Eli Lilly and Company — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also provides unaudited fourth-quarter data; this is an annual report, not a standalone quarterly filing. Lilly is primarily a pharmaceutical company, with animal health operations included in segment reporting as immaterial.
Financial performance
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue | $23.08 billion | $21.84 billion |
| Net income | $5.07 billion | $4.33 billion |
| Diluted EPS | $4.58 | $3.94 |
| Gross margin | 81.1% | 80.6% |
| Research and development expense | $4.88 billion | $4.33 billion |
| Marketing, selling, and administrative expense | $7.05 billion | $6.89 billion |
| Operating cash flow | $6.86 billion | $4.34 billion |
| Cash and short-term investments at year-end | $6.73 billion | $4.50 billion |
| Total debt at year-end, per management discussion | $6.93 billion | $6.66 billion |
Fourth-quarter 2010 revenue was $6.19 billion, versus $5.93 billion in Q4 2009; net income was $1.17 billion versus $915 million, and diluted EPS was $1.05 versus $0.83. Full-year revenue grew 6%, with volume up 3%, prices contributing 2%, and foreign exchange having negligible impact. U.S. revenue rose 5% to $12.87 billion; international revenue rose 7% to $10.21 billion.
Current assets were $14.84 billion and current liabilities $7.10 billion at year-end. The filing states that operating cash, available cash, and commercial-paper access should fund normal 2011 needs, including debt service, capital spending, and dividends. Cash flow funded $2.17 billion of dividends, $694 million of capital expenditures, and acquisitions/product rights. The annual dividend was $1.96 per share. Management reported $1.24 billion of unused committed bank facilities, including $1.20 billion backing commercial paper and maturing in May 2011.
Material changes and business drivers
- Growth was led by Alimta (+29%), Cymbalta (+13%), animal health products (+15%), and Humalog (+5%); Gemzar declined 16% amid generic competition. Alimta revenue reached $2.21 billion, Cymbalta $3.46 billion, and Zyprexa $5.03 billion.
- Gross margin rose 0.5 percentage points, attributed to lower manufacturing costs and higher prices, partly offset by foreign-exchange effects on international inventory.
- R&D expense increased 13%, reflecting pipeline and business-development costs, including trial-related charges. Selling and administrative expense increased 2%; cost-containment efforts and lower litigation and administrative costs partly offset higher overseas selling and marketing costs.
- Other-net expense improved by $224.5 million to $5 million net expense, reflecting investment gains, lower net interest expense, German Zyprexa litigation recoveries, and an insurance recovery.
- The effective tax rate rose to 22.3% from 19.2%. FY 2010 included an $85.1 million noncash tax charge associated with U.S. health care reform. Reported net income also included $192 million of restructuring, impairment, and special charges and $50 million of acquired in-process R&D expense.
Outlook, risks, and contingencies
- 2011 guidance: EPS of $3.92–$4.07; revenue growth flat to slightly positive; gross margin expected to decline about two percentage points; R&D expense growth expected to be relatively flat. Guidance assumes U.S. Strattera exclusivity is maintained, rapid and severe Zyprexa erosion after patent expirations, and continued severe U.S. Gemzar erosion.
- Management expects U.S. health care reform to reduce 2011 revenue by $400–$500 million and estimates a $150–$200 million nondeductible manufacturer fee in selling and administrative expense. Expected 2011 capital spending is $800–$900 million.
- Patent expiry is a major earnings risk: Zyprexa exclusivity was expected to end in the U.S. in October 2011 and in major European markets during 2011. Zyprexa, Cymbalta, Alimta, Humalog, Cialis, Gemzar, Evista, and Strattera together represented 74% of 2010 worldwide revenue. Gemzar had already lost U.S. compound protection, and generic competition was causing sharp sales declines.
- Patent challenges remained pending for products including Cymbalta, Alimta, and Strattera. Lilly disclosed that adverse outcomes could materially affect future results; generic launch risk was particularly significant for Strattera if its appeal failed.
- Pipeline outcomes were mixed: the FDA requested additional safety and efficacy information for Bydureon; semagacestat development was halted after unfavorable Phase III results; teplizumab missed its primary endpoint; and tasisulam Phase III studies were suspended in melanoma. These setbacks underscore lengthy, costly, uncertain drug development.
- Legal and regulatory exposures include Zyprexa product-liability claims and residual litigation, Byetta and other product-liability suits, patent disputes, and government investigations, including matters concerning Alimta reimbursement, Actos, and potential foreign bribery. Lilly said outcomes generally were not expected to materially harm financial position or liquidity, but could materially affect an individual period’s results. It is largely self-insured for future product-liability losses.
- Pricing and reimbursement pressures are expected to intensify in the U.S. and international markets. Other stated risks include product safety, manufacturing or supplier interruptions, foreign exchange, tax changes, and reliance on a small number of major U.S. wholesalers.
Most important facts for investors to verify
- Actual 2011 revenue, EPS, gross-margin performance, and health-reform costs against management’s guidance and assumptions.
- Timing and commercial impact of generic Zyprexa entry, plus Gemzar erosion and the outcome of Strattera and Cymbalta patent litigation.
- Cash generation, debt maturities and refinancing access, and the sustainability of dividends and planned capital spending.
- Regulatory decisions and clinical progress for Bydureon, florbetapir, and other late-stage candidates, including the impact of discontinued or suspended programs.
- Developments in product-liability cases and government investigations, and whether recorded reserves adequately reflect potential exposure.