Eli Lilly and Company — Form 10-Q Summary
Business context and reporting period
Pharmaceutical and animal-health company reporting for the quarter and nine months ended September 30, 2013; comparisons are with the same 2012 periods. Revenue comes from human pharmaceutical products and animal health.
Financial performance and position
| Metric | Third quarter 2013 | Nine months 2013 |
|---|---|---|
| Revenue | $5.77 billion, up 6% | $17.30 billion, up 4% |
| Net income | $1.20 billion, down 9% | $3.96 billion, up 21% |
| Diluted EPS | $1.11, down 6% | $3.64, up 25% |
| Gross margin | 79.2%, up 1.3 percentage points | 79.6%, up 0.9 percentage points |
Quarterly revenue growth reflected higher prices and volume, partly offset by unfavorable foreign exchange. Nine-month product gains included Cymbalta, Alimta, insulin products, Cialis, and animal health; Zyprexa declines weighed on results. Quarterly SG&A fell 6% to $1.65 billion, while R&D rose 3% to $1.38 billion. The effective tax rate was 20.5% in both 2013 periods, versus 29.2% in third-quarter 2012 and 25.8% for the first nine months of 2012.
Operating cash flow for the first nine months was $4.01 billion, versus $3.70 billion in 2012. Capital spending was $548 million; dividends paid were $1.59 billion and share repurchases were $1.20 billion. Cash and equivalents were $4.37 billion at September 30, 2013, and short-term investments were $1.01 billion. Total debt was $5.28 billion, down from $5.53 billion at year-end 2012; management attributed the decrease primarily to lower fair value of hedged debt. Current assets were $13.20 billion and current liabilities $8.08 billion.
Material changes and unusual items
- Comparisons were substantially affected by exenatide collaboration income: Lilly recognized $495.4 million pretax in first-quarter 2013 upon transferring exenatide commercial rights outside the U.S.; third-quarter 2012 included $787.8 million pretax income related to early payment of the revenue-sharing obligation. Third-quarter 2013 had no such income.
- Quarterly net income and EPS declined partly because of the prior-year exenatide income, partly offset by improved gross margin, lower SG&A, and a lower tax rate. Nine-month earnings increased on improved gross margin, lower SG&A, and lower taxes.
- No special charges were recorded in third-quarter 2013, compared with $53.3 million in third-quarter 2012. Nine-month 2013 special charges were $85.2 million, mainly for a planned German facility closure and workforce reductions.
- In the third quarter, Lilly resolved remaining tax matters for 2008–2009, reducing gross unrecognized tax benefits by about $630 million; the effect on earnings was immaterial. Cash tax payments after tax credits were approximately $135 million.
Guidance, outlook, and risks
Management narrowed full-year 2013 diluted EPS guidance to $4.33–$4.38; revenue guidance remained $22.6–$23.4 billion. Other guidance included gross margin of approximately 79%, SG&A of $7.0–$7.2 billion, R&D of $5.3–$5.5 billion, and other-net income of $440–$590 million. Capital expenditure guidance was revised to approximately $1.0 billion. Management estimated fourth-quarter U.S. Cymbalta sales of about $500 million, including substantial reserves for expected returns after U.S. exclusivity ends December 11, 2013.
Management cited expected generic competition following Cymbalta’s December 2013 and Evista’s March 2014 U.S. loss of exclusivity, each expected to cause a rapid and severe sales decline. Alimta patent challenges could also materially affect future results, liquidity, and financial position if resolved adversely; the company said the outcome could not be determined. Lilly reported approximately 235 Byetta product-liability lawsuits involving about 650 plaintiffs and said it is substantially self-insured for product liability. Other risks include pricing and reimbursement pressures, foreign exchange, and the inherent uncertainty of drug development.
The pipeline had about 60 candidates in human testing or regulatory review. Dulaglutide and ramucirumab were submitted for review in the third quarter; empagliflozin and a new insulin glargine product were also under regulatory review. Development setbacks included discontinuation of enzastaurin after negative Phase III results and discontinuation of tabalumab’s rheumatoid-arthritis program for lack of efficacy. Lilly and Pfizer announced a tanezumab collaboration in October, subject to an FDA partial clinical hold and a potential $200 million upfront payment if the parties continue after FDA feedback.
Lilly said cash from operations, available cash, and commercial paper access should fund normal needs; it had $1.36 billion of unused committed bank facilities. Both S&P and Moody’s outlooks were stable. A new $5 billion share repurchase program was announced in October 2013, after quarter-end.
Important facts for investors to verify
- Actual Cymbalta sales erosion, return reserves, and earnings impact following the December 2013 U.S. exclusivity loss; and the subsequent Evista generic-launch impact.
- Progress and regulatory outcomes for key late-stage candidates, especially dulaglutide, empagliflozin, ramucirumab, and the new insulin glargine product.
- Developments in Alimta patent litigation and Byetta and other product-liability matters, including potential exposure beyond recorded accruals.
- Delivery against full-year 2013 EPS and revenue guidance, and the funding and execution of the newly announced repurchase program.