Eli Lilly and Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Lilly operates primarily in human pharmaceuticals; animal health is included in segment reporting and was not material as a separate segment.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $5.44 billion | $6.15 billion | $16.65 billion | $18.24 billion |
| Net income | $1.33 billion | $1.24 billion | $3.26 billion | $3.49 billion |
| Diluted EPS | $1.18 | $1.11 | $2.92 | $3.13 |
| Gross margin as a percentage of revenue | 77.9% | 78.2% | 78.7% | 79.5% |
| Operating cash flow | Not separately provided for the quarter | $3.70 billion | $5.29 billion |
Revenue fell 11% in Q3 and 9% year to date. Lower volume—primarily Zyprexa’s loss of exclusivity—and unfavorable foreign exchange drove the decline, partly offset by price increases and growth in other products. Q3 net income and EPS rose 7% and 6%, respectively, largely due to a one-time Amylin-related gain; year-to-date net income and EPS declined 7%.
Q3 research and development expense was $1.34 billion, up 5%; marketing, selling, and administrative expense was $1.76 billion, down 8%. For the nine months, those expenses were $3.82 billion (up 4%) and $5.54 billion (down 4%), respectively. Q3 and year-to-date special charges were $53.3 million and $77.1 million. The year-ago nine-month period included $388 million of acquired in-process R&D expense.
Liquidity, debt, and cash flow
- At September 30, cash and cash equivalents were $5.32 billion; short-term investments were $1.58 billion. Together, these totaled $6.90 billion, approximately flat versus year-end 2011.
- Total debt was $5.52 billion, down $1.47 billion from December 31, 2011, primarily after repayment of $1.50 billion of long-term debt. Long-term debt was $5.51 billion; short-term borrowings and current maturities were $9.1 million.
- Nine-month operating cash flow was $3.70 billion. Investing activities used $1.17 billion and financing activities used $3.15 billion; dividends paid were $1.64 billion.
- Lilly reported $1.24 billion of unused committed bank credit facilities, including $1.20 billion supporting its commercial paper program. Management said operating cash flow and available cash should cover normal needs, including dividends, debt service, capital spending, and share repurchases.
Material changes and notable items
- Zyprexa revenue fell 68% in Q3 and 66% year to date, reflecting loss of patent exclusivity in the U.S. and most major markets outside Japan. It was the primary cause of the overall revenue decline.
- Amylin’s acquisition by Bristol-Myers Squibb resulted in full payment of its revenue-sharing obligation. Lilly recognized $787.8 million of pretax income in Q3 and year to date, contributing approximately $0.43 to Q3 EPS. Lilly expects an additional net gain of approximately $490 million in 2013 as ex-U.S. commercial rights transfer, subject to those transfers.
- Growth in selected products partly offset Zyprexa weakness: Q3 revenue increased 16% for Cymbalta, 20% for Forteo, 31% for Effient, and 6% for animal health. Year-to-date increases included 20% for Cymbalta, 22% for Forteo, 59% for Effient, and 22% for animal health.
- The effective tax rate was 29.2% in Q3 and 25.8% for the first nine months, versus 17.7% and 19.0% in the comparable 2011 periods. The Q3 2012 rate reflected the Amylin payment and expiration of the U.S. R&D tax credit; the 2011 Q3 rate included a discrete tax benefit.
- Lilly acquired ChemGen for $206.9 million in cash in February 2012. No shares were repurchased under the announced program during the first nine months; $419.2 million remained, and Lilly expected to complete the program during the rest of 2012.
Guidance, outlook, and risks
Lilly forecast 2012 EPS of $3.68–$3.78, total revenue of $21.8–$22.8 billion, gross margin of approximately 78%, marketing and administrative expense of $7.3–$7.7 billion, and R&D expense of $5.0–$5.3 billion. Other-net was expected to be $640–$715 million of net income, revised from a prior range spanning net expense and net income. Operating cash flow was expected to fund approximately $800 million of capital expenditures, business development, dividends, and share repurchases. The outlook incorporated an expected Zyprexa sales decline of more than $3 billion, partly offset by growth in other franchises and animal health.
- Patent expirations are a significant risk: Lilly cited expected U.S. loss of Cymbalta protection in December 2013 and Evista in March 2014, and Humalog’s U.S. patent expiration in May 2013. Alimta generic challenges could also threaten exclusivity; an adverse outcome could materially affect results, liquidity, and financial position.
- Alimta patent litigation remained unresolved. The appeals court affirmed the compound patent ruling in Lilly’s favor, but defendants sought further review; trial over a separate patent was scheduled for August 2013. Lilly cautioned that it could not assure victory.
- Lilly reported product-liability litigation involving Byetta, Zyprexa, and other products. It said it was self-insured for substantially all currently marketed products because product-liability insurance was generally unavailable; outcomes and potential exposure were not reliably estimable.
- Pipeline outcomes are uncertain. In August 2012, Lilly stopped Phase III studies of pomaglumetad methionil for lack of efficacy. Solanezumab missed primary endpoints in two Phase III trials, although a prespecified pooled analysis showed reduced cognitive decline in mild Alzheimer’s disease; next steps depended on regulatory discussions. Lilly also reported positive Phase III results for dulaglutide and a positive ramucirumab trial result.
- Management cited pharmaceutical pricing and reimbursement measures, health-care and tax policy changes, foreign-exchange movements, global economic uncertainty, regulatory and supply risks, and the high failure rate of drug development as risks to forecasts.
Key facts for investors to verify
- How much reported earnings and revised 2012 EPS guidance depend on the nonrecurring Amylin payment, and the conditions and timing for the expected 2013 gain.
- The pace and remaining impact of Zyprexa erosion, and expected exposure to upcoming Cymbalta, Evista, and Humalog patent expirations.
- Developments in Alimta patent litigation and potential generic-entry timing.
- Progress, regulatory decisions, and commercial prospects for late-stage pipeline candidates, particularly solanezumab, dulaglutide, and ramucirumab.
- Cash generation, debt repayment, dividend and repurchase funding, and the potential financial impact of litigation and pricing or reimbursement changes.