Eli Lilly and Company — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports fourth-quarter results. Lilly discovers, develops, manufactures, and sells pharmaceutical products; animal health operations are not material for segment reporting.
Financial results and liquidity
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Revenue | $21.84 billion | $20.37 billion |
| Income (loss) before taxes | $5.36 billion | $(1.31) billion |
| Net income (loss) | $4.33 billion | $(2.07) billion |
| Diluted EPS | $3.94 | $(1.89) |
| Gross margin | 80.6% | 78.5% |
| Research and development expense | $4.33 billion | $3.84 billion |
| Cash from operating activities | $4.34 billion | $7.30 billion |
- Revenue grew 7%; worldwide volume increased 7%, pricing contributed 3%, and foreign exchange reduced growth by 3%. U.S. revenue rose 12% to $12.29 billion; non-U.S. revenue rose 1% to $9.54 billion.
- Largest product sales included Zyprexa ($4.92 billion), Cymbalta ($3.07 billion), Humalog ($1.96 billion), and Alimta ($1.71 billion). Alimta sales rose 48%; Gemzar fell 21%, largely reflecting generic competition.
- Marketing, selling, and administrative expense increased 4% to $6.89 billion; R&D expense increased 13%. The effective tax rate was 19.2%.
- Year-end cash, cash equivalents, and short-term investments totaled approximately $4.50 billion, versus $5.93 billion in 2008. Total debt was $6.66 billion, down $3.80 billion; Lilly issued $2.40 billion of long-term notes and repaid substantial commercial paper borrowings.
- Capital expenditures were $765 million. Dividends paid were $2.15 billion, or $1.96 per share. Current assets were $12.49 billion and current liabilities $6.57 billion.
- Fourth quarter: Revenue was $5.93 billion versus $5.20 billion a year earlier; net income was $915 million and diluted EPS was $0.83, compared with a $3.63 billion net loss and $(3.31) EPS in Q4 2008. The prior-year quarter included a $4.69 billion ImClone acquired in-process R&D charge.
Changes, outlook, and material matters
- Return to profitability in 2009 primarily reflects the absence of the unusually large 2008 ImClone acquired in-process R&D charge and Zyprexa investigation charges, alongside revenue growth. The 2009 results included $692.7 million of asset impairment, restructuring, and other special charges, including Tippecanoe site-related charges and Zyprexa state-claim provisions.
- Operating cash flow declined from 2008, which benefited from acquisition-related and working-capital effects. 2009 operating cash flow included payments related to the Zyprexa federal settlement; cash paid for that settlement was approximately $1.39 billion.
- For 2010, management forecast EPS of $4.65–$4.85, excluding potential U.S. health care reform effects and restructuring charges; high-single-digit, volume-driven revenue growth; gross margin flat to declining; low- to mid-single-digit growth in marketing and administrative expense; and low-double-digit R&D growth. Expected capital expenditures were about $1.0 billion. Management said operating cash flow and available resources should fund normal needs, debt service, capital spending, litigation costs, and dividends.
- Management targeted $1 billion of cost-structure reductions by end-2011 and global headcount of 35,000, excluding strategic sales-force additions; further restructuring charges may result.
- Patent expiry and generic-entry risk is significant: eight products represented 74% of 2009 worldwide revenue and face loss of major patent-based protection over the coming years. Zyprexa’s key U.S. patent protection was expected to expire in 2011; Gemzar had already encountered generic competition in major markets.
- Material legal and compliance exposures include remaining Zyprexa product-liability and state claims, generic patent challenges involving Cymbalta, Gemzar, Alimta, Evista, and Strattera, and ongoing investigations, including an FCPA-related investigation. Lilly operates under a five-year Corporate Integrity Agreement following its Zyprexa marketing-practices resolution. The company stated that adverse outcomes in certain matters could materially affect results.
- Additional risks include pricing and reimbursement pressure, clinical and regulatory failures, product safety claims, manufacturing or supplier interruptions, and foreign-exchange exposure. Product liability insurance is limited; Lilly expects to be self-insured for future losses on substantially all marketed products.
- Pipeline developments included FDA approvals or expanded indications for Effient, Alimta, Byetta, Forteo, and Zyprexa Relprevv. Lilly reported more than 60 drug candidates in human testing; development remains costly and uncertain.
Key facts for investors to verify
- Whether 2010 revenue and EPS guidance was achieved, and the realized effects of health care reform, pricing, and restructuring.
- Sales trends and generic-entry timing for Zyprexa, Gemzar, and other products facing patent challenges or expirations.
- Cash generation, debt levels, and the sustainability of dividends after settlement payments and planned capital spending.
- Developments in Zyprexa litigation, patent disputes, and government investigations, including any changes in recorded reserves or potential exposure.
- Progress and outcomes of late-stage pipeline programs, especially exenatide once weekly and Alzheimer’s disease candidates.