impact net revenue. As anticipated, we believe the new prescription volumes beginning in late November were impacted by these actions with some week-by-week volatility driven by end of year seasonality. We continue to build payer access for Mounjaro for type 2 diabetes. As of January 1st AXIS stands just over 50% for patients with type 2 diabetes across commercial and Part D.

Regarding the percentage of paid scripts. For Q4 we estimate the percentage of paid script from Mounjaro to be approximately 40% with paid script defined as those prescription outside the 25 non-covered co-pay cards, but inclusive of the 25 covered co-pay card. As we expand payer access, the proportion of paid scripts should continue to increase. On slide 12, we provide an update on capital allocation. In 2022, we invested $9.6 billion to drive future growth through a combination of R&D expenditures, business development outlays and capital investment. In addition, we returned approximately $3.5 billion to shareholders in dividends and repurchased $1.5 billion in stock. Our capital allocation priorities remain unchanged and are oriented towards achieving our strategic deliverables of top-tier revenue growth and speeding life changing medicines to patients.

We do this through investments in our current portfolio to drive new launches, investment in our manufacturing capacity in our future innovation through R&D and business development. And we returned capital to shareholders through dividend payments and share repurchases. Slide 13 provides an updated 2023 financial guidance. The only change we’ve made from the guidance we provided in December is to update our effective tax rate, which result in an updated EPS range. During December guidance call, we shared that the effective tax rate for 2023 would be approximately 16% based on the assumed deferral or repeal of the tax provision requiring capitalization of R&D. Since this provision was not deferred or repealed in 2022 and given the uncertainty around if and when such action will take place in 2023, we have updated our tax rate from 16% to approximately 13%.

This update to our effective tax rate results in new EPS range of $7.90 to $8.10 on a GAAP basis and $8.35 to $8.55 on a non-GAAP basis. Regarding FX rates there has been a general weakening of the dollar since we set our initial 2023 financial guidance last year. However, we’re not adjusting guidance for FX changes at this time as we’re only one month into the year and FX markets can be quite volatile. As I shared in December, the most significant headwind in revenue growth in 2023 versus 2022 will be the impact of COVID-19 antibody sales. This year-over-year comparisons will be most pronounced in Q1 2023 given that we had $1.5 billion of COVID-19 antibody sales in Q1 2022. To a lesser extent the loss of exclusivity of Alimta in the US in Q2 2022 will also impact year-over-year growth in the first half of 2023.

Still the midpoint of our 2023 revenue guidance range represents roughly 7% of growth or 50% growth for our core business excluding COVID-19 antibodies. This year holds tremendous promise for us to help patients as we execute on the current wave of potential launches while maintaining our commitment to invest in and progress future innovation. We expect this ongoing focus on disciplined execution and investment will help drive top two revenue growth through 2030. Now, I will turn the call over to Dan, to provide an update on our pipeline.

Dan Skovronsky: Thanks Anat. 2022 was a really productive year for Lilly R&Ds. We advanced our late-stage assets of tirzepatide, donanemab, pirtobrutinib, mirikizumab and lebrikizumab to key regulatory submissions and we obtained the approval for Mounjaro. We launched Mounjaro for type 2 diabetes in mid-2022. As Dave shared, we received an approval last week for pirtobrutinib now known as Jaypirca. By the end of this year, we also have the potential to launch two new immunology assets with mirikizumab and lebrikizumab. And for ganitumab, we’re looking forward to our Phase III readout mid-year, which if positive will form the basis of our submission for traditional approval. In 2022, we also gained clarity on the next wave of assets that have entered or will soon enter Phase III registrational trials.

Those are our SERD in breast cancer, our weekly insulin for diabetes, remternetug in Alzheimer’s disease and as shared in our December guidance call, we now have Orforglipron and Retatrutide in diabetes and obesity. Given the updates we provided in mid-December, today I’ll just briefly highlight progress since our last earnings call. Slide 14 shows select pipeline opportunities as of January 30th and slides 15 and 16, show a recap of 2022 key events and potential key events for 2023. Starting with diabetes and cardiometabolic disease, in November, we shared results from the EMPA-KIDNEY Phase III trial, in collaboration with Boehringer Ingelheim, as the largest and broadest SGLT2 inhibitor trial in CKD to-date. The results showed a significant benefit of Jardiance, in reducing the relative risk of kidney disease progression or cardiovascular death by 28% compared with placebo in people with chronic kidney disease.

The overall safety data were consistent with previous findings confirming the well-established safety profile of Jardiance. CKD is a leading cause of death worldwide, affecting over 850 million people globally and 37 million in the U.S. We’ve submitted to the FDA and EMA for approval and expect to make submissions to other regulatory agencies in the coming months. In January we started QWINT-1, a Phase III study comparing fixed dose escalation of Lilly’s weekly insulin to Insulin Glargine, in insulin-naive type 2 diabetes patients. With this initiation all five studies in the QWINT Phase III program are now underway. Moving to earlier stage assets in our Diabetes and CV pipeline, in Q4 we advanced two assets into Phase II, that aim to lower Lp(a), a well-known risk factor for atherosclerotic cardiovascular disease.

The first is an oral inhibitor, a small molecule that disrupts the interaction between the apoA protein and the lipoprotein particle and the second uses siRNA to disrupt the production of apoA in the liver. We shared proof-of-concept data on the siRNA asset during our December 2021 R&D Investor Meeting. This is our second siRNA asset to advance to Phase II, following our ANGPTL3 siRNA, which entered Phase II earlier in 2022. We also recently moved an siRNA asset targeting ApoC-III in cardiovascular disease into Phase I. Our genetic medicines portfolio is advancing and we remain optimistic about the prospect of improving cardiovascular outcomes with these molecules. Lastly, we discontinued our Phase I KHK inhibitor. In oncology, we’re of course pleased with the recent approval of Jaypirca and we look forward to continuing the substantial ongoing development program for the molecule in the years ahead.

Jaypirca is the second product approved from our 2019 Loxo Oncology acquisition, which reshaped our oncology efforts at Lilly. Loxo at Lilly’s growing NME portfolio now includes a number of emerging assets shown in our pipeline, including our FGFR3 program which recently dosed its first patient. Also, in Q4, we dosed the first patient in EMBER-4, our second Phase III trial for imlunestrant, our oral SERD. EMBER-4 will study imlunestrant in the adjuvant setting. As a sequential monotherapy in patients who previously received two to five years of adjuvant endocrine therapy for ER-positive HER2-negative early breast cancer with increased risk of recurrence. Lastly turning to Verzenio. As noted in our guidance call at the San Antonio Breast Cancer Symposium in December, we shared the latest interim analysis for monarchE, our adjuvant high-risk early breast cancer study of abemaciclib in combination with endocrine therapy for the treatment of adult patients with HR-positive HER2-negative node positive early breast cancer at high risk of recurrence.

We’ve now submitted an sNDA to the US FDA to potentially expand our adjuvant indication beyond the currently indicated Cohort 1 KI-67 greater than 20% population. In immunology, we’re looking forward to potential FDA approvals later this year for mirikizumab in ulcerative colitis, which we expect in the first half of the year and lebrikizumab in atopic dermatitis, which we expect in the second half of the year. Looking earlier in our immunology pipeline, as mentioned in our guidance call, we presented exciting proof-of-concept results for our PD-1 agonist antibody peresolimab in rheumatoid arthritis at the ACR conference in November and we have now initiated a global dose-ranging Phase IIb study. Moving to neuroscience. We’ve advanced into Phase II our P2X7 inhibitor for chronic pain.

Lilly acquired rights to this asset from Asahi Kasei Pharma in early 2021. With regards to donanemab. As Dave mentioned, the sole efficiency cited by the FDA to our submission for accelerated approval was a number of patients with at least 12 months of drug exposure. The Phase II TRAILBLAZER-ALZ trial on which the accelerated approval application was based, allowed patients to complete their course of treatment with donanemab when they reached a predefined level of amyloid plaque clearance. Due to the speed of plaque reduction that we saw, many patients were able to stop dosing as early as six months into treatment, resulting in fewer patients receiving 12 months or more of donanemab dosing. We remain confident in the potential donanemab as a new treatment for people with early symptomatic Alzheimer’s disease and look forward to sharing results from the Phase III TRABLASER-ALZ-2 study in Q2 of this year.

In summary, while 2022 was an outstanding year of pipeline progress, we’re fully focused on the work we need to do in 2023 to make our next set of potential medicines a reality for patients. We look forward to providing additional updates throughout the year. Now I turn the call back to Dave.

Dave Ricks: Thanks Dan. Before we move to Q&A, let me summarize the progress we made during 2022. We delivered strong revenue growth in our core business, propelled by our key growth products. We launched Mounjaro for patients with type two diabetes, while advancing and expanding our development program for tirzepatide, including the start of the SURMOUNT-MMO outcome study and the initiation of a rolling submission for chronic weight management. In 2022, we submitted regulatory applications for important pipeline products like mirikizumab, pirtobrutinib and lebrikizumab. And in 2023, we’ve already received approval for Jaypirca and are poised to advance donanemab in the regulatory process assuming positive data from the TRAILBLAZER-ALZ-2 Phase III study.

In addition, we continue to invest in our pipeline, our capacity, our capabilities and our people. Finally, we returned $5 billion to shareholders via the dividend and share repurchases. And for the fifth consecutive year, announced a 15% dividend increase for 2023. With continued growth in Mounjaro and our key products, including Verzenio, Jardiance and Taltz, we expect our core business revenue to grow by mid-teens in 2023. We are energized by the launch opportunities before us this year and no strong launch execution is key to our long-term success. Taken together, we believe that we are well positioned to deliver top-tier revenue growth through at least 2030 and to deliver on Lilly’s mission to make life better for people around the world.

So now, I’ll turn it over to Joe to moderate the Q&A session.

Joe Fletcher: Thanks, Dave. We’d like to take questions from as many callers as possible and conclude our call in a timely manner. Lois, please go ahead and provide the instructions for the Q&A session, and we’re ready for the first caller.

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Q&A Session

Operator: Thank you. Our first question is from Colin Bristow from UBS. Please go ahead.

Colin Bristow: Hey good morning and thanks for taking the questions. Just first on Mounjaro. So, it looks like the net price dropped to gain in 3Q to 4Q. Can you just walk us through what specifically drove this, and just update us on how you expect this to trend over the course of the year? And then just maybe looking sort of out to the future of your obesity portfolio, beyond 4G , do you have any interest in mechanisms that target the sort of the mitochondrion coupling side of the equation, that would be helpful. Thank you

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

Mike Mason: Yes. Thanks for the question. I think the best way to answer that is to take a look at what we saw as kind of our Mounjaro paid scripts in Q4 and then how we think that will progress over ’23. In the fourth quarter, we classify about 40% of Mounjaro scripts as paid, which we defined as patients that aren’t supported by our $25 non-coverage savings program. In our savings program, as we discussed at launch was designed to bridge people living with type 2 diabetes to access. As we discussed in the Q3 earnings call, we have adjusted a program to better ensure, it’s being used for people living only with type 2 diabetes. These adjustments included removing our $25 non-covered benefit from our savings card for new patients.

We didn’t make any adjustments for existing patients who are seeing these cards are set to expire on June of this year, June 30. As expected, these changes have reduced new patient start volume, while increasing the percent of new patients with a history of diabetes treatments and the percent with formulary coverage. I think the way I would look at our savings program right now for new patients is that, we have graduated from the bridging program and now are kind of the type of savings program, really focused on covered patients that you would do in kind of a normalized cycle of a product. So thus we expect that Mounjaro’s percent of paid scripts and a net revenue per script to increase through 2023, as we continue to increase access and grow new starts.

We remain disciplined in our access discussions so we can maximize long-term value. From the start, our value our approach was to make sure that we capture value in the long-term versus the short term and we’ve remained very disciplined on that. We have just over 50% access for lives in Part D and commercial segments for people living with type 2 diabetes We’re very pleased where we’re at on the access front and where the way our contracting has turned out at this point. So hopefully that helps provide some color to our gross to net in Q4. Thanks.

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