Business Context and Reporting Period
This Form 10-Q covers Eli Lilly and Company for the quarter and nine months ended September 30, 2008. The company operates primarily in pharmaceutical products, with a smaller animal health segment. The reporting period was significantly impacted by major legal settlements regarding the drug Zyprexa, strategic restructuring, and the termination of the AIR Insulin development program.
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | 9M 2008 | 9M 2007 |
|---|---|---|---|---|
| Net Sales | $5,209.5 million | $4,586.8 million | $15,167.5 million | $13,443.9 million |
| Net Income (Loss) | $(465.6) million | $926.3 million | $1,557.5 million | $2,098.6 million |
| Earnings Per Share (Diluted) | $(0.43) | $0.85 | $1.42 | $1.93 |
| Gross Margin | 77.8% | 77.0% | 77.1% | 77.9% |
| Cash and Cash Equivalents | $4,353.6 million | $3,220.5 million (Dec 2007) | N/A | |
| Total Debt | $4,612.1 million | $5,007.2 million (Dec 2007) | N/A | |
| Operating Cash Flow (9M) | N/A | $4,915.1 million | $2,924.8 million |
Material Changes vs. Prior Period
- Net Loss in Q3 2008: The company reported a net loss of $465.6 million in Q3 2008, a reversal from a net income of $926.3 million in Q3 2007. This was primarily driven by a $1.48 billion pretax charge related to Zyprexa investigations and settlements.
- Revenue Growth: Net sales increased 14% in Q3 and 13% for the nine months ended September 30, 2008, compared to the prior year. Growth was driven by Cymbalta, Alimta, Cialis, Humalog, and Gemzar, as well as favorable foreign exchange rates.
- Special Charges: Total asset impairments, restructuring, and special charges were $1.66 billion in Q3 2008 and $1.89 billion for the nine months, compared to $81.3 million and $204.3 million in the respective 2007 periods. Key components included the Zyprexa charge ($1.48 billion), restructuring of the Greenfield site ($182.4 million), and termination of the AIR Insulin program ($145.7 million).
- Acquisitions: The company acquired SGX Pharmaceuticals for approximately $66.5 million, resulting in a $28.0 million immediate expense for in-process research and development (IPR&D).
Guidance, Outlook, and Risks
- Revised Guidance: Full-year 2008 earnings guidance was lowered to $2.44 to $2.49 per share, down from previous guidance of $3.79 to $3.94. This reduction reflects the $1.47 per share impact of third-quarter special items.
- ImClone Acquisition: Lilly announced a definitive agreement to acquire ImClone Systems for approximately $6.5 billion. The transaction is expected to close in Q4 2008 or Q1 2009 and will likely incur a one-time IPR&D charge.
- Legal and Regulatory Risks:
- Zyprexa: Significant exposure remains regarding product liability lawsuits (approx. 1,615 claims remaining) and government investigations. A $1.42 billion charge was recorded for federal investigations, and a $62 million settlement was reached with 32 states.
- Patent Litigation: Ongoing challenges to patents for Cymbalta, Gemzar, Alimta, Evista, and Strattera in the U.S., and Zyprexa internationally (Canada, Germany, UK).
- Operational Changes: The company sold its Greenfield, Indiana site to Covance and entered into a 10-year service agreement. Development of the AIR Insulin program was terminated due to regulatory uncertainties and commercial evaluation.
Investor Verification Checklist
- Verify the final settlement terms and potential for additional liabilities regarding the Zyprexa federal and state investigations.
- Monitor the status of the ImClone acquisition, including regulatory approvals and the magnitude of the anticipated IPR&D charge.
- Assess the impact of generic competition on Zyprexa sales in Canada and Germany, and the outcome of patent litigation for key products (Cymbalta, Gemzar, Alimta).
- Review the progress of the strategic review of the Tippecanoe Labs facility in Lafayette, Indiana, for potential future impairment charges.
- Confirm the timeline and regulatory status of the prasugrel New Drug Application (NDA) with the FDA.