Eli Lilly and Company — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009; filed July 31, 2009. Lilly reports primarily one business segment: human pharmaceutical products. The results include ImClone, acquired in November 2008.
Financial results
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Total revenue | $5.293 billion | $5.150 billion | $10.340 billion | $9.958 billion |
| Net income | $1.159 billion | $958.8 million | $2.472 billion | $2.023 billion |
| Diluted EPS | $1.06 | $0.88 | $2.25 | $1.85 |
| Operating cash flow | Not separately presented for the quarter | $1.011 billion | $2.784 billion |
- Revenue rose 3% in Q2 and 4% in the first half. Worldwide sales volume increased 6% in both periods and pricing contributed 3%; unfavorable foreign exchange reduced growth by 7% in Q2 and 6% in the first half. U.S. revenue increased, while revenue outside the U.S. declined.
- Q2 product sales were led by Zyprexa ($1.203 billion), Cymbalta ($744 million), Humalog ($478 million), and Alimta ($385 million). Alimta sales grew 40% in Q2 and Cymbalta 14%; Gemzar fell 20% and Zyprexa 3% worldwide.
- Gross margin was 82.1% of revenue in Q2 and 82.9% for the first half, up 5.4 and 6.1 percentage points, respectively. Lilly attributed the improvement to foreign exchange effects on international inventory costs and a prior-year manufacturing impairment charge.
- Q2 R&D expense was $1.040 billion, up 9%; marketing, selling, and administrative expense was $1.708 billion, essentially flat. First-half R&D was $1.988 billion, up 9%, while SG&A was $3.237 billion, slightly lower.
- First-half operating cash flow declined to $1.011 billion, including a $1.393 billion payment related to the Eastern District of Pennsylvania Zyprexa settlement and unfavorable changes in operating assets and liabilities. Dividends paid were $1.076 billion.
- At June 30, cash and cash equivalents were $3.322 billion and short-term investments were $168 million, down from a combined $5.926 billion at year-end. Total debt was $7.723 billion, down $2.74 billion from year-end; short-term borrowings fell to $1.035 billion, while long-term debt rose to $6.688 billion. The company reported $1.24 billion in unused committed credit facilities.
Material changes and unusual items
- Net income and EPS increased year over year, alongside modest revenue growth. ImClone-related Erbitux revenue contributed to growth; collaboration and other revenue increased 54% in Q2.
- Q2 included a $105 million pretax charge for currently probable and estimable Zyprexa-related state claims outside the earlier federal settlement. Lilly said further charges could occur.
- The first-half effective tax rate was 21.6%, compared with 10.6% in 2008. The prior-year period benefited from a $210.3 million tax benefit tied to resolution of most of an IRS audit for 2001–2004.
- Lilly issued $2.4 billion of fixed-rate notes in March 2009. It had paid substantially all of the $1.42 billion EDPA settlement recorded in 2008 by the reporting date.
- In July 2009, after quarter-end, the FDA approved Effient (prasugrel); Lilly and Daiichi Sankyo planned a U.S. launch by early August. Phase III dirucotide trials were discontinued after the drug failed to meet study endpoints.
Outlook, commentary, and risks
- Full-year 2009 reported EPS guidance was revised to $4.14–$4.24; other guidance was unchanged. Lilly expected mid-single-digit revenue growth, full-year gross-margin improvement, flat to low-single-digit SG&A growth, low-double-digit R&D growth, and a net other expense of $200–$250 million.
- For the second half, Lilly expected gross margin as a percentage of revenue to decline versus the second half of 2008. Capital expenditures were projected at approximately $1.1 billion, with continued strong operating cash flow. Management said operating cash and available funds should cover normal needs, debt service, litigation costs, capital spending, and dividends.
- Key risks include Zyprexa product-liability and state claims; generic patent challenges affecting Cymbalta, Gemzar, Alimta, Evista, and Zyprexa; possible generic competition and foreign-exchange effects; and potential U.S. and international drug-pricing, reimbursement, and healthcare-policy changes.
- Lilly noted that substantially all currently marketed products were self-insured for future product-liability losses. It also identified possible additional Zyprexa-related charges and potential significant charges depending on the outcome of its review of the Tippecanoe manufacturing site.
- Pipeline and launch execution remain relevant: exenatide once weekly was under FDA review, Cymbalta chronic-pain resubmission was made, and Phase III solanezumab trials began. Guidance is subject to regulatory, competitive, litigation, tax, foreign-exchange, and macroeconomic uncertainty.
Investor facts to verify
- Whether revenue and margin growth persist after the favorable first-half foreign-exchange and inventory-cost effects.
- Cash generation and debt trends after settlement payments, dividends, and planned 2009 funding needs.
- Additional costs or settlements arising from Zyprexa state claims and product-liability litigation.
- Commercial uptake of Effient and regulatory or clinical outcomes for key pipeline products.
- Potential generic entry and patent-litigation outcomes for major products, alongside pricing and reimbursement changes.