Eli Lilly and Company — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 figures are included below. Lilly’s principal business is pharmaceutical products, with animal health operations reported within the segment information because they are not material to the financial statements.
Financial results and liquidity
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $24.29 billion | $23.08 billion | +5% |
| Gross margin as a percentage of revenue | 79.1% | 81.1% | Down 2.0 percentage points |
| Income before income taxes | $5.35 billion | $6.53 billion | Down 18% |
| Net income | $4.35 billion | $5.07 billion | Down 14% |
| Diluted earnings per share | $3.90 | $4.58 | Down 15% |
| Operating cash flow | $7.23 billion | $6.86 billion | Up $377.7 million |
| Capital expenditures | $672 million | $694 million | Down $22.3 million |
| Cash, cash equivalents and short-term investments | $6.90 billion | $6.73 billion | Up $170 million |
| Total debt | $6.99 billion | $6.93 billion | Up $60.5 million |
Net income was 17.9% of revenue, versus 22.0% in 2010. Current assets were $14.25 billion and current liabilities $8.93 billion at year-end. The effective tax rate fell to 18.7% from 22.3%, reflecting tax benefits related to the Boehringer Ingelheim collaboration and resolution of IRS audit matters; the 2010 rate included a health-reform-related charge.
For Q4 2011, revenue was $6.05 billion, net income was $858.2 million, and diluted EPS was $0.77, compared with $6.19 billion, $1.17 billion, and $1.05, respectively, in Q4 2010.
Business developments and changes versus 2010
- Revenue growth was led by Cymbalta (+20%), animal health (+21%), Humalog (+15%), Alimta (+11%), and Cialis (+10%). Gemzar revenue fell 61% and Zyprexa fell 8%, largely due to loss of exclusivity and generic competition.
- Worldwide sales volume increased 6%; favorable foreign exchange contributed 2 percentage points, while lower prices reduced growth by 3 percentage points. U.S. revenue rose 1% to $12.98 billion; revenue outside the U.S. rose 11% to $11.31 billion.
- Gross margin declined primarily because foreign exchange increased costs of international inventories sold and patent expirations affected product mix. Marketing, selling and administrative expense rose 12% to $7.88 billion; R&D expense increased 3% to $5.02 billion.
- Net income also reflected a $388 million acquired in-process R&D charge for the Boehringer Ingelheim diabetes collaboration; $401.4 million in impairment, restructuring and special charges, including $316.4 million mainly for severance and $85 million related to Xigris; and higher other-net expense.
- U.S. health reform reduced 2011 revenue by $408.8 million and added $178 million to marketing, selling and administrative expense for the industry fee. Lilly paid $2.18 billion in dividends and maintained its indicated annual dividend at $1.96 per share.
Outlook, risks and contingencies
For 2012, management forecast revenue of $21.8–$22.8 billion, EPS of $3.10–$3.20, gross margin of approximately 77%, marketing, selling and administrative expense of $7.4–$7.8 billion, and R&D expense of $5.0–$5.3 billion. Zyprexa sales were expected to decline by more than $3 billion; anticipated growth in several established and newer products and Elanco was expected to partly offset the decline. Management expected operating cash flow to cover approximately $800 million in capital expenditures, business-development activity and the dividend, and planned to retire $1.51 billion of debt as it matured.
- Patent and concentration exposure: Seven significant patent-protected products represented 71% of 2011 worldwide revenue. Zyprexa lost U.S. exclusivity in October 2011; Cymbalta and Humalog U.S. patent protection was due to expire in 2013, and Evista in 2014. Lilly warned that loss of exclusivity can rapidly reduce sales. Generic manufacturers’ Alimta patent challenges remained a key uncertainty; an adverse outcome could materially affect results, liquidity and financial position.
- Pipeline and product risks: Drug development is costly and uncertain. Arxxant did not meet its primary endpoint; the FDA requested additional studies for liprotamase and a reader-training program for florbetapir. A Phase III necitumumab study stopped enrollment following thromboembolism safety concerns. Lilly withdrew Xigris after a study failed to show the primary mortality benefit.
- Legal, compliance and product liability: Matters include Byetta product-liability claims, Zyprexa litigation, an SEC/DOJ investigation into potential foreign-corruption-law issues, and other government investigations. Lilly operates under a five-year Corporate Integrity Agreement related to the Zyprexa marketing-practices resolution. The company states that it is largely self-insured for future product-liability losses. It cannot reasonably estimate maximum exposure or possible losses above accrued amounts for significant matters; it cautions that certain outcomes could affect results in an individual period.
- Pricing, reimbursement and macroeconomic risks: Management cited government and payer cost controls, rebates and price reductions, including expected pricing actions in Japan; foreign-exchange volatility; economic and sovereign-debt conditions; and the potential effect of further health-care or tax legislation.
- Liquidity and funding: Management expected available cash and operating cash flow to meet normal 2012 needs. Lilly had $1.24 billion of unused committed bank facilities, including $1.20 billion supporting its commercial-paper program. It also disclosed underfunded pension and retiree-health obligations and expected 2012 pension and post-retirement contributions.
Most important facts for investors to verify
- Whether 2012 revenue and EPS guidance was achieved, especially against the expected Zyprexa decline of more than $3 billion.
- Developments in Alimta patent litigation and the timing and commercial impact of generic competition and other patent expirations.
- Growth, launch progress and regulatory outcomes for pipeline and recently launched products, including diabetes medicines, florbetapir and liprotamase.
- Whether margin, expense and cash-flow trends support the dividend, planned capital spending and scheduled debt repayments.
- Updates on Byetta and other product-liability matters, the SEC/DOJ investigation, and compliance obligations, including any changes to accruals or potential exposure.