Eli Lilly and Company — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014; fourth-quarter figures are also reported. Lilly discovers, develops, manufactures, and markets human pharmaceuticals and animal health products. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $19.62 billion | $23.11 billion |
| Net income | $2.39 billion | $4.68 billion |
| Diluted EPS | $2.23 | $4.32 |
| Gross margin | 74.9% | 78.8% |
| Operating cash flow | $4.37 billion | $5.74 billion |
| Capital expenditures | $1.16 billion | $1.01 billion |
- Fourth quarter: Revenue was $5.12 billion versus $5.81 billion in Q4 2013; net income was $428.5 million versus $727.5 million, and diluted EPS was $0.40 versus $0.67.
- Balance sheet at year-end: Cash and cash equivalents were $3.87 billion; current assets $12.18 billion and current liabilities $11.21 billion. Investments totaled $5.52 billion, excluding $5.41 billion of restricted cash held in escrow for the pending Novartis Animal Health acquisition.
- Debt: Total debt was $8.06 billion, including $2.68 billion in short-term commercial paper, versus $5.21 billion a year earlier. Lilly reported $3.31 billion of unused committed credit facilities.
- Segments: Human pharmaceutical revenue was $17.27 billion and segment profit $3.13 billion; animal health revenue was $2.35 billion and segment profit $564.2 million.
Material changes and notable items
- Revenue fell 15%, driven principally by U.S. patent expirations for Cymbalta and Evista. U.S. revenue declined 29%; revenue outside the U.S. rose 3%, with currency headwinds.
- Cymbalta revenue fell 68% overall to $1.61 billion, including an 89% U.S. decline. Evista revenue fell 60% to $419.8 million, including a 73% U.S. decline. Animal health revenue increased 9% to $2.35 billion.
- Net income declined 49% and diluted EPS 48%. In addition to weaker revenue and gross margin, results included $468.7 million of impairment, restructuring, and special charges; $200.2 million of acquired in-process R&D expense; and a $119.0 million U.S. branded prescription drug fee charge. Lower R&D and marketing, selling, and administrative expenses partly offset these items.
- On January 1, 2015, Lilly completed its approximately $5.4 billion all-cash acquisition of Novartis Animal Health. It subsequently sold certain U.S. Sentinel-related assets to Virbac for approximately $410 million. The acquired business retained by Lilly generated approximately $1.1 billion of 2014 revenue.
- New products approved in 2014 included Trulicity, Jardiance, and Cyramza. The late-stage pipeline included approximately 55 candidates in human testing or regulatory review; results and approvals remain uncertain.
Outlook, risks, and contingencies
- 2015 guidance: Revenue of $19.5–$20.0 billion; diluted EPS of $2.40–$2.50; gross margin of approximately 75%; R&D expense of $4.7–$4.9 billion; marketing, selling, and administrative expense of $6.5–$6.8 billion; and capital expenditures of approximately $1.3 billion. Guidance includes expected Novartis Animal Health revenue.
- Management projected an approximately 18.5% tax rate, assuming extension of the R&D tax credit and other tax provisions; without extension, the rate was expected to be about 1.5 percentage points higher.
- Guidance excludes a possible $200 million upfront tanezumab collaboration charge if the FDA partial clinical hold is removed and development resumes; Lilly estimated this would reduce EPS by approximately $0.12.
- Management highlighted continued exposure to generic competition and upcoming loss of exclusivity, including Alimta patents in major markets and Zyprexa in Japan. Cymbalta data protection had expired in major European countries, with generic entry expected in 2015. Patent challenges to Alimta’s vitamin dosage regimen patents could materially affect results if Lilly loses.
- Other principal risks include drug-development failure, product safety or efficacy issues, regulatory and pricing pressure, foreign-exchange movements, manufacturing or supply disruption, and integration of the Novartis acquisition.
- Legal matters: Lilly disclosed significant Alimta patent proceedings and product-liability litigation involving Actos, Byetta, and Prozac. In an Actos case, punitive damages against Lilly were reduced to approximately $9 million; the judgment was appealed, and indemnification by Takeda was not assured. A Brazilian employee case carried a court-estimated potential impact of approximately 1.0 billion Brazilian reais (about $375 million at year-end exchange rates); Lilly appealed. The filing says outcomes cannot be determined.
Important facts for investors to verify
- Whether new-product growth and Novartis Animal Health integration can offset continuing losses from patent expirations.
- Progress and decisions in Alimta patent litigation, as well as timing and commercial impact of generic or biosimilar competition.
- Whether 2015 guidance assumptions—including tax-credit extensions, product launches, currency rates, and acquisition contribution—are achieved.
- Developments in the Actos, Byetta, Prozac, and Brazil litigation, including potential losses and the extent of any indemnification.
- Liquidity and financing after the acquisition: year-end restricted cash was earmarked for the transaction, while commercial paper borrowings had increased substantially.