Eli Lilly and Company — 2012 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial statements are unaudited; comparisons are with the corresponding 2011 periods. Lilly reports primarily as one human-pharmaceutical-products business, with animal health included for segment reporting.
Financial performance
| Metric | Q2 2012 | Six months 2012 |
|---|---|---|
| Revenue | $5.60 billion, down 10% | $11.20 billion, down 7% |
| Net income | $923.6 million, down 23% | $1.93 billion, down 14% |
| Diluted EPS | $0.83, down 22% | $1.73, down 14% |
| Gross margin as a percentage of revenue | 79.5%, down 0.9 percentage point | 79.1%, down 1.0 percentage point |
Revenue fell mainly because Zyprexa lost patent exclusivity in the U.S. and most major markets outside Japan. Q2 revenue declined 9% from lower volume and 2% from foreign exchange, partly offset by 1% from price. Cymbalta, Alimta, Forteo, Effient, and animal health products provided growth. Q2 sales of Zyprexa fell 73% overall; six-month sales fell 65%. For the six months, operating cash flow was $2.16 billion, versus $3.22 billion in 2011; investing cash outflow was $1.04 billion and financing cash outflow was $2.61 billion.
Balance sheet and liquidity
At June 30, cash and cash equivalents were $4.35 billion and short-term investments were $915.7 million, totaling $5.26 billion, compared with $6.90 billion at year-end 2011. Total debt was $5.51 billion, down $1.48 billion from year-end after repayment of $1.50 billion of long-term debt. Current assets were $12.31 billion and current liabilities $6.61 billion. Lilly reported $1.24 billion of unused committed credit facilities, including $1.20 billion backing its commercial paper program, and said operating cash flow and available cash should fund normal needs, dividends, debt service, capital spending, and share repurchases.
Material changes and notable items
- Net product sales for the first half fell 8%; collaboration and other revenue rose 6%. Animal health revenue increased 32% in both the quarter and first half.
- R&D expense rose 5% in Q2 and 4% for the first half, reflecting late-stage clinical-trial costs. Marketing, selling, and administrative expense declined 5% in Q2 and 1% for the first half.
- The first half of 2011 included a $388 million acquired in-process R&D charge related to the Boehringer Ingelheim diabetes collaboration; no such charge was recorded in 2012. 2011 also included higher restructuring and special charges ($208.6 million for the first half versus $23.8 million in 2012). These prior-year items benefited year-over-year earnings comparisons.
- Lilly acquired ChemGen for $206.9 million in cash in February 2012. The board authorized resumption of its share-repurchase program; $419.2 million remained, and the company expected to complete the program during the remainder of 2012.
Outlook, risks, and contingencies
Lilly raised its 2012 diluted EPS guidance to $3.29–$3.39 from $3.14–$3.29. It maintained revenue guidance of $21.8–$22.8 billion, including an expected Zyprexa sales decline exceeding $3 billion. It raised expected gross margin to approximately 78% of revenue and lowered expected marketing, selling, and administrative expense to $7.3–$7.7 billion. R&D expense guidance remained $5.0–$5.3 billion; other-net guidance was revised to a range from $75 million expense to $50 million income. Capital expenditures were expected to be approximately $800 million.
Management cited patent expirations, pricing and reimbursement pressures, healthcare policy and tax changes, foreign exchange and macroeconomic conditions, regulatory outcomes, litigation, and product development and launch uncertainty as factors that could cause actual results to differ from guidance. U.S. patent protection for Cymbalta and Evista was expected to expire in 2014; FDA pediatric exclusivity extended Cymbalta exclusivity to December 2013. Humalog’s U.S. patent was due to expire in May 2013.
- Alimta patent litigation: The company awaited an appellate ruling on the validity of a key patent; an adverse outcome and earlier generic entry could materially harm results, liquidity, and financial position.
- Product-liability matters: The filing describes Zyprexa, Byetta, DES, and other litigation. Lilly said it is substantially self-insured for future product-liability claims on currently marketed products.
- Pipeline uncertainty: Lilly had approximately 65 potential new drugs in human testing or regulatory review. Solanezumab Phase III results were expected in the second half of 2012; July 2012 results for pomaglumetad in one study were negative, with further study results pending.
- Other exposure: Tax examinations for 2008–2009 remained in progress. Management said the resolution of most disclosed matters was not expected to materially affect financial position or liquidity, but could materially affect results in a single period.
Investor verification points
- Track Zyprexa erosion and whether growth in other products and animal health offsets lost revenue.
- Verify progress and outcomes in Alimta patent litigation and the timing of generic competition.
- Compare subsequent results with 2012 revenue, EPS, gross-margin, expense, and cash-flow guidance.
- Monitor pipeline readouts and regulatory decisions, particularly solanezumab and other late-stage candidates.
- Review liquidity, debt repayment, dividends, and completion of the remaining share-repurchase authorization.