ELI LILLY & Co quarterly report, Q1 FY2013

Eli Lilly and Company — Q1 2013 Form 10-Q

Business context and period: Pharmaceutical and animal health company; unaudited results for the three months ended March 31, 2013, compared with Q1 2012. Amounts are in U.S. dollars.

Financial results

MetricQ1 2013Q1 2012Change
Revenue$5.602 billion$5.602 billionFlat
Gross margin79.3%78.6%Up 0.7 percentage points
Net income$1.548 billion$1.011 billionUp 53%
Diluted EPS$1.42$0.91Up 56%
Operating cash flow$379.4 million$852.5 millionDown $473.1 million
Cash and cash equivalents$3.937 billion$4.019 billion at Dec. 31, 2012Down $82.2 million
Total debt$5.460 billion$5.531 billion at Dec. 31, 2012Down $71.7 million
Current assets / current liabilities$12.326 billion / $7.594 billion$13.039 billion / $8.390 billion at Dec. 31, 2012Current ratio approximately 1.62

Net income and EPS benefited substantially from $495.4 million pretax income ($0.29 per share) recognized on the transfer of exenatide commercial rights outside the U.S. to Amylin. Excluding this unusual gain, reported earnings growth would have been materially lower; the filing does not provide an adjusted EPS measure excluding it. Other-net income was $529.2 million, versus $46.0 million of expense in Q1 2012.

Revenue and operating trends

  • U.S. revenue increased 2% to $3.137 billion; revenue outside the U.S. decreased 2% to $2.465 billion. Management attributed worldwide results to a 4% benefit from higher prices, offset by a 3% volume decline and 1% unfavorable foreign exchange impact.
  • Zyprexa sales fell 49% worldwide to $284.8 million following loss of patent exclusivity in most major markets outside Japan. Cymbalta rose 19% to $1.328 billion; Humalog rose 7% to $632.7 million; Cialis rose 11% to $515.0 million. Animal health revenue increased 2% to $499.1 million.
  • Research and development expense increased 17% to $1.348 billion, including $92.2 million in empagliflozin regulatory-submission milestones and approximately $60 million related to discontinuing tabalumab’s rheumatoid arthritis program. Marketing, selling, and administrative expense fell 11% to $1.652 billion, primarily from cost-containment efforts.
  • Cash from operations was lower, in part reflecting working-capital movements and the $495.4 million exenatide gain being deducted in the cash-flow reconciliation. Investing activities provided $1.355 billion, mainly reflecting investment sales and maturities; financing used $1.730 billion, including $1.198 billion of share repurchases and $531.1 million of dividends.

Outlook, risks, and contingencies

  • Management reaffirmed 2013 diluted EPS guidance of $4.10–$4.25 and revenue of $22.6–$23.4 billion. Expected gross margin was approximately 78%; marketing, selling, and administrative expense $7.1–$7.4 billion; R&D expense $5.3–$5.6 billion; and other-net income $440–$590 million. Operating cash flow was expected to cover capital expenditures of approximately $900 million, potential business development, and dividends.
  • Management anticipated revenue growth despite the expected U.S. Cymbalta exclusivity loss in December 2013 and the loss of anticipated exenatide revenue-sharing payments. It cited growth products, emerging markets—particularly China—and animal health; a weaker Japanese yen could restrain Japan revenue.
  • Patent expirations are a key exposure: Cymbalta U.S. exclusivity was expected to end in December 2013 and Evista in March 2014, with potentially rapid and severe sales declines. Humalog’s U.S. patent expires in May 2013; management did not expect an immediate severe decline but noted uncertainty around biosimilar entry.
  • Alimta generic patent challenges remain significant: trial on the vitamin-dosage patent was scheduled for August 2013. Lilly warned an unfavorable outcome could materially affect future results, liquidity, and financial position. Other disclosed litigation includes Byetta, DES, and Prozac product-liability claims; Lilly said outcomes generally could affect individual-period results, while it could not estimate maximum exposure or possible losses beyond accruals.
  • Additional risks include drug-development failure and regulatory delays, government and insurer pricing or reimbursement measures, foreign exchange, and uncertain tax examinations. Lilly reported $1.36 billion of unused committed bank facilities and stated available cash and operating cash generation should fund normal needs and 2013 debt maturities.

Key facts for investors to verify

  • How much of Q1’s earnings increase is attributable to the $495.4 million exenatide-rights gain, and how recurring earnings compare after that item.
  • Whether the reaffirmed full-year guidance incorporates the timing and magnitude of Cymbalta’s U.S. generic launch and the end of exenatide revenue sharing.
  • Progress and outcomes in Alimta patent litigation, and the resulting potential effect on exclusivity and revenue.
  • Operating cash-flow trends, working-capital requirements, share repurchases, and dividend funding.
  • Pipeline milestones and regulatory decisions, particularly empagliflozin and other late-stage candidates, alongside the disclosed development risks.