Eli Lilly & Co. Q3 2007 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, and the nine-month period ended on that date. Eli Lilly & Co. operates primarily in the pharmaceutical products segment, with a smaller animal health segment. The reporting period includes the full impact of the January 29, 2007, acquisition of ICOS Corporation (Cialis) and the second-quarter acquisitions of Hypnion, Inc. and Ivy Animal Health, Inc.
Key Financial Metrics
| Metric | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Net Sales | $4,586.8M | $3,864.1M | $13,443.9M | $11,445.7M |
| Net Income | $926.3M | $873.6M | $2,098.6M | $2,530.4M |
| Earnings Per Share (Diluted) | $0.85 | $0.80 | $1.93 | $2.33 |
| Gross Margin | 77.0% | 77.7% | 77.9% | 77.9% |
| Operating Cash Flow (9M) | $2,924.8M (vs. $2,118.2M in 2006) | |||
| Total Debt | $4.97B (Short-term: $442.1M; Long-term: $4,532.2M) | |||
| Cash & Equivalents | $2,495.5M (as of Sept 30, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 19% in Q3 and 17% for the nine months ended Sept 30, 2007. Growth was driven by volume increases in Cymbalta, Humalog, and Gemzar, as well as the inclusion of full Cialis sales following the ICOS acquisition.
- Earnings Volatility: While Q3 net income rose 6%, nine-month net income declined 17% compared to 2006. The decline was primarily due to significant non-cash charges for acquired in-process research and development (IPR&D) totaling $656.6M for the nine months.
- Special Charges: Q3 included an $81.3M pretax charge related to a reduction in expected product liability insurance recoveries for Zyprexa. Q1 included $123.0M in asset impairments and restructuring charges.
- Acquisition Impact: The ICOS acquisition added $303.5M in IPR&D charges in Q1. Hypnion and Ivy acquisitions added $291.1M and $37.0M in IPR&D charges in Q2, respectively.
Guidance, Outlook, and Risks
Management Guidance:
- Full Year 2007 EPS: Updated to a range of $2.74 to $2.79 (12-14% growth vs. 2006).
- Q4 2007 EPS: Expected to be between $0.81 and $0.86.
- Sales: Full-year sales growth expected in the mid-teens.
- Other Income: Expected to be approximately $100M for the full year.
Key Risks and Contingencies:
- Zyprexa Litigation: Ongoing product liability lawsuits (approx. 1,200 plaintiffs remaining) and government investigations regarding marketing practices. Generic entry has occurred in Canada and is expected in Germany in Q4 2007, which management states will have a material adverse impact.
- Patent Challenges: Active litigation regarding patents for Evista, Gemzar, and Strattera. The U.S. Supreme Court denied certiorari for Zyprexa patent challenges in October 2007, ending that specific U.S. litigation.
- Insurance Disputes: Disputes with insurance carriers regarding coverage for Zyprexa product liability claims.
Investor Verification Checklist
- Generic Zyprexa Impact: Verify the actual sales erosion in Canada and Germany following generic entry and the timeline for other European markets.
- Product Liability Reserves: Monitor the status of the remaining ~1,200 Zyprexa lawsuits and the outcome of insurance carrier disputes.
- Acquisition Integration: Assess the operational efficiencies and sales performance of the ICOS (Cialis) integration.
- Regulatory Approvals: Track the FDA submission status for prasugrel (antiplatelet) and the approval status for Cymbalta (fibromyalgia) and Alimta (lung cancer).
- Debt Levels: Confirm the company's ability to service the increased debt load ($4.97B) resulting from the ICOS acquisition.