Eli Lilly (LLY) reported first quarter earnings per share of $ 1.24, 7 cents above the Zacks Consensus Estimate and 5% above the year-ago earnings of $ 1.18. First quarter results were driven by higher revenues. First quarter revenues increased 6% to $ 5.8 billion, slightly above the Zacks Consensus Revenue Estimate of $ 5.7 billion. Revenues were boosted by strong performance in international markets.
Reported earnings, however, declined 16% to 95 cents including the impact of restructuring charges and costs associated with the company’s agreement with Boehringer Ingelheim.
Quarterly Details
First quarter revenues increased mainly due to a 5% volume growth and 1% foreign exchange fluctuation. Price increases did not have a major impact on revenue growth. Healthcare reform impacted revenues by $ 90 million.
US revenues increased 1% to $ 3 billion mainly due to price increases, partially offset by lower volume growth. Ex-US revenues increased 13% to $ 2.8 billion mainly due to higher demand and favorable foreign exchange fluctuations, partially offset by lower prices.
During the first quarter, Eli Lilly’s lead product Zyprexa recorded a 6% increase in revenues which came in at $ 1.3 billion. While US revenues increased 2%, international market revenues increased 8%, mainly due to higher volume and favorable foreign exchange fluctuations.
Products contributing to first quarter growth included Cymbalta (13% growth to $ 908.8 million), Humulin (12% growth to $ 289.8 million), Alimta (10% growth to $ 579.9 million) and Cialis (6% growth to $ 434.4 million). Alimta continued to perform well in ex-US markets due to increased demand in Japan and other international markets. Meanwhile, Humulin revenues benefited from increased demand thanks to Eli Lilly’s partnership deal with Wal-Mart (WMT) for Humulin ReliOn.
Eli Lilly’s Animal Health segment contributed $ 369.8 million (up 28%) to revenues. Higher demand and the impact of the acquisition of certain Pfizer (PFE) animal health products helped boost Animal Health revenues.
Meanwhile, Gemzar revenues continued to decline with first quarter sales falling 46% to $ 156.1 million. Sales were impacted by the entry of generics in the US in mid-November. The product is also facing generic competition in major international markets. Effient posted revenues of $ 56.3 million with US revenues coming in at $ 42 million.
Expenses
On the operational front, expenses increased 10% during the quarter. R&D expenses were 8% higher, mainly due to costs associated with late-stage clinical activities. Apart from this, marketing, selling and administrative expenses increased 11% to $ 1.8 billion, driven by higher administrative expenses in the US and higher ex-US marketing and selling expenses.
Revenue Guidance Adjusted
While Eli Lilly maintained its EPS guidance of $ 4.15 – $ 4.30 per share in 2011 (down 9-12% from 2010) for 2011, the company tweaked other aspects of its guidance. Revenue growth is now expected in low single digits due to favorable movement of foreign currency.
The company was previously expecting revenue growth to be flat or slightly up from 2010 levels. Eli Lilly still expects the US health care reform to impact 2011 revenues by $ 400 – $ 500 million. The Zacks Consensus Earnings Estimate is currently $ 4.24.
2011 will be a challenging year for Eli Lilly with the company losing patent exclusivity on Zyprexa. Zyprexa sales should erode rapidly from October 2011 with the entry of generics. Moreover, we expect continued erosion of Gemzar sales due to genericization. Meanwhile, Strattera generics are not expected to enter the US market in 2011.
The company expects gross margin as a percentage of revenue to decline 3 percentage points instead of 2 percentage points due to the impact of foreign currency movement. Meanwhile, marketing, selling and administrative expenses are still expected to increase in the low–to mid-single digit range, with research and development expenses expected to remain flat. Eli Lilly expects to have ten new candidates in phase III development by year end.
Eli Lilly expects cash flows to be sufficient for funding capital expenditures of $ 800 – $ 900 million, acquisitions and dividend.
Neutral on Eli Lilly
We currently have a Neutral recommendation on Eli Lilly, supported by a Zacks #3 Rank (short-term “Hold” rating). We expect the top-and bottom-line to remain under pressure from late 2011 as the contraction in Zyprexa sales more than offsets growth in Cymbalta, diabetes and new product sales.
Barring significant cost-cutting efforts or additional revenue catalysts, 2013 will be the beginning of a very challenging period with Cymbalta losing US patent protection during the year. On the flip side, strong performance of the diabetes business, the ramp of Effient and upside from the ImClone deal should offer some downside support. We are also pleased to see Eli Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline.
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