Eli Lilly and Company — FY2013 Form 10-K
Reporting period: Year ended December 31, 2013; filed February 19, 2014. The filing also reports fourth-quarter results. Lilly discovers, develops, manufactures, and markets human pharmaceutical and animal health products worldwide.
Financial performance and position
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $23.11 billion | $22.60 billion | +2% |
| Net income | $4.68 billion | $4.09 billion | +15% |
| Diluted EPS | $4.32 | $3.66 | +18% |
| Gross margin | 78.8% | 78.8% | Unchanged |
| Operating cash flow | $5.74 billion | $5.30 billion | +8% |
| Capital expenditures | $1.01 billion | $905 million | +$107 million |
Fourth quarter: Revenue was $5.81 billion, compared with $5.96 billion in Q4 2012. Net income was $728 million and diluted EPS was $0.67, versus $827 million and $0.74, respectively.
Costs and margins: Marketing, selling, and administrative expense fell 5% to $7.13 billion, reflecting cost controls and reduced U.S. sales and marketing ahead of patent expirations. Research and development expense rose 5% to $5.53 billion, including $97 million of empagliflozin submission milestones and $57 million of acquired in-process R&D. The effective tax rate declined to 20.5% from 24.4%, partly reflecting reinstated U.S. R&D tax credits.
Liquidity and debt: Year-end cash and cash equivalents were $3.83 billion; investments totaled $9.19 billion. Current assets were $13.10 billion versus current liabilities of $8.92 billion. Total debt was $5.21 billion, down from $5.53 billion; $1.01 billion was current, including debt maturing in March 2014 that Lilly intended to refinance. Unused committed credit facilities were $1.36 billion. Cash and investments held at foreign subsidiaries were $11.61 billion, with repatriation of a significant portion potentially subject to tax.
Capital returns: Lilly paid $2.12 billion in dividends and repurchased $1.70 billion of shares in 2013. The annual dividend was $1.96 per share; a $5 billion repurchase authorization was announced in October, with $4.5 billion remaining at year-end.
Changes versus the prior comparable period
- Revenue recovered modestly after a 7% decline in 2012, while net income and EPS increased. Earnings benefited from higher gross margin dollars, lower selling and administrative costs, a lower tax rate, and fewer diluted shares.
- Product growth included Cialis (+12%), Humalog (+9%), animal health (+6%), Alimta (+4%), and Forteo (+8%). Zyprexa revenue fell 30% worldwide as generic erosion continued.
- U.S. revenue rose 5% to $12.89 billion; revenue outside the U.S. fell 1% to $10.22 billion, primarily reflecting yen weakness and, to a lesser extent, lower prices.
- The 2013 comparison included $495 million of pretax income tied to transfer of exenatide commercial rights outside the U.S.; 2012 included $788 million of pretax income from early payment of Amylin’s revenue-sharing obligation. These items affect comparability.
- Restructuring and special charges declined to $121 million from $281 million. 2013 charges primarily reflected severance and costs associated with an anticipated German facility closure.
Outlook, management commentary, and key risks
2014 guidance: Lilly expected revenue of $19.2–$19.8 billion and diluted EPS of $2.77–$2.85. It forecast gross margin of approximately 74%, marketing and administrative expense of $6.2–$6.5 billion, and R&D expense of $4.4–$4.7 billion. Operating cash flow was expected to cover dividends of about $2.1 billion and capital spending of about $1.3 billion, as well as potential business development and repurchases. Guidance excluded a potential $200 million tanezumab collaboration payment, which would reduce EPS by about $0.12 if triggered.
- Patent losses: Cymbalta lost U.S. exclusivity in December 2013, and Lilly expected rapid, severe sales declines. Evista U.S. exclusivity was expected to end in March 2014, also with immediate generic competition anticipated. Cymbalta European data protection was due to expire in 2014, with generic entry expected in most affected markets in 2015. Management expected these losses to materially pressure revenue and cash flow.
- Pipeline execution: Dulaglutide, empagliflozin, a new insulin glargine product, and ramucirumab were under regulatory review. Lilly expected 2014 submissions for certain ramucirumab indications. Pipeline outcomes remain uncertain; development of edivoxetine, enzastaurin, and liprotamase was stopped, and the ramucirumab ROSE breast-cancer study missed its primary endpoint.
- Legal and regulatory: Alimta generic patent challenges were ongoing in the U.S. and Europe; an unfavorable outcome could materially affect future results. Sanofi sued over Lilly’s insulin glargine product in January 2014; the resulting statutory stay could delay FDA approval. A U.S. DOJ FCPA investigation remained open after a 2012 SEC settlement of $29.4 million. Lilly also reported product-liability claims, including Byetta and Prozac matters; it is self-insured for product liability.
- Other risks: Management highlighted pricing and reimbursement pressure, generic and biosimilar competition, product safety, manufacturing and supply interruptions, foreign exchange and macroeconomic conditions, tax changes, cybersecurity, and reliance on collaborators and suppliers. Lilly stated that it could not reasonably estimate maximum exposure or loss ranges for certain contingencies.
- Unusual accounting sensitivity: A 5% change in the global returns, rebates, and discounts liability would affect pretax income by approximately $138 million. The U.S. liability increased to $2.22 billion, primarily because of the Cymbalta returns reserve after loss of exclusivity.
Investor verification priorities
- Track quarterly Cymbalta and Evista erosion, returns, rebate accruals, and the pace of replacement-product growth against 2014 guidance.
- Check whether pipeline candidates receive approvals on schedule and whether the tanezumab clinical hold is lifted and the potential payment is incurred.
- Monitor Alimta patent decisions and the insulin glargine patent litigation for effects on launch timing and exclusivity.
- Reconcile earnings quality for the exenatide-related gains and other one-time items; compare reported results with underlying product trends and operating cash flow.
- Review the $1.01 billion 2014 debt maturity and refinancing, foreign cash repatriation tax exposure, and planned capital returns.
- Follow the open DOJ FCPA investigation, product-liability matters, and any updates to contingency accruals; outcomes and potential financial effects are not clearly quantified in the filing.