Eli Lilly and Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The filing was signed October 29, 2014. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
Lilly operates in human pharmaceuticals and animal health. Results were substantially affected by U.S. patent expirations for Cymbalta and Evista, which drove lower sales and earnings. Growth in several other products and animal health partly offset the declines.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $4.88 billion | $5.77 billion | $14.49 billion | $17.30 billion |
| Income before taxes | $655.5 million | $1.51 billion | $2.49 billion | $4.98 billion |
| Net income | $500.6 million | $1.20 billion | $1.96 billion | $3.96 billion |
| Diluted EPS | $0.47 | $1.11 | $1.82 | $3.64 |
| Gross margin as % of revenue | 74.0% | 79.2% | 74.6% | 79.6% |
| Dividends paid per share | $0.49 | $0.49 | $1.47 | $1.47 |
- Revenue fell 16% in both the quarter and year-to-date periods. Q3 U.S. revenue declined 33%, while revenue outside the U.S. increased 8%. For nine months, U.S. revenue declined 32% and non-U.S. revenue increased 5%.
- Cymbalta revenue fell 73% in Q3 and 70% year to date; Evista fell 65% and 55%, respectively. Animal health revenue grew 10% in Q3 and 9% year to date. Other notable growth included Humalog, Alimta, and Cialis.
- Gross margin declined 5.2 percentage points in Q3 and 5.0 points year to date, primarily reflecting the product mix and lost U.S. exclusivity for Cymbalta and Evista; foreign exchange also weighed on year-to-date margin.
- Q3 R&D expense decreased 10% to $1.24 billion; nine-month expense decreased 13% to $3.55 billion. Marketing, selling, and administrative expense rose 1% in Q3 to $1.67 billion, partly due to a $119 million prescription drug fee charge, but declined 7% year to date to $4.82 billion.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $3.02 billion, versus $4.01 billion a year earlier. Investing activities used $1.73 billion and financing activities used $1.70 billion.
- Cash and cash equivalents were $3.17 billion at September 30, down from $3.83 billion at year-end 2013. The company also reported $9.05 billion of investments.
- Total debt was approximately $5.61 billion, up from $5.21 billion at year-end. Debt included $300 million of commercial paper. Lilly had $3.20 billion of unused committed credit facilities backing its commercial paper program.
- Nine-month cash uses included $1.58 billion of dividends, $753.8 million of capital expenditures, $551.4 million net cash paid for acquisitions, and $500 million of share repurchases.
Material changes, outlook, and management commentary
- In October, Lilly revised 2014 guidance: revenue of $19.4–$19.8 billion; diluted EPS of $2.36–$2.44; net income of at least $2.6 billion; operating cash flow of at least $4.0 billion; and gross margin of approximately 74.5%. Expected R&D expense is $4.6–$4.8 billion, marketing, selling, and administrative expense $6.4–$6.6 billion, and other income $300–$350 million.
- Management cited stronger U.S. dollar exchange rates, competitive pressures and U.S. animal-health market dynamics, patent-related sales declines, and growth from other products and launches. Guidance assumes the Novartis Animal Health acquisition does not close in 2014.
- The planned Novartis Animal Health acquisition is an all-cash transaction of approximately $5.4 billion, expected to close by the end of Q1 2015 subject to regulatory and other conditions. Lilly expected to fund it with approximately $3.4 billion of cash and investments and $2.0 billion of new debt. U.S. Sentinel product assets are to be divested as part of the regulatory review.
- In October, Lilly and Boehringer Ingelheim revised their diabetes collaboration. Lilly expected a Q4 gain of approximately $90 million and an acquired in-process R&D charge of approximately $55 million. Lilly also expected an approximately $170 million Q4 impairment charge following approval to close and sell a Puerto Rico manufacturing plant.
- Pipeline developments included U.S. approval and launch of Trulicity, approvals and launches of Jardiance, and European approval of Lilly’s insulin glargine product. Basaglar had tentative U.S. FDA approval, but final approval was subject to a potential 30-month patent-litigation stay. Lilly reported approximately 55 potential new drugs in human testing or regulatory review.
Risks, contingencies, and unusual items
- Patent expirations and challenges remain significant risks. Lilly warned that generic entry for Cymbalta and potential loss of Alimta exclusivity could cause rapid, severe revenue declines; Zyprexa was expected to lose Japanese exclusivity in December 2015.
- Alimta patent litigation is ongoing in the U.S., Europe, and Japan. Lilly said an adverse outcome could materially affect future results, liquidity, and financial position. Effient patents also face generic challenges.
- Actos product-liability litigation involved approximately 4,900 U.S. cases. A jury’s $6 billion and $3 billion punitive awards against Takeda and Lilly, respectively, were substantially reduced by a judge on October 27, 2014, to approximately $30 million against Takeda and $9 million against Lilly. Lilly disputes the verdict and intends to appeal; it relies on Takeda’s contractual defense and indemnification obligations but cannot assure full indemnification.
- A Brazilian employee-litigation ruling was estimated by the judge to have a financial impact of approximately $450 million plus interest; Lilly appealed and said it could not estimate the reasonably possible loss range.
- Lilly recognized $95 million of acquired in-process R&D charges, including $45 million paid to Immunocore and a $50 million obligation to AstraZeneca. The Q3 results also included the $119 million branded prescription drug fee charge and $36.3 million of restructuring and special charges.
- Other risks include pharmaceutical pricing and reimbursement pressures, foreign exchange, regulatory and R&D uncertainty, and litigation. Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
Investor verification priorities
- Track post-expiration sales trends for Cymbalta and Evista and the ability of other products to offset their declines.
- Reconcile revised 2014 guidance with the expected Q4 collaboration gain, R&D charge, and Puerto Rico impairment.
- Verify timing, regulatory conditions, divestitures, and financing for the Novartis Animal Health acquisition.
- Monitor Alimta and Effient patent cases, Actos indemnification and appeal developments, and the Brazilian litigation exposure.
- Assess operating cash generation, debt and acquisition funding needs, and whether dividends and repurchases remain supported by cash flow.