Eli Lilly and Company Reports Fourth-Quarter and Full-Year 2010 Results, Provides 2011 Financial Guidance

INDIANAPOLIS, Jan. 27, 2011 /PRNewswire/ --

• Higher volume drove four percent revenue growth in Q4.
• Gross margin improvements in Q4 led to growth in operating income.
• Fourth quarter earnings per share grew to $1.05 (reported), or $1.11 (non-GAAP).
• Full-year 2010 revenue topped $23 billion as eight human pharmaceutical medicines and the company’s animal health business all exceed $1 billion in annual sales.
• Full-year 2010 earnings per share grew to $4.58 (reported), or $4.74 (non-GAAP).
• 2011 earnings per share guidance range set at $3.92 - $4.07 (reported), or $4.15 - $4.30 (non-GAAP).

Eli Lilly and Company (NYSE: LLY) today announced financial results for the fourth quarter and full year of 2010.

Financial results for 2010 and 2009 are presented on both a reported and a non-GAAP basis. Reported results were prepared in accordance with generally accepted accounting principles (GAAP) and include all revenue and expenses recognized during the period. Non-GAAP results exclude the items described in the reconciliation tables. The non-GAAP results are presented in order to provide additional insights into the underlying trends in the company’s business. The company’s 2011 financial guidance is also being provided on both a reported and a non-GAAP basis.

“Lilly’s fourth quarter results capped a year of solid financial performance in which we achieved volume-driven revenue growth along with good expense control. These results allowed us to deliver attractive earnings growth and a healthy dividend for our shareholders, while still investing in the research and development and business development activities that will enable us to bring the next generation of new medicines to patients,” said John C. Lechleiter Ph.D., Lilly’s chairman and chief executive officer. “As we begin 2011, we remain committed to our strategy of accelerating the flow of potential new medicines through our pipeline and are prepared to meet the challenges of patent expirations for several of our products.”

Key Events Over the Last Three Months

• The company announced a global agreement with Boehringer Ingelheim to jointly develop and commercialize a portfolio of diabetes compounds currently in mid- and late-stage development. Included are Boehringer Ingelheim’s two oral diabetes agents--linagliptin and BI 10773--as well as Lilly’s two basal insulin analogues - LY2605541 and LY2963016 - along with an option to co-develop and co-commercialize Lilly’s anti-TGF-beta monoclonal antibody.
• The company completed the acquisition of Avid Radiopharmaceuticals, Inc., a company developing novel molecular imaging compounds intended for the detection and monitoring of chronic human diseases. In addition, the U.S. FDA assigned priority review designation to the marketing application for Amyvid (florbetapir), Avid’s lead program in development. The Peripheral and Central Nervous System Drugs Advisory Committee of the FDA held a meeting to discuss Amyvid’s new drug application on January 20, 2011. The Committee decided that it could not recommend approval of Amyvid at this time based on the currently available data (13-3); but, voted unanimously (16-0) to recommend approval of Amyvid conditional on a reader training program that demonstrates reader accuracy and consistency through a re-read of previously acquired scans. The Committee supported that efficacy was established and there were no significant safety concerns raised.
• The U.S. Food and Drug Administration (FDA) Gastrointestinal Drugs Advisory Committee voted to recommend non-approval of liprotamase, a non-porcine pancreatic enzyme replacement therapy, currently under FDA review for the treatment of exocrine pancreatic insufficiency. During the meeting, the Committee had questions about the degree of efficacy of liprotamase and recommended that additional studies be conducted prior to considering approval of liprotamase for EPI. The company will continue to work with the FDA to address the questions raised in the meeting as the agency moves toward a final decision on the application.
• The U.S. District Court for the District of Delaware ruled that judgment would be entered in the company’s favor regarding its Alimta^® patent litigation. Including the recently-obtained pediatric exclusivity, the patent provides protection for Alimta until January of 2017.
• The U.S. Court of Appeals for the Federal Circuit heard the company’s appeal of a prior district court ruling invalidating the patent for Strattera^®. The company is currently awaiting the appeals court’s ruling.
• The U.S. FDA approved Cymbalta^® for the management of chronic musculoskeletal pain. This has been established in studies in patients with chronic low back pain and chronic pain due to osteoarthritis.
• The U.S. FDA approved Axiron^® for replacement therapy in men for certain conditions associated with a deficiency or absence of testosterone. The company, along with its partner Acrux Ltd., expects to launch Axiron in the U.S. by mid-2011.
• The company’s Elanco Animal Health division launched two new companion animal products. Assurity is a topical flea treatment solely for cats, while Trifexis is a broad-spectrum canine parasiticide.
• The company suspended all current studies evaluating tasisulam as a second-line treatment for those with unresectable or metastatic melanoma. Tasisulam, an investigational, small-molecule anti-cancer compound, continues to be studied in other types of cancers.
• The company notified its partner, MacroGenics Inc., of its decision to terminate the collaboration agreement for the development of teplizumab.

Fourth-Quarter Reported Results

In the fourth quarter of 2010, worldwide total revenue was $6.187 billion, an increase of 4 percent compared with the fourth quarter of 2009. This 4 percent revenue growth was comprised of an increase of 3 percent in volume and 2 percent due to higher prices, offset by a 1 percent decrease due to the impact of foreign exchange rates. Total revenue in the U.S. increased 5 percent to $3.420 billion primarily due to higher prices and, to a lesser extent, increased volume. Total revenue outside the U.S. increased 4 percent to $2.767 billion due to increased demand, partially offset by the negative impact of foreign exchange rates and lower prices. Fourth-quarter 2010 total revenue was reduced by approximately $70 million due to the impact of U.S. health care reform.

Gross margin increased 10 percent in the fourth quarter of 2010. Gross margin as a percent of total revenue was 80.1 percent, reflecting an increase of 4.2 percentage points compared with the fourth quarter of 2009. This increase was due to the impact of changes in foreign currencies compared to the U.S. dollar on international inventories sold, which slightly decreased cost of sales in the fourth quarter of 2010, but significantly increased cost of sales in the fourth quarter of 2009. To a lesser extent, the increase in gross margin as a percent of revenue was also due to lower manufacturing costs.

Marketing, selling and administrative expenses increased 2 percent to $1.989 billion. Higher marketing and selling expenses outside the U.S. were partially offset by lower administrative expenses and company-wide cost containment efforts. Research and development expenses were $1.438 billion, or 23 percent of total revenue. Compared with the fourth quarter of 2009, research and development expenses grew 18 percent due primarily to charges related to pipeline molecules, including charges related to business development activities and termination of clinical trials. Total operating expense, defined as the sum of research and development, marketing, selling and administrative expenses, increased 8 percent compared with the fourth quarter of 2009.

In the fourth quarter of 2010, the company recognized a charge of $79.0 million for restructuring primarily related to severance and other related costs from previously announced strategic actions that the company is taking to reduce its cost structure and global workforce. In the fourth quarter of 2009, the company recognized asset impairments, restructuring and other special charges of $37.9 million, primarily related to the previously announced strategic actions, as well as a $90.0 million inprocess research and development charge associated with the in-licensing of an oral JAK1/JAK2 inhibitor, INCB28050, from Incyte Corporation.

Operating income in the fourth quarter of 2010 increased 20 percent to $1.449 billion, compared to the fourth quarter of 2009, due primarily to increased gross margin, partially offset by increased research and development expenses.

Other income (expense) improved $28.4 million, to a net expense of $39.4 million, primarily driven by increased other miscellaneous income and the net gain on equity investments, as well as lower net interest expense, partially offset by foreign exchange losses.

The effective tax rate was 17.0 percent in the fourth quarter of 2010, compared with an effective tax rate of 19.5 percent in the fourth quarter of 2009. The effective tax rate for the fourth quarter of 2010 reflects a full-year adjustment related to the extension of the R&D tax credit in the U.S. in late December.

Net income and earnings per share increased to $1.170 billion and $1.05, respectively, compared with fourth-quarter 2009 net income of $915 million and earnings per share of $0.83. The increases in net income and earnings per share were primarily due to higher operating income, improved other income and a lower effective tax rate.

Fourth-Quarter non-GAAP Results

Operating income increased 15 percent to $1.528 billion, due to increased gross margin, partially offset by increased research and development expenses. Net income increased 24 percent to $1.235 billion, while earnings per share increased 22 percent to $1.11. These increases were primarily driven by sales growth leveraged by gross margin improvements and the tax adjustment related to the extension of the R&D tax credit in the U.S. Excluding the impact of changes in foreign exchange rates, operating income and earnings per share would have increased approximately 3 percent and 10 percent, respectively.

For purposes of non-GAAP reporting, items totaling $0.06 and $0.08 in the fourth quarters of 2010 and 2009, respectively, have been excluded. For further detail, see the reconciliation below as well as the footnotes to the non-GAAP income statement later in this press release. Numbers in the 2009 fourth quarter column do not add due to rounding.

Full Year 2010 Reported Results

For the full-year 2010, worldwide total revenue increased 6 percent to $23.076 billion compared with 2009. This 6 percent revenue growth was comprised of a 3 percent increase due to higher volume and a 2 percent increase due to higher prices, while the impact of foreign exchange rates was negligible (numbers do not add due to rounding). Total revenue in the U.S. increased 5 percent to $12.866 billion due to higher prices. Total revenue outside the U.S. increased 7 percent to $10.210 billion due to increased demand, partially offset by lower prices. 2010 total revenue was reduced by approximately $230 million due to the impact of U.S. health care reform.

Gross margin as a percent of total revenue increased by 0.5 percentage points in 2010 to 81.1 percent. This increase was due to lower manufacturing costs and higher selling prices, partially offset by the negative effect of foreign exchange rates on international inventories sold.

Marketing, selling and administrative expenses increased 2 percent in 2010 compared with 2009, to $7.053 billion. Higher marketing and selling expenses outside the U.S. were partially offset by lower administrative and litigation expenses and company-wide cost containment efforts. Research and development expenses were $4.884 billion in 2010, or 21 percent of total revenue. Compared with 2009, research and development expenses grew 13 percent due primarily to charges related to pipeline molecules, including charges related to business development activities and termination of clinical trials. Total operating expenses, defined as the sum of research and development, marketing, selling and administrative expenses, increased 6 percent in 2010, compared with 2009.

In 2010, the company recognized a charge of $50.0 million related to acquired in-process research and development associated with the in-licensing agreement with Acrux Corporation. In 2009, the company recognized charges of $90.0 million for acquired in-process research and development associated with the in-licensing agreement with Incyte Corporation.

In 2010, the company recognized charges of $192.0 million for asset impairments, restructuring and other special charges primarily related to severance costs from previously announced strategic actions. In 2009, the company recognized charges totaling $692.7 million for asset impairments, restructuring and other special charges.

Operating income in 2010 rose 17 percent to $6.530 billion compared to 2009, due primarily to increased gross margin, and lower asset impairments, restructuring and other special charges, partially offset by increased research and development expenses.

Other income (expense) in 2010 was a net expense of $5.0 million, compared to a net expense of $229.5 million in 2009, due primarily to net gains on equity investments, lower net interest expense, damages recovered from generic pharmaceutical companies following Zyprexa^® patent litigation in Germany, and an insurance recovery associated with the theft of product at the company’s Enfield distribution center.

The effective tax rate was 22.3 percent for the full-year 2010. In 2009, the effective tax rate was 19.2 percent. The 2010 effective tax rate increased due to $85.1 million in additional tax expense in the first quarter related to U.S. health care reform. The 2009 effective tax rate was reduced due to the tax benefit of asset impairment and restructuring charges associated with the sale of the Tippecanoe manufacturing site.

For the full-year 2010, net income and earnings per share increased to $5.070 billion and $4.58, respectively, compared to full-year 2009 net income of $4.329 billion and earnings per share of $3.94. The increases in net income and earnings per share were primarily due to higher operating income and improved other income, partially offset by a higher effective tax rate.

Full-Year 2010 non-GAAP Results

Operating income increased 6 percent to $6.772 billion due primarily to increased gross margin, partially offset by increased research and development expenses. The effective tax rate for 2010 was 22.6 percent, up from 21.0 percent in 2009. Net income and earnings per share increased 8 percent and 7 percent, to $5.241 billion and $4.74, respectively. Excluding the impact of changes in foreign exchange ra