10-QPeriod: Q2 FY2008

ELI LILLY & Co Quarterly Report for Q2 Ended Jun 30, 2008

Filed August 6, 2008For Securities:LLY

Summary

Eli Lilly and Company (LLY) reported a significant increase in net sales and net income for the six months ended June 30, 2008, compared to the same period in 2007. Worldwide sales grew 12%, driven by strong performance from key products like Cymbalta, Cialis, Humalog, Alimta, and Gemzar, along with favorable foreign exchange rates. Net income more than doubled, reaching $2.02 billion, bolstered by a significant discrete income tax benefit related to the resolution of an IRS audit. The company continues to invest heavily in research and development, though R&D expenses as a percentage of sales remained consistent year-over-year. However, the period was also marked by substantial restructuring and other special charges, including the termination of the AIR Insulin program and impairments of manufacturing assets, which impacted earnings per share. The company also announced plans to acquire SGX Pharmaceuticals to enhance its drug discovery platform and continued to address ongoing patent litigation and product liability claims, particularly related to Zyprexa, which could materially impact future results.

Financial Highlights

21 data points
Beta

Revenue

$5.15B

76.7% Gross Margin

Net Income

$958.80M

18.6% Net Margin

Cash & Equivalents

$2.87B

Free Cash Flow

$2.78B

Financial Statements
Beta
Revenue$5.15B
Cost of Revenue$1.20B
Gross Profit$3.95B
R&D Expenses$951.50M
SG&A Expenses$1.70B
Net Income$958.80M

Key Highlights

  • 1Strong sales growth of 12% year-over-year for the first six months of 2008, driven by key products and favorable foreign exchange.
  • 2Net income surged by 73% to $2.02 billion for the first six months of 2008, significantly aided by a $210.3 million income tax benefit from settling a portion of an IRS audit.
  • 3Significant investments in R&D continue, with expenses increasing 8% for the first half of 2008.
  • 4The company incurred substantial charges related to restructuring and asset impairments, notably the termination of the AIR Insulin program and manufacturing asset write-downs.
  • 5Acquisition of SGX Pharmaceuticals announced for $64 million to strengthen drug discovery capabilities.
  • 6Ongoing material risks remain from patent litigation (e.g., Evista, Gemzar, Strattera, Zyprexa) and significant Zyprexa product liability litigation, with potential material adverse effects on future financial results.
  • 7Despite challenges, the company maintained strong cash flow from operations and has sufficient liquidity to fund its operating needs.

Frequently Asked Questions

The significant increase in net income to $2.02 billion for the first six months of 2008 was primarily driven by a $210.3 million discrete income tax benefit resulting from the resolution of a substantial portion of the IRS audit for tax years 2001-2004. Without this one-time benefit, the net income growth would have been less pronounced.

The company faces significant risks from ongoing patent litigation concerning key products like Evista, Gemzar, Strattera, and Zyprexa, which could lead to the introduction of generic competitors. Additionally, the extensive Zyprexa product liability litigation, including claims from state Medicaid agencies and private healthcare payors, represents a material contingent liability, with the potential for significant adverse impact on future financial results. The company also incurred substantial restructuring and special charges related to program terminations and asset impairments.

Eli Lilly is actively managing its product pipeline through both internal development and strategic business development. This includes the announced acquisition of SGX Pharmaceuticals to enhance drug discovery capabilities, licensing agreements for new drug candidates, and ongoing clinical development for several therapies. Key product sales like Cymbalta, Cialis, Humalog, Alimta, and Gemzar are showing strong growth, contributing to overall revenue increases.

During the second quarter of 2008, Eli Lilly identified an understatement in its return reserve methodology, leading to a restatement of its consolidated balance sheets as of December 31, 2007, 2006, and 2005. The restatement primarily impacted deferred tax assets, other current liabilities, other noncurrent liabilities, retained earnings, and shareholders' equity. However, the company concluded that the errors were not material to any individual prior period's statements of income, and therefore, prior filed income statements were not adjusted.