10-QPeriod: Q2 FY2015

ELI LILLY & Co Quarterly Report for Q2 Ended Jun 30, 2015

Filed July 30, 2015For Securities:LLY

Summary

Eli Lilly and Company's (LLY) Form 10-Q filing for the quarter ended June 30, 2015, reveals a slight increase in revenue but a notable decrease in net income and earnings per share compared to the prior year's period. This decline in profitability was primarily driven by significant one-time charges, including those related to the acquisition of Novartis Animal Health (Novartis AH), acquired in-process research and development (IPR&D) expenses from new collaborations, asset impairment, restructuring charges, and a debt extinguishment loss. Despite these headwinds, the company generated positive operating cash flow and maintained a strong liquidity position. The company's revenue growth was modest, with increased volume in the U.S. and internationally, partly due to the inclusion of Novartis AH revenues. However, patent expirations for key drugs like Cymbalta and Evista continued to negatively impact sales. Management provided updated full-year 2015 financial guidance, expecting EPS in the range of $2.20 to $2.30 and revenue between $19.7 billion and $20.0 billion, reflecting confidence in the underlying business performance and new product launches.

Financial Highlights

53 data points
Beta

Revenue

$4.98B

75.5% Gross Margin

Net Income

$600.80M

12.1% Net Margin

EPS (Diluted)

$0.56

Total Assets

$36.04B

Cash & Equivalents

$3.32B

Free Cash Flow

$948.60M

Financial Statements
Beta
Revenue$4.98B
Cost of Revenue$1.22B
Gross Profit$3.76B
R&D Expenses$1.17B
SG&A Expenses$1.64B
Operating Expenses$2.80B
Interest Expense$36.80M
Net Income$600.80M
EPS (Basic)$0.57
EPS (Diluted)$0.56
Shares Outstanding (Basic)1.06B
Shares Outstanding (Diluted)1.07B

Key Highlights

  • 1Revenue saw a slight increase of 1% to $4.98 billion for the quarter and remained flat at $9.62 billion for the first six months of 2015 compared to the prior year.
  • 2Net income decreased significantly by 18% to $600.8 million for the quarter and 23% to $1.13 billion for the first six months, impacted by substantial one-time charges.
  • 3The acquisition of Novartis Animal Health, completed in January 2015 for $5.29 billion, is a significant strategic move, contributing to the animal health segment's revenue but also incurring integration and inventory valuation costs.
  • 4Research and development (R&D) expenses decreased slightly year-over-year, partly due to favorable foreign exchange rates, while marketing, selling, and administrative expenses remained relatively flat.
  • 5The company recognized substantial acquired in-process R&D (IPR&D) charges totaling $80.0 million for the quarter and $336.0 million year-to-date, related to new collaboration agreements.
  • 6A significant debt extinguishment loss of $166.7 million was recorded during the period, related to the repurchase and redemption of certain fixed-rate notes.
  • 7Eli Lilly updated its full-year 2015 EPS guidance to $2.20-$2.30 and revenue guidance to $19.7-$20.0 billion.

Frequently Asked Questions

The decline in net income and EPS was primarily due to significant one-time charges. These include costs associated with the acquisition of Novartis Animal Health (such as inventory fair value adjustments), acquired in-process research and development (IPR&D) expenses from new collaborations with companies like BioNTech and Hanmi, asset impairment, restructuring, and other special charges related to integration efforts, and a substantial debt extinguishment loss incurred from repurchasing debt. These items, while impacting short-term profitability, are being managed within the company's broader financial strategy.

The acquisition of Novartis Animal Health (Novartis AH), completed on January 1, 2015, for $5.29 billion, has significantly boosted the animal health segment's revenue, contributing $840.8 million in the second quarter of 2015 and $1.59 billion year-to-date. However, it also led to increased expenses related to integration costs, inventory step-up adjustments, and intangible asset impairments. The company is actively integrating the business to realize expected synergies.

The company continues to face challenges from patent expirations for key drugs. Cymbalta and Evista have experienced significant revenue declines in the U.S. and Europe due to generic competition. While Alimta's U.S. sales showed some price-driven increase, international sales are impacted by foreign exchange rates and potential generic entry. Zyprexa is also facing patent expiry in Japan by the end of 2015. Management is focused on the performance of newer products like Jardiance, Trulicity, and Cyramza, and its late-stage pipeline to offset these declines.

Eli Lilly is maintaining a significant investment in R&D, with expenses for the six months ending June 30, 2015, at $2.21 billion. While R&D expenses decreased slightly year-over-year, partly due to favorable foreign exchange rates and lower late-stage clinical development costs, the company has entered into several new collaborations (e.g., with BioNTech, Hanmi, and Pfizer) which involve significant upfront IPR&D charges. This indicates a strategic focus on acquiring and developing new drug candidates to fuel future growth.