Eli Lilly and Company Reports Second-Quarter 2011 Results

INDIANAPOLIS, July 21, 2011 /PRNewswire/ --

• Second-quarter 2011 revenue grew 9 percent to $6.253 billion due to increased demand and favorable exchange rates.
• Q2 expense growth driven primarily by marketing efforts to support new launches, restructuring charge and exchange rates.
• R&D investments support clinical pipeline of 70 potential new medicines.
• Company delivered second quarter earnings per share of $1.07 (reported), or $1.18 (non-GAAP).
• 2011 earnings per share guidance range revised to $3.85 - $3.95 (reported), or $4.25 $4.35 (non-GAAP).

Eli Lilly and Company (NYSE: LLY) today announced financial results for the second quarter of 2011.

Financial results for 2011 and 2010 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.

"In the second quarter, Lilly once again achieved solid volume-driven revenue growth, despite the negative impact of generic versions of gemcitabine in the United States. Our financial results reflect the solid performance of many of our marketed products, as well as important investments we are making to expand our commercial opportunities and deliver the next wave of potential new medicines to patients," said John C. Lechleiter, Ph.D., Lilly's chairman, president and chief executive officer. "Key Lilly products continue to perform well, including Cymbalta, Cialis and our insulins. Exchange rates have also contributed to favorable sales comparisons. At the same time, we are investing for the company's future by supporting the launches of new medicines and new indications, as well as funding our R&D pipeline, which now boasts 70 potential new medicines in clinical development."

Key Events Over the Last Three Months

• The U.S. Food and Drug Administration (FDA) approved Tradjenta (linagliptin), a prescription medication used along with diet and exercise to lower blood sugar in adults with type 2 diabetes. The company, along with its partner Boehringer Ingelheim, recently launched Tradjenta in the United States. Linagliptin was also approved in Japan, Mexico and Brazil and received a positive opinion from the European Medicines Agency's Committee for Medicinal Products for Human Use (CHMP).
• The European Commission granted marketing authorization to Bydureon, the first once-weekly treatment for type 2 diabetes. The company is developing Bydureon along with its partners, Amylin Pharmaceuticals and Alkermes, Inc.
• The company filed for a new indication with the FDA for Erbitux® in first-line non-small cell lung cancer.
• The U.S. District Court for the Southern District of Indiana issued an order that prohibits the remaining defendants in the Cymbalta® patent litigation from selling a generic duloxetine product in the United States during the term of the Cymbalta compound patent. The patent provides protection for Cymbalta until at least June of 2013.
• The company signed agreements with private investors Care Capital and NovaQuest Capital to establish BioCritica Inc., a newly-formed and privately-held biotechnology company. BioCritica, based in Indiana, will focus initially on the continued development and commercialization of Xigris® in the United States.
• The company completed the acquisition of the animal health business of Janssen Pharmaceutica NV, a Johnson & Johnson Company, after gaining final approval from the European Commission. Terms of the deal were not disclosed.
• On June 30, 2011 the company held a meeting with the investment community where it outlined its corporate strategy, reviewed its operational performance, discussed potential medicines in its clinical pipeline and reaffirmed its mid-term financial outlook. A press release summarizing the highlights of the meeting can be found on the company's website, www.lilly.com, or at the following link.

Second-Quarter Reported Results

In the second quarter of 2011, worldwide total revenue was $6.253 billion, an increase of 9 percent compared with the second quarter of 2010. This 9 percent revenue growth was comprised of increases of 5 percent in volume and 4 percent due to the impact of foreign exchange rates. Reflecting the loss of U.S. patent exclusivity for Gemzar® in November 2010, price had a negligible impact on revenue growth. Total revenue in the U.S. increased 3 percent to $3.346 billion primarily due to increased volume, and, to a lesser extent, higher prices. Total revenue outside the U.S. increased 17 percent to $2.906 billion due to increased volume and the positive impact of foreign exchange rates. Second-quarter 2011 total revenue was reduced by approximately $110 million due to the impact of U.S. health care reform.

Gross margin increased 6 percent in the second quarter of 2011. Gross margin as a percent of total revenue was 80.4 percent, reflecting a decrease of 1.8 percentage points compared with the second quarter of 2010. The decrease in gross margin percent was due to the impact of changes in foreign currencies compared to the U.S. dollar on international inventories sold during the quarter.

Total operating expense, defined as the sum of research and development, marketing, selling and administrative expenses, increased 12 percent compared with the second quarter of 2010. Marketing, selling and administrative expenses increased 16 percent to $2.043 billion. Research and development expenses increased 6 percent to $1.261 billion, or 20.2 percent of total revenue. Total operating expense growth was driven by the recently-announced diabetes collaboration with Boehringer Ingelheim, including late-stage clinical trial costs, as well as the effect of foreign exchange rates and marketing efforts to support launches of new products and new indications. In addition, approximately $45 million of the increase in operating expense was due to the mandatory pharmaceutical manufacturers fee associated with U.S. health care reform.

In the second quarter of 2011, the company recognized a charge of $132.3 million for restructuring related to severance costs from previously announced strategic actions that the company is taking to reduce its cost structure and global workforce. In the second quarter of 2010, the company recognized restructuring charges of $27.3 million, primarily related to the previously announced strategic actions.

Operating income in the second quarter of 2011 was $1.589 billion, a decrease of 9 percent compared to the second quarter of 2010, due primarily to increased marketing, selling and administrative expenses, lower gross margin percent and higher restructuring charges.

Other income (expense) was a net expense of $57.6 million, compared to net expense of $18.4 million in the second quarter of 2010. The increase in second quarter 2011 expense was driven by the partial impairment of the acquired in-process research and development asset related to liprotamase, partially offset by gains on the disposition of investment securities.

The effective tax rate was 21.8 percent in the second quarter of 2011, compared with an effective tax rate of 22.3 percent in the second quarter of 2010. This decrease was driven primarily by the lapse of the U.S. R&D tax credit, which resulted in an increase in the 2010 effective tax rate. The lower tax rate for the second quarter of 2011 reflects reinstatement of the U.S. R&D tax credit for 2010 and 2011 during the fourth quarter of 2010.

Net income and earnings per share decreased to $1.197 billion and $1.07, respectively, compared with second-quarter 2010 net income of $1.349 billion and earnings per share of $1.22. The decreases in net income and earnings per share were primarily driven by lower operating income, partially offset by a lower effective tax rate.

Second-Quarter 2011 non-GAAP Results

Operating income decreased 3 percent to $1.721 billion, due to increased marketing, selling and administrative expenses and a lower gross margin percent. Net income decreased 4 percent to $1.316 billion, while earnings per share decreased 5 percent to $1.18. These decreases were primarily driven by lower operating income, partially offset by a lower net effective tax rate. Excluding the impact of changes in foreign exchange rates, earnings per share would have decreased approximately 4 percent.

For purposes of non-GAAP reporting, items totaling $.11 and $.02 per share in the second quarters of 2011 and 2010, 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.