Eli Lilly and Company — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited consolidated results. Comparisons are with the three months ended March 31, 2010 unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $5,839.2 million | $5,485.5 million | Up 6% |
| Gross margin | 79.8% | 79.5% | Up 0.3 percentage points |
| Income before income taxes | $1,273.9 million | $1,707.8 million | Down 25% |
| Net income | $1,055.9 million | $1,248.1 million | Down 15% |
| Diluted earnings per share | $0.95 | $1.13 | Down 16% |
| Cash from operating activities | $1,176.1 million | $958.0 million | Up 23% |
- Revenue growth reflected higher worldwide volume (up 5%) and favorable foreign exchange (1% contribution); pricing had a negligible effect. U.S. revenue rose 1%, while revenue outside the U.S. rose 13%.
- Net product sales were $5,689.9 million, up 7%; collaboration and other revenue was $149.3 million, down 2%.
- Research and development expense was $1,124.0 million, up 8%. Marketing, selling, and administrative expense was $1,785.7 million, up 11%. Acquired in-process R&D expense rose to $388.0 million from $50.0 million, primarily for the Boehringer Ingelheim diabetes collaboration. Restructuring and special charges were $76.3 million versus $26.2 million.
- The effective tax rate was 17.1%, compared with 26.9%. The lower rate reflected, among other items, the tax benefit of the diabetes-collaboration IPR&D charge and the U.S. R&D tax credit extension. Q1 2010 included an $85.1 million noncash tax charge related to retiree drug-subsidy legislation.
Financial position and liquidity
- At March 31, 2011, cash and cash equivalents were $6,506.4 million and short-term investments were $206.7 million, totaling $6.71 billion. Combined cash and short-term investments were broadly unchanged from $6.73 billion at December 31, 2010.
- Total debt, including short-term borrowings and long-term debt, was approximately $6.67 billion, down from approximately $6.93 billion at year-end. Short-term borrowings increased to $1,539.9 million from $156.0 million, while long-term debt fell to $5,132.4 million from $6,770.5 million.
- Operating cash flow was $1,176.1 million. Investing activities used $40.7 million and financing activities used $713.8 million; dividends paid were $543.2 million. Cash and cash equivalents increased $513.2 million during the quarter.
- Management said operating cash flow and available cash should fund normal operating needs, debt service, capital expenditures, and dividends in 2011. The company reported $1.24 billion of unused committed bank credit facilities, including $1.20 billion supporting its commercial-paper program.
Material changes and business developments
- Net income and EPS declined despite revenue growth and slightly improved gross margin. Higher IPR&D and restructuring charges, increased operating expenses, and the comparison with Q1 2010’s other income contributed to the decline. Other-net shifted from $74.5 million of income to $11.2 million of expense; the prior-year period included German Zyprexa litigation damages and investment-sale gains.
- Product revenue was led by Zyprexa ($1,281.9 million, up 6%), Cymbalta ($908.8 million, up 13%), and Alimta ($579.9 million, up 10%). Animal health revenue grew 28% to $369.8 million. Gemzar fell 46% to $156.1 million following generic competition; Strattera declined 5% to $138.7 million.
- U.S. health-care reform reduced Q1 2011 revenue by $89.0 million, compared with $62.4 million in Q1 2010. The new nondeductible pharmaceutical manufacturers’ fee added $43.8 million of Q1 2011 expense.
- The company entered a global diabetes development and commercialization collaboration with Boehringer Ingelheim and recorded the associated $388.0 million upfront IPR&D charge. It also reported a positive European regulatory committee opinion for Bydureon in April 2011; U.S. review remained pending additional safety data.
Outlook, risks, and contingencies
- 2011 diluted EPS guidance was lowered to $3.86–$4.01, excluding potential future restructuring charges. Management expected low-single-digit revenue growth, assuming U.S. Strattera exclusivity is maintained and substantial Zyprexa and Gemzar erosion continues.
- Management expected U.S. health-care reform to reduce 2011 revenue by $400–$500 million; gross margin as a percentage of revenue to decline about three percentage points; marketing, selling, and administrative expense to grow low- to mid-single digits; and R&D expense growth to remain relatively flat. The expected manufacturers’ fee was $150–$200 million for 2011. Other-net expense was forecast at $50–$150 million, and capital expenditures at $800–$900 million.
- Loss of exclusivity is a major risk: U.S. Zyprexa exclusivity was expected to end in October 2011, with key European expirations during 2011. Management anticipated rapid and severe sales declines. Generic Gemzar competition was already reducing sales. Strattera faced an adverse patent ruling under appeal; an unsuccessful appeal could trigger rapid U.S. sales erosion. The filing also identifies upcoming exclusivity losses for Cymbalta and Humalog in 2013 and Evista in 2014.
- Other risks include drug-development and regulatory setbacks, pricing and rebate pressure, foreign-exchange and economic volatility, patent disputes, and litigation. The filing reports product-liability matters involving Zyprexa and Byetta, among others, and notes that substantially all currently marketed products are self-insured for future product-liability losses. The filing text does not provide a clear aggregate estimate of potential exposure for these matters.
- In Q1 2011, the company effectively settled IRS examinations for tax years 2005–2006 and expected an approximately $200 million cash payment in Q2 2011. Audits and tax matters for 2007–2009 remained unresolved; potential changes in unrecognized tax benefits could not be estimated.
Important facts for investors to verify
- Whether revenue and EPS guidance assumptions remain achievable, particularly the expected Zyprexa and Gemzar declines and Strattera patent outcome.
- The timing and commercial impact of Zyprexa generic launches in the U.S. and Europe, and the status of litigation concerning Strattera, Cymbalta, and Alimta patents.
- Regulatory progress and safety requirements for Bydureon and other late-stage pipeline candidates, including the necitumumab trial safety review.
- Actual costs and cash effects of health-care reform, restructuring, tax settlements, and product-liability or other legal proceedings.
- Whether cash generation, debt levels, and planned spending remain consistent with management’s 2011 liquidity outlook.