Eli Lilly & Company (LLY) reported third quarter adjusted earnings per share of $1.13, in-line with the Zacks Consensus Estimate but 7% below the year-ago earnings of $1.21. Earnings in the quarter were hurt by higher operating expenses which offset the rise in revenues.
Third quarter revenues increased 9% to $6.1 billion, just above the Zacks Consensus Revenue Estimate of $6.0 billion. Revenues were boosted by increased demand for Lilly’s major products. Exchange rates also favorably impacted revenues during the quarter. Reported earnings (including special items), declined 6% to $1.11. Reported earnings included $25.2 million of restructuring costs.
Quarterly Details
Third quarter revenues increased mainly due to 4% volume growth and 4% foreign exchange fluctuation. Price increases did not have a major impact on revenue growth. The US healthcare reform impacted revenues by $130 million.
US revenues increased 4% to $3.3 billion mainly due to higher volumes. Higher prices also contributed to the increase in US revenues. Ex-US revenues increased 15% to $2.9 billion mainly due to higher demand and favorable foreign exchange fluctuations.
During the third quarter, Eli Lilly’s lead product Zyprexa recorded a 3% decline in revenues, which came in at $1.18 billion. US revenues fell 7% due to lower volume that was partially offset by higher prices. International market revenues increased 2%, mainly due to favorable foreign exchange fluctuations.
While Zyprexa lost patent exclusivity in several European markets in September 2011, loss of US patent exclusivity is just round the corner with the product slated to go off-patent on October 23, 2011. We expect a major decline in Zyprexa revenues with the loss of US patent protection.
Products contributing to third quarter growth included Cymbalta (29% growth to $1.1 billion), Humalog (20% growth to $593.2 million), Forteo (20% growth to $240.3 million), Strattera (20% growth to $153.2 million), Alimta (12% growth to $629.7 million) and Cialis (16% growth to $469.8 million). Alimta continued to perform well due to increased demand.
Eli Lilly’s Animal Health segment contributed $451 million (up 28%) to revenues. Higher demand and the impact of the acquisition of certain Johnson and Johnson (JNJ) and Pfizer (PFE) animal health products helped boost Animal Health revenues.
Meanwhile, Gemzar revenues continued to decline with third quarter sales falling 72% to $91 million. Sales were impacted by the entry of generics in the US last year. The product is also facing generic competition in major international markets. Effient posted revenues of $83.5 million with US revenues coming in at $61.4 million. Worldwide exenatide (Byetta and Bydureon) sales increased 1% to $171 million.
Expenses
On the operational front, expenses increased 10% during the quarter, reflecting Eli Lilly’s efforts in support of new product launches, investment in research and development, and exchange rate movements.
Research and development (R&D) expenses were 5% higher. Apart from this, marketing, selling and administrative expenses increased 13% to $1.9 billion. Eli Lilly’s pipeline now has 66 candidates including 10 in phase III development.
2011 Projection
Eli Lilly increased the lower end of its 2011 earnings per share guidance range by five cents and now expects earnings in the range of $4.30 – $4.35 per share (old guidance: $4.25 – $4.35). The Zacks Consensus Estimate currently stands at $4.33.
Revenue growth is still expected in mid-single digits. Eli Lilly still expects the US health care reform to impact 2011 revenues by $400 – $500 million.
2011 will be a challenging year for Eli Lilly with the company losing patent exclusivity on Zyprexa. Zyprexa sales should erode rapidly from late October 2011 with the entry of generics. Moreover, we expect continued erosion of Gemzar sales due to genericization.
The company expects gross margin as a percentage of revenue to decline in the range of 2-3 percentage points. Meanwhile, marketing, selling and administrative expenses are expected to increase in high-single digits, with research and development expenses expected to increase in low-single digits.
Eli Lilly expects cash flows to be sufficient for funding capital expenditures of $700 million, acquisitions and dividend.
Neutral on Eli Lilly
We currently have a Neutral recommendation on Eli Lilly, which carries a Zacks #3 Rank (short-term Hold rating). Eli Lilly is entering a tough period with the loss of exclusivity on Zyprexa. 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. 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 Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline.
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