LLY

Business Context and Reporting Period

Company: Eli Lilly & Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Eli Lilly operates primarily in the human pharmaceutical sector, with a non-material animal health segment. The company reported strong profitability in the first quarter of 2009, driven by growth in key products (Cymbalta, Alimta, Humalog) and the inclusion of Erbitux revenue following the November 2008 acquisition of ImClone Systems Inc.

Key Financial Metrics

Note: Total Debt calculated as Short-term borrowings ($1,602.8M) + Long-term debt ($6,870.8M) for Q1 2009. Q1 2008 debt figures derived from prior period balance sheet context where available or noted as unavailable in text.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 5% year-over-year. U.S. revenue grew 13% ($325.3M increase), while non-U.S. revenue declined 4% due to unfavorable foreign exchange rates.
• Profitability: Net income rose 23% to $1.31 billion. This compares favorably to Q1 2008, which was impacted by a $145.7M charge for asset impairments/restructuring (AIR Insulin program termination) and an $87.0M charge for acquired in-process R&D.
• Cash Flow Volatility: Operating cash flow dropped significantly to $87.9M from $1.70 billion in the prior year. This decrease was primarily due to a $1.06 billion cash payment related to the Eastern District of Pennsylvania (EDPA) settlement regarding Zyprexa marketing practices.
• Debt Reduction: Total debt decreased by approximately $1.99 billion to $8.47 billion. The company reduced short-term borrowings by $4.24 billion, partially offset by issuing $2.40 billion in long-term fixed-rate notes in March 2009.
• Product Performance:
  • Alimta: Sales increased 36% (driven by demand).
  • Cymbalta: Sales increased 17%.
  • Gemzar: Sales decreased 14% due to generic competition and lower prices.
  • Zyprexa: Sales remained flat (0% change) as U.S. growth was offset by declines outside the U.S.

Guidance, Outlook, and Risks

Management Guidance (Full Year 2009)

• Earnings Per Share: Expected to be in the range of $4.00 to $4.25.
• Sales Growth: Expected to be mid-single digits.
• Gross Margin: Expected to increase substantially, driven by the strengthening U.S. dollar.
• Expenses: Marketing, selling, and administrative expenses expected to be flat to low-single digit growth; R&D expenses expected to grow in low-double digits.
• Other Net Expense: Expected net loss between $200.0 million and $250.0 million.

Key Risks and Contingencies

• Zyprexa Litigation: The company settled federal and state claims in Q1 2009, paying $1.06 billion. However, significant product liability litigation remains, including approximately 120 lawsuits covering 140 plaintiffs in the U.S. and class actions in Canada. The company has recorded $1.61 billion in net charges for these matters since 2005.
• Patent Challenges: Ongoing Hatch-Waxman litigation for Cymbalta, Gemzar, Alimta, and Evista. International patent challenges for Zyprexa persist in Canada, the U.K., and other European markets.
• Regulatory Environment: Uncertainty regarding U.S. healthcare reform, potential price controls, and proposals to negotiate drug prices under Medicare Part D.
• Acquisition Integration: The company is finalizing the purchase price allocation for the ImClone acquisition, which included a $4.69 billion charge for acquired in-process R&D in late 2008.

Investor Verification Checklist

• Settlement Obligations: Verify the remaining cash outflows required for the EDPA settlement and state Medicaid settlements (approx. $362M available for states).
• Patent Expirations: Monitor trial dates for generic challenges to Gemzar (Sept 2009), Cymbalta, and Zyprexa (Canada decision expected H2 2009).
• Cash Position: Confirm the sustainability of the $3.3 billion cash balance given the significant Q1 outflow for settlements and the reduction in operating cash flow.
• Foreign Exchange Impact: Assess the sensitivity of non-U.S. revenue (which declined 4%) to further currency fluctuations, as the strengthening dollar is a key driver of the projected gross margin expansion.
• ImClone Integration: Track the commercial performance of Erbitux and the pipeline assets acquired from ImClone to ensure they meet revenue expectations.