Eli Lilly and Company — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also provides unaudited fourth-quarter results. Lilly discovers, develops, manufactures, and markets human pharmaceuticals and animal-health products.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $22.60 billion | $24.29 billion | Down 7% |
| Net income | $4.09 billion | $4.35 billion | Down 6% |
| Diluted EPS | $3.66 | $3.90 | Down 6% |
| Gross margin | 78.8% | 79.1% | Down 0.3 percentage points |
| Cash from operations | $5.30 billion | $7.23 billion | Down $1.93 billion |
| Capital expenditures | $905 million | $672 million | Up $233 million |
Revenue declines primarily reflected Zyprexa’s loss of exclusivity. Worldwide volume fell 7%; foreign exchange reduced revenue by 2 percentage points, partly offset by 2 percentage points from higher prices. U.S. revenue fell 5% to $12.31 billion and non-U.S. revenue fell 9% to $10.29 billion. Lilly reported a net margin of 18.1%.
Key product trends: Cymbalta revenue rose 20% to $4.99 billion; Alimta rose 5% to $2.59 billion; animal-health revenue rose 21% to $2.04 billion; and Zyprexa fell 63% to $1.70 billion. Human-pharmaceutical segment profit was $4.39 billion, versus $5.84 billion; animal-health segment profit increased to $508 million from $301 million.
Fourth quarter: Revenue was $5.96 billion versus $6.05 billion in Q4 2011; net income was $827 million versus $858 million; diluted EPS was $0.74 versus $0.77. Q4 included $204 million of asset impairment, restructuring, and other special charges.
Cash, debt, and liquidity
Year-end cash and cash equivalents were $4.02 billion, down from $5.92 billion. Total debt was approximately $5.53 billion, down from $6.99 billion, primarily following repayment of $1.50 billion of long-term debt. Current assets were $13.04 billion and current liabilities $8.39 billion. Lilly had $1.36 billion of unused committed bank facilities, including $1.20 billion supporting its commercial-paper program. Management said operating cash flow and available cash were expected to fund normal operating needs, dividends, repurchases, capital expenditures, and 2013 debt maturities.
Cash uses included $2.19 billion of dividends, $721 million of share repurchases, and $905 million of capital expenditures. The annual dividend was $1.96 per share; management maintained the quarterly dividend at $0.49 for the first quarter of 2013.
Material changes, outlook, and risks
- Patent exposure: Cymbalta U.S. exclusivity was expected to end in December 2013, Evista’s in March 2014, and Humalog’s U.S. patent expired in May 2013. Management expected generic Cymbalta to cause a rapid, severe sales decline. Seven major products recently lost, or were expected to lose, significant U.S. protection; together they represented 68% of 2012 worldwide revenue.
- One-time items: Lilly recognized $787.8 million pretax income related to early payment of Amylin’s exenatide revenue-sharing obligation. It also recorded $281.1 million of special charges, including a $122.6 million liprotamase impairment, $74.5 million of restructuring charges, a $64.0 million delivery-device platform impairment, and $20.0 million related to Xigris.
- Pipeline: Lilly reported approximately 60 candidates in human testing or regulatory review. Dulaglutide and empagliflozin had positive late-stage results, with filings anticipated in 2013; ramucirumab filings were also anticipated. Solanezumab missed primary endpoints in two Phase III Alzheimer’s trials, though pooled secondary analysis indicated reduced cognitive decline in mild Alzheimer’s disease. Development of pomaglumetad was stopped for lack of efficacy; the rheumatoid-arthritis program for tabalumab was discontinued after year-end.
- 2013 guidance: Diluted EPS of $4.10–$4.25, including an estimated one-time $0.07-per-share research tax credit benefit; revenue of $22.6–$23.4 billion; gross margin of approximately 78%; marketing, selling, and administrative expense of $7.1–$7.4 billion; R&D expense of $5.2–$5.5 billion; and other-net income of $340–$490 million. Management expected operating cash flow to cover dividends, the remaining announced $1.5 billion repurchase program, approximately $900 million of capital expenditures, and potential business development.
- Legal and regulatory: Alimta generic patent challenges could materially affect future results if Lilly does not prevail. Product-liability matters include Byetta, Zyprexa, DES, Prozac, Darvon, and other products; Lilly is largely self-insured for product liability. A 2012 SEC settlement concerning foreign subsidiary activities required a $29.4 million civil payment; the related DOJ investigation remained open. Lilly also remained subject to a five-year Corporate Integrity Agreement related to Zyprexa marketing practices.
- Other principal risks: pricing and reimbursement pressure, regulatory and compliance actions, R&D failure, product safety issues, supply interruption, patent disputes, foreign-exchange movements, and macroeconomic conditions. Management cited no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Timing and sales impact of Cymbalta, Evista, and Humalog exclusivity losses, and Lilly’s ability to offset them with newer products and animal health growth.
- Whether 2013 revenue and EPS guidance is achieved, including the effect of the one-time tax credit and exenatide transition-related items.
- Clinical and regulatory progress for late-stage candidates, particularly dulaglutide, empagliflozin, ramucirumab, and solanezumab.
- Outcome and potential financial exposure from Alimta patent litigation, product-liability claims, and the unresolved DOJ investigation.
- Cash-flow durability, rebate and discount accruals, pension funding requirements, and the ability to sustain dividends and planned repurchases.