Eli Lilly and Company Reports Third-Quarter 2011 Results

INDIANAPOLIS, Oct. 20, 2011 /PRNewswire/ --

• Third-quarter 2011 revenue grew 9 percent to $6.148 billion due to increased demand for several key brands and favorable exchange rates.
• Revenue for Cymbalta, Humalog, Forteo, Strattera, Cialis and Alimta all grew in double-digits, with strong growth also seen in animal health, Japan and China.
• Q3 operating expense growth was driven primarily by marketing efforts to support new launches, investments in research and development, and exchange rates.
• Clinical pipeline now contains 66 potential new medicines, including 10 in Phase III.
• Company delivered third quarter earnings per share of $1.11 (reported), or $1.13 (non-GAAP).
• 2011 earnings per share guidance range revised to $3.89 - $3.94 (reported), or $4.30 $4.35 (non-GAAP).

Eli Lilly and Company (NYSE: LLY) today announced financial results for the third 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 third quarter Lilly continued to drive revenue growth for many key brands, including Cymbalta, Humalog, Forteo and Strattera, with strong growth also seen in animal health, Japan and China. This growth offset the continued erosion of Gemzar sales due to generic competition," said John C. Lechleiter, Ph.D., Lilly's chairman, president and chief executive officer. "As we face the loss of patent exclusivity for Zyprexa in most major markets, we are well-prepared as a company to meet the challenges before us. We remain committed to our innovation-based strategy and are focused on delivering the next wave of new medicines to patients in the coming years."

Key Events Over the Last Three Months

• The European Commission granted marketing authorization for Trajenta® for the treatment of adults with type 2 diabetes. The company and its partner Boehringer Ingelheim have recently begun launching Trajenta in the European Union, beginning with the United Kingdom.

• The U.S. Food and Drug Administration (FDA) approved Cialis® tablets for once daily use for the treatment of men who have both erectile dysfunction and the signs and symptoms of benign prostatic hyperplasia (ED+BPH). The FDA also approved Cialis for once daily use for a separate indication for the treatment of the signs and symptoms of BPH.

• The European Medicines Agency's (EMA) Committee for Medicinal Products for Human Use (CHMP) issued a positive opinion for the use of Alimta® as continuation maintenance therapy in patients with advanced nonsquamous non-small cell lung cancer (NSCLC).

• The U.S. Court of Appeals for the Federal Circuit overturned a prior ruling by the U.S. District Court for the District of New Jersey and upheld the validity of the company's method-of-use patent on Strattera®. The method-of-use patent provides protection for Strattera through May of 2017.

• The company, along with its partners Amylin Pharmaceuticals, Inc. and Alkermes, Inc., submitted a reply to a complete response letter issued in October 2010 by FDA regarding Bydureon, an investigational medication for type 2 diabetes. The FDA has assigned a new Prescription Drug User Fee Act (PDUFA) action date of January 28, 2012.

• The company submitted its reply to a complete response letter by FDA regarding Amyvid, a molecular Positron Emission Tomography (PET) imaging agent under investigation for the detection of beta-amyloid plaque in the brains of living patients.

• The America Invents Act was signed into law, aligning new U.S. patent laws more closely with those from other countries and improving the global competiveness of U.S. innovator companies such as Lilly. The law will provide new advantages for U.S. inventors by streamlining the application process and addressing the backlog of current applications. This new law, which transitions the U.S. from a "first-to-invent" to a "first-inventor-to-file" system, is the most significant overhaul of the U.S. patent system in 175 years.

Third-Quarter Reported Results

In the third quarter of 2011, worldwide total revenue was $6.148 billion, an increase of 9 percent compared with the third quarter of 2010. This 9 percent revenue growth was comprised of increases of 4 percent in volume and 4 percent due to the impact of foreign exchange rates. Price had a negligible impact on revenue growth, reflecting the loss of U.S. patent exclusivity for Gemzar® in November 2010. Total revenue in the U.S. increased 4 percent to $3.273 billion due to higher prices and increased volume. Total revenue outside the U.S. increased 15 percent to $2.874 billion due to the positive impact of foreign exchange rates and increased volume. Third-quarter 2011 total revenue was reduced by approximately $130 million due to the impact of U.S. health care reform.

Gross margin increased 3.1 percent to $4.810 billion in the third quarter of 2011. Gross margin as a percent of total revenue was 78.2 percent, reflecting a decrease of 4.3 percentage points compared with the third quarter of 2010. The decrease in gross margin percent was due primarily to the impact of foreign exchange rates on inventories sold during the quarter.

Total operating expense, defined as the sum of research and development, marketing, selling and administrative expenses, increased 10 percent compared with the third quarter of 2010. Marketing, selling and administrative expenses increased 13 percent to $1.918 billion. Research and development expenses increased 5 percent to $1.281 billion, or 20.8 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. 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 third quarter of 2011, the company recognized a charge of $25.2 million for restructuring primarily related to severance costs from previously announced strategic actions that the company is taking to reduce its cost structure and global workforce. In the third quarter of 2010, the company recognized restructuring charges of $59.5 million, primarily related to the previously announced strategic actions.

Operating income in the third quarter of 2011 was $1.586 billion, a decrease of 6 percent compared to the third quarter of 2010, due primarily to lower gross margin percent and increased marketing, selling and administrative expenses.

Other income (expense) was a net expense of $83.4 million, compared to net expense of $21.7 million in the third quarter of 2010. The increase in third quarter 2011 expense was driven primarily by the partial impairment of an acquired in-process research and development asset related to Amyvid.

The effective tax rate was 17.7 percent in the third quarter of 2011, compared with an effective tax rate of 22.0 percent in the third quarter of 2010. The largest driver of the decrease in the effective tax rate was the recognition of a $45.4 million discrete benefit primarily as a result of the resolution of the IRS audit of the company's 2007 federal income tax return. For the full year 2011, the company expects the effective tax rate to be approximately 19.5 percent.

Net income and earnings per share decreased to $1.236 billion and $1.11, respectively, compared with third-quarter 2010 net income of $1.303 billion and earnings per share of $1.18. The decreases in net income and earnings per share were primarily driven by lower operating income and higher other expense, partially offset by a lower effective tax rate.

Third-Quarter 2011 non-GAAP Results

Operating income decreased 8 percent to $1.611 billion, due to lower gross margin percent and increased marketing, selling and administrative expenses. Net income decreased 7 percent to $1.254 billion, while earnings per share decreased 7 percent to $1.13. These decreases were primarily driven by lower operating income and higher other expense, 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 1 percent.

For purposes of non-GAAP reporting, items totaling $.02 and $.03 per share in the third 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.