10-QPeriod: Q2 FY2007

ELI LILLY & Co Quarterly Report for Q2 Ended Jun 30, 2007

Filed August 6, 2007For Securities:LLY

Summary

Eli Lilly and Company (LLY) reported its second-quarter and first-half results for 2007, showcasing significant revenue growth driven by strong performance in key therapeutic areas like neurosciences and endocrinology, as well as the inclusion of Cialis sales following the ICOS acquisition. However, the company experienced a notable decrease in net income and diluted earnings per share compared to the prior year. This decline was largely attributed to substantial in-process research and development charges resulting from acquisitions, coupled with asset impairments, restructuring, and other special charges. Despite the profit dip, Lilly's strategic acquisitions, particularly ICOS for Cialis, and ongoing investments in R&D and marketing indicate a focus on future growth. The company reaffirmed its full-year earnings guidance and raised its sales growth expectations, signaling confidence in its product pipeline and market positioning. Investors should monitor the company's ongoing patent litigation, particularly concerning Zyprexa, and government investigations, which continue to pose potential risks.

Key Highlights

  • 1Net sales increased by 20% for the second quarter and 17% for the first half of 2007 compared to the prior year, driven by volume and key products like Cymbalta, as well as the full inclusion of Cialis sales post-acquisition.
  • 2Net income and diluted earnings per share decreased significantly in both the second quarter (down 19% and 20% respectively) and the first half (down 29% and 29% respectively) of 2007 compared to 2006.
  • 3The company incurred substantial in-process R&D charges totaling $656.6 million for the first half of 2007, primarily related to the acquisitions of ICOS ($303.5M), Hypnion ($291.1M), and Ivy ($37.0M), which significantly impacted profitability.
  • 4The acquisition of ICOS Corporation for approximately $2.3 billion was completed in January 2007, bringing the full value of Cialis under Lilly's control and enabling operational efficiencies.
  • 5Research and development expenses increased by 10% for the second quarter and 11% for the first half of 2007, reflecting increased investment in discovery research and late-stage clinical trials, along with costs related to the Arxxant program.
  • 6The company raised its full-year 2007 earnings per share guidance to $2.75-$2.85 and its full-year sales growth guidance to mid-teens.
  • 7Significant ongoing legal matters, including patent litigation for Zyprexa, Evista, and Gemzar, government investigations into marketing practices, and product liability lawsuits related to Zyprexa, continue to be material considerations.

Frequently Asked Questions

Revenue growth was primarily driven by increased sales volume across key products, the continued strong performance of Cymbalta, and the inclusion of Cialis sales following the full acquisition of ICOS Corporation in January 2007. Sales outside the U.S. also benefited from favorable exchange rates.

The decrease in net income and diluted EPS was largely due to significant one-time charges in 2007, including substantial in-process research and development expenses related to acquisitions (ICOS, Hypnion, Ivy) and asset impairments, restructuring, and other special charges. These items significantly impacted the bottom line despite revenue growth.

Lilly remains confident in its U.S. patent protection for Zyprexa, which is expected to last until 2011. While a district court ruling in favor of Lilly was upheld by the Court of Appeals, generic manufacturers are seeking review by the U.S. Supreme Court. Additionally, Lilly is facing patent challenges in Canada and Germany, with mixed outcomes reported, and is appealing adverse decisions.

The acquisition of ICOS Corporation for approximately $2.3 billion in January 2007 brought the full value of Cialis under Lilly's control. This allows Lilly to realize operational efficiencies in the development, marketing, and selling of the drug, and Cialis sales are now fully consolidated into Lilly's revenue.