Business context and reporting period
Eli Lilly and Company is a pharmaceutical company reporting unaudited consolidated results for the quarter and six months ended June 30, 2011, compared with the same 2010 periods. It reports one significant business segment: human pharmaceutical products; animal health is included for segment reporting purposes.
Financial performance
Dollars in millions, except per-share amounts. Balance-sheet comparisons are June 30, 2011 versus December 31, 2010.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $6,252.8 | $5,748.7 | $12,092.0 | $11,234.2 |
| Gross margin as % of revenue | 80.4% | 82.2% | 80.1% | 80.9% |
| Research and development | $1,260.6 | $1,187.2 | $2,384.6 | $2,226.3 |
| Marketing, selling, and administrative | $2,043.0 | $1,755.4 | $3,828.7 | $3,369.8 |
| Net income | $1,197.3 | $1,348.9 | $2,253.2 | $2,597.0 |
| Diluted EPS | $1.07 | $1.22 | $2.02 | $2.35 |
- Revenue increased 9% in Q2 and 8% in the first half. Reported net income declined 11% and 13%, respectively; EPS declined 12% and 14%.
- Six-month operating cash flow was $3,216.4, versus $2,869.6 in 2010. Investing cash outflow was $1,939.3 and financing cash outflow was $1,278.1. Cash and equivalents rose $120.3 during the half to $6,113.5.
- Cash, equivalents, and short-term investments totaled $6,329.8, down from $6,727.0 at year-end. Current assets were $14,950.3 and current liabilities $8,620.5.
- Total debt was approximately $6,728.6, down $197.9 from year-end; this included $1,528.5 in short-term borrowings and $5,200.1 in long-term debt. Management reported AA- and A2 ratings from S&P and Moody’s. It also reported $1.24 billion in unused committed credit facilities, including $1.20 billion supporting commercial paper.
- Dividends paid were $1,095.3 in the first half; dividends were $0.49 per share in Q2 and $0.98 per share for the half.
Material changes versus the prior comparable period
- Revenue growth reflected higher sales of Cymbalta, Zyprexa, animal health products, Alimta, Humalog, and Cialis. Growth was partly offset by Gemzar’s loss of exclusivity and declining sales.
- Gemzar revenue fell 62% in Q2 and 54% in the first half. Zyprexa revenue grew 12% in Q2 and 9% in the first half, but the company expected sharp declines after 2011 patent expirations. Animal health revenue grew 20% and 24%, respectively.
- Gross margin declined 1.8 percentage points in Q2 and 0.8 points in the first half, primarily due to foreign-currency effects on international inventory costs.
- SG&A increased 16% in Q2 and 14% in the first half; R&D increased 6% and 7%. Higher costs included collaboration and launch activity, litigation expense, and the U.S. pharmaceutical manufacturers’ fee.
- First-half results included $388.0 of acquired in-process R&D expense for the Boehringer Ingelheim diabetes collaboration, versus $50.0 in 2010. Restructuring and other special charges were $208.6 for the half, versus $53.5; Q2 charges were $132.3, versus $27.3.
- Other-net expense was $57.6 in Q2 and $68.8 for the half, compared with $18.4 expense and $56.1 income in the prior-year periods. Q2 2011 included a partial impairment of liprotamase; first-half 2010 other income included litigation damages and investment gains.
- The effective tax rate was 21.8% in Q2 and 19.7% for the first half, compared with 22.3% and 24.6%. The 2011 rates benefited from the R&D tax credit and, for the half, the tax benefit related to the BI IPR&D charge.
Guidance, outlook, risks, and contingencies
- Management updated 2011 EPS guidance to $3.85–$3.95. The guidance excludes potential additional restructuring charges tied to previously announced actions.
- Management expected mid-single-digit revenue growth, assuming continued U.S. Strattera exclusivity and rapid, severe erosion of Zyprexa after patent expirations, as well as continued severe U.S. Gemzar erosion. It estimated U.S. health-care-reform effects would reduce 2011 revenue by $400–$500 million.
- Outlook called for gross margin as a percentage of revenue to fall 2–3 percentage points; SG&A growth in the high single digits, including $150–$200 million of nondeductible manufacturers’ fees; low-single-digit R&D growth; and $100–$175 million of net other expense. Management expected operating cash flow to fund $700–$800 million of capital expenditures, business-development activity, and dividends.
- Patent expiry is a major commercial risk: Zyprexa exclusivity was expected to end in the U.S. in October 2011 and in major European markets during 2011. The filing also identifies upcoming U.S. exclusivity losses for Cymbalta, Humalog, and Evista, and notes material reliance on products including Zyprexa, Cymbalta, Alimta, and Humalog.
- Patent litigation over Alimta and Strattera could affect future results if resolved unfavorably. The filing reports favorable appellate or trial rulings for both as of July 2011, but appeals or further review remained possible. Gemzar was already experiencing generic competition.
- Product-liability matters include approximately 120 Byetta lawsuits involving about 400 plaintiffs, plus roughly 340 additional claimants known to the company; a Byetta trial was scheduled for October 2011. Zyprexa product-liability lawsuits and other claims also remained pending. The company said outcomes and potential losses generally could not be reliably estimated and disclosed that it was self-insured for substantially all currently marketed products.
- Pipeline and regulatory uncertainty remained significant. Bydureon received European authorization, but the U.S. FDA response was pending review; FDA letters required additional work for florbetapir and liprotamase. Enrollment in one necitumumab Phase III study stopped following safety concerns involving thromboembolism.
- The company loaned collaboration partner Amylin $165 million, repayable in three years. It also disclosed a lawsuit by Amylin alleging antitrust, unfair-competition, and contract violations; Lilly said it considered the claims without merit.
- Management said operating cash, available cash, and credit access should fund normal 2011 needs. It also highlighted payer pressure, health-care reform, international pricing controls, foreign-exchange and macroeconomic volatility, and risks to R&D approvals and launches.
Most important facts for investors to verify
- Whether 2011 EPS and revenue guidance assumptions were achieved, especially Zyprexa erosion, Strattera exclusivity, and health-care-reform rebates and fees.
- The timing and financial impact of Zyprexa, Cymbalta, Humalog, and other patent expirations, and the status of Alimta and Strattera litigation.
- Whether pipeline and collaboration milestones, including Bydureon, linagliptin, empagliflozin, and necitumumab, progressed as expected and what further payments or costs followed.
- How gross margin, SG&A, restructuring charges, and the liprotamase impairment developed, and whether cash flow continued to cover investment, debt service, and dividends.
- Updates on Byetta and Zyprexa litigation, related reserves and exposures, and the company’s continuing self-insurance position.