Eli Lilly and Company — Form 10-Q Summary
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2010. Lilly reports one significant business segment: human pharmaceutical products; animal health is included with pharmaceuticals for segment reporting. Unless otherwise stated, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $5.655 billion | $5.562 billion | $16.889 billion | $15.902 billion |
| Net income | $1.303 billion | $941.8 million | $3.900 billion | $3.413 billion |
| Diluted EPS | $1.18 | $0.86 | $3.53 | $3.11 |
| Gross margin as % of revenue | 82.5% | 81.1% | 81.4% | 82.3% |
- Revenue grew 2% in Q3 and 6% year to date; net income rose 38% and 14%, respectively. EPS increased 37% and 14%. Management attributed stronger earnings growth chiefly to lower restructuring and special charges than in 2009.
- Q3 revenue growth reflected higher prices; volume was essentially flat and foreign exchange reduced growth by 1 percentage point. For the first nine months, volume increased 3%, prices 2%, and foreign exchange contributed 1 percentage point.
- Key nine-month product movements included Alimta up 39%, Cymbalta up 10%, Cialis up 10%, and animal health up 13%; Gemzar fell 14% and Strattera fell 6%. Zyprexa, the largest product, rose 4% year to date but declined 1% in Q3.
- Q3 gross margin improved 1.4 percentage points, mainly on manufacturing productivity and prices. The nine-month margin declined 0.9 points, principally due to foreign-currency effects on international inventory costs.
- R&D expense rose 9% in Q3 and 11% year to date, to $1.220 billion and $3.446 billion, respectively, including approximately $80 million related to stopping semagacestat development and higher late-stage trial costs. Marketing, selling, and administrative expense was essentially flat in Q3 and rose 3% year to date.
- Operating cash flow was $4.629 billion for the first nine months, versus $2.317 billion in 2009. Investing used $1.595 billion; financing used $1.472 billion. Cash and equivalents rose to $5.909 billion from $4.463 billion at year-end 2009.
- Cash, cash equivalents, and short-term investments totaled $6.140 billion at September 30, versus $4.498 billion at December 31, 2009. Current assets were $14.184 billion and current liabilities $6.097 billion.
- Total debt was $7.14 billion, up $475 million from year-end; long-term debt on the balance sheet was $6.982 billion and short-term borrowings were $155 million. About 90% of total debt was fixed-rate before the effect of swaps; swaps had converted approximately 70% of fixed-rate debt to floating rates. Ratings were S&P AA- and Moody’s A1; Moody’s long-term rating was under review for possible downgrade.
- Dividends paid were $1.621 billion year to date; dividends were $0.49 per share in Q3. Lilly reported $1.24 billion of unused committed bank facilities, including $1.20 billion supporting commercial paper.
Material changes and unusual items
- Compared with 2009, Q3 restructuring and special charges fell to $59.5 million from $549.8 million; nine-month charges fell to $113.0 million from $654.8 million. Lilly expected further related charges in Q4 2010.
- U.S. health-care reform increased rebates and reduced revenue by approximately $25 million in Q3 and $155 million year to date. The company estimated a full-year revenue impact of $225 million to $275 million. A noncash $85.1 million deferred-tax charge was recorded in Q1 for the future tax treatment of retiree prescription-drug subsidies.
- Effective tax rates were 22.0% in Q3 and 23.8% year to date, versus 11.9% and 19.1% in 2009. The 2010 rates reflected expiration of the U.S. R&D tax credit and the Q1 health-reform tax charge; comparisons were also affected by the 2009 restructuring charge.
- Acquisitions included Alnara Pharmaceuticals and European animal-health product lines. The Alnara purchase consideration was $291.7 million, including contingent potential future payments; the recorded contingent-consideration liability was $103.3 million. Lilly also paid approximately $400 million to reacquire duloxetine rights outside the U.S. and Japan under its terminated Boehringer Ingelheim collaboration.
- Other-net income for the first nine months was $34.4 million, compared with expense of $161.7 million in 2009, mainly reflecting Zyprexa patent-litigation damages recovered in Germany and an investment-security gain. Q3 other-net expense improved in part due to an insurance recovery related to product theft.
Outlook, risks, and contingencies
- Management raised 2010 EPS guidance to $4.55–$4.65, excluding potential Q4 restructuring charges and potential charges related to Bydureon and teplizumab. It expected mid-single-digit volume-driven revenue growth, gross margin flat to increasing, low-single-digit growth in marketing and administrative expense, and low-double-digit R&D growth. Capital expenditures were estimated at approximately $700 million; cash flow was expected to fund investment, business development, and dividends.
- Lilly targeted $1 billion in cost reductions by the end of 2011 and a reduction of approximately 5,500 positions, subject to strategic additions and acquisitions. Most savings were expected in marketing, selling, and administration.
- The FDA issued a complete response letter for Bydureon after quarter-end, requesting a heart-rhythm safety study and additional efficacy and labeling information. Lilly and partners targeted a response by the end of 2011, subject to FDA discussions; the company warned that related Q4 charges were possible.
- Lilly halted semagacestat after Phase III results showed no slowing of Alzheimer’s progression and worsening in clinical measures. Teplizumab’s primary endpoint was not met; further enrollment and dosing in two trials were suspended, and Lilly notified its partner of intent to terminate the collaboration in October.
- Patent expirations and challenges pose significant sales risks. Lilly expected U.S. generic Gemzar as soon as mid-November 2010; Zyprexa exclusivity was expected to end in the U.S. and major European markets in 2011. Strattera’s patent was ruled invalid at trial, with appeal pending and a launch injunction in place; other disputes include Cymbalta, Alimta, Evista, and Zyprexa patents.
- Material contingencies include Zyprexa product-liability and related claims, other product-liability suits, patent disputes, and environmental matters. Lilly said outcomes could materially affect results in an individual period, and that resolution of Zyprexa litigation could materially affect results, liquidity, and financial position. It reported that substantially all currently marketed products are self-insured against future product-liability losses.
- Management cited health-care cost controls, government and private-payer pricing pressure, foreign price reductions, generic competition, regulatory outcomes, litigation, foreign exchange, and macroeconomic conditions as risks. The company stated available cash and operating cash flow should cover normal operating needs.
Key facts investors should verify
- Whether full-year EPS guidance was achieved, including the effect of excluded restructuring or pipeline-related charges.
- The realized revenue and margin impact of health-care reform, pricing pressure, and generic entry—especially Gemzar and the anticipated 2011 Zyprexa exclusivity losses.
- Regulatory and clinical developments for Bydureon, teplizumab, and the remaining late-stage pipeline, including any resulting charges or changes to launch timing.
- Outcomes of key patent cases and Zyprexa-related litigation, and any associated cash payments, insurance recoveries, or changes in recorded exposures.
- Whether operating cash generation, liquidity, debt ratings, and the planned cost reductions remained consistent with management’s expectations.