Eli Lilly and Company — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Lilly discovers, develops, manufactures, and sells human pharmaceuticals and animal-health products worldwide. The filing also reports fourth-quarter 2016 results.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $21.22 billion | $19.96 billion | +6% |
| Gross margin | $15.57 billion; 73.4% of revenue | $14.92 billion; 74.8% | Margin down 1.4 percentage points |
| Operating expenses (R&D plus marketing, selling and administrative) | $11.70 billion | $11.33 billion | +3% |
| Income before taxes | $3.37 billion | $2.79 billion | +21% |
| Net income | $2.74 billion | $2.41 billion | +14% |
| Diluted earnings per share | $2.58 | $2.26 | +14% |
| Cash from operating activities | $4.85 billion | $2.96 billion | +$1.89 billion |
Fourth-quarter revenue was $5.76 billion, net income $771.8 million, and diluted EPS $0.73. R&D spending was $5.24 billion for 2016, up 9%; capital expenditures were $1.04 billion. Dividends paid were $2.04 per share.
At year-end, cash and cash equivalents were $4.58 billion and investments totaled $6.66 billion. Total debt was $10.31 billion, including $1.30 billion of commercial paper; long-term debt was $8.37 billion. Current assets were $15.10 billion and current liabilities $10.99 billion. Lilly reported $2.87 billion of unused committed credit facilities, including $2.70 billion available to support commercial paper.
Business and changes versus the prior year
- U.S. revenue increased 14% to $11.51 billion; revenue outside the U.S. declined 1% to $9.72 billion. Consolidated volume rose 7%; pricing was flat overall, while foreign exchange had a negligible reported impact on revenue change.
- Growth reflected uptake of Trulicity, Taltz, Jardiance and Cyramza, and the transfer of U.S. and Canadian Erbitux commercialization rights. Trulicity revenue rose to $925.5 million from $248.7 million; Cyramza increased 60% to $614.1 million; Erbitux increased 42% to $687.0 million.
- Declines included Alimta, down 8% to $2.28 billion, and Zyprexa, down 23% to $725.3 million, amid generic competition and loss of exclusivity. Cymbalta declined 9% to $930.5 million overall; U.S. results included an approximately $175 million benefit from a reduction in its expected-return reserve.
- Human pharmaceutical revenue was $18.06 billion; animal-health revenue was $3.16 billion, down 1%. Segment profits were $4.01 billion for human pharmaceuticals and $663.7 million for animal health.
- Gross margin percentage fell mainly because foreign-exchange benefits on international inventories sold were lower. Higher late-stage development costs contributed to increased R&D expense; lower spending on older products was largely offset by new-product costs in marketing and administration.
Outlook, management commentary and risks
- 2017 guidance: Revenue of $21.8–$22.3 billion; diluted EPS of $2.69–$2.79; gross margin of approximately 73.5%; R&D expense of $4.9–$5.1 billion; marketing, selling and administrative expense of $6.4–$6.6 billion; tax rate of approximately 24.5%; capital expenditures of approximately $1.2 billion. Guidance includes an estimated CoLucid-related acquired IPR&D charge.
- Management expected growth from animal health and products including Trajenta, Forteo, Humalog, Trulicity, Taltz, Basaglar, Cyramza, Jardiance and Lartruvo. Olumiant was approved in Europe in early 2017; U.S. and Japan decisions remained pending at filing. Lilly discontinued development for certain solanezumab Alzheimer’s indications after a Phase III study failed to meet its primary endpoint; a separate preclinical Alzheimer’s study was to continue.
- Material 2016 items included a $203.9 million charge associated with Venezuela’s currency and financial crisis; $382.5 million of impairment, restructuring and special charges, primarily integration, severance and an animal-health facility closure; and $30.0 million of acquired IPR&D, versus $535.0 million in 2015.
- Near-term patent expirations create significant exposure: Strattera U.S. protection was expected to end in May 2017; Cialis U.S. and major European protection in November 2017; and Effient U.S. exclusivity in October 2017, with an authorized generic potentially entering earlier. Lilly expects generic competition to cause sharp revenue declines. Alimta generic challenges and patent proceedings remain material; Lilly cautions an adverse outcome could materially affect results, liquidity and financial position.
- Other risks include pricing and reimbursement pressure, payer consolidation and rebates, R&D and regulatory uncertainty, product safety and liability claims, manufacturing or supplier disruptions, foreign-exchange and tax changes, and cybersecurity. Lilly is self-insured for product-liability losses. It disclosed investigations concerning pharmacy-benefit-manager arrangements and distributor pricing in China, and litigation over insulin pricing, among other matters.
- After year-end, Lilly completed an approximately $885 million U.S. animal-vaccine portfolio acquisition and agreed to acquire CoLucid for approximately $960 million, subject to closing conditions. The filing estimated an approximately $850 million CoLucid IPR&D charge upon completion.
- Management and the auditor reported effective internal control over financial reporting at December 31, 2016; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether 2017 revenue and EPS guidance was achieved, including the assumed foreign-exchange impact, tax rate and acquisition charges.
- Actual generic-entry timing and revenue effects for Strattera, Cialis, Effient and Alimta, and the outcomes of the Alimta and Effient patent proceedings.
- Whether growth in newer products offsets declines in established products and whether reported growth is affected by return-reserve adjustments or collaboration accounting.
- Cash generation, debt and commercial-paper levels after the animal-health and CoLucid transactions, and the availability of committed credit facilities.
- Developments in product-liability claims, government investigations, pricing and reimbursement policy, and any resulting accruals or cash costs.