Lilly Posts Profit Increase

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Indianapolis-based Eli Lilly and Co. (NYSE: LLY) is reporting second quarter net income of $1.2 billion, compared to $924 million during the same period a year earlier. The company is expecting overall revenue growth outside of the U.S., particularly in China. July 24, 2013

News Release

INDIANAPOLIS, Ind. - Eli Lilly and Company (NYSE: LLY) today announced financial results for the second quarter of 2013.

"In the second quarter, Lilly delivered solid financial results, highlighted by good revenue growth and strict cost containment efforts that led to robust earnings growth," said John C. Lechleiter, Ph.D., Lilly's chairman, president and chief executive officer. "Continued operating and financial discipline, along with a maturing pipeline of potential new medicines, gives me great confidence in the company's ability to meet the challenges we face from upcoming patent expirations and to resume growth after 2014."

Key Events Over the Last Three Months

The marketing authorization application for LY2963016, an investigational basal (long-acting) insulin for the treatment of type 1 and type 2 diabetes, was accepted for review by the European Medicines Agency. LY2963016 is a new insulin glargine product being developed in collaboration with Boehringer Ingelheim.

The company disclosed positive Phase III clinical trial data for several late-stage investigational medicines from its diabetes pipeline, including dulaglutide and, in collaboration with Boehringer Ingelheim, empagliflozin, as part of the American Diabetes Association Scientific Sessions.

The company expressed its disappointment with the Centers for Medicare & Medicaid Services draft decision proposing Coverage with Evidence Development for the use of beta-amyloid positron emission tomography (PET) imaging agents, including Lilly's product, Amyvid.

The company announced plans to stop development of enzastaurin, which was being studied in a Phase III clinical trial as a monotherapy in the prevention of relapse in patients with diffuse large B-cell lymphoma.

The company stopped its Phase II study for LY2886721, a beta secretase (BACE) inhibitor being investigated as a once-daily treatment for its potential to slow the progression of Alzheimer's disease.

The company announced that the PRONOUNCE study of Alimta did not achieve its primary endpoint of improved progression-free survival without grade four adverse events in nonsquamous non-small cell lung cancer.

Second-Quarter Reported Results

In the second quarter of 2013, worldwide total revenue was $5.930 billion, an increase of 6 percent compared with the second quarter of 2012. Revenue growth was comprised of 6 percent due to higher prices and 2 percent due to higher volume, partially offset by a decrease of 2 percent due to the unfavorable impact of foreign exchange rates. The increase in volume was driven by solid volume gains for various products, partially offset by continued volume declines of Zyprexa due to the loss of patent exclusivity in most major markets and the transfer of exenatide commercial rights outside of the U.S. to Amylin Pharmaceuticals. Total revenue in the U.S. increased 13 percent to $3.397 billion driven by increased prices, primarily for Cymbalta. Total revenue outside the U.S. decreased by 2 percent to $2.532 billion, driven by the unfavorable impact of foreign exchange rates, primarily the Japanese yen, and the loss of market exclusivity for Zyprexa in most markets outside of Japan and, to a lesser extent, decreased prices, partially offset by increased volume.

Gross margin increased 7 percent to $4.764 billion in the second quarter of 2013, as growth in other products offset the loss of patent exclusivity for Zyprexa. Gross margin as a percent of total revenue was 80.3 percent, an increase of 0.8 percentage points compared with the second quarter of 2012. The increase in gross margin percent was primarily due to higher prices and production volumes, partially offset by the impact of foreign exchange rates on international inventories sold.

Total operating expense in the second quarter of 2013, defined as the sum of research and development, marketing, selling and administrative expenses, decreased 2 percent compared with the second quarter of 2012 to $3.198 billion. Marketing, selling and administrative expenses decreased 3 percent to $1.868 billion, as ongoing cost containment efforts and the favorable impact of foreign exchange rates were partially offset by higher litigation expenses. Research and development expenses increased 1 percent to $1.330 billion, or 22.4 percent of total revenue.

In the second quarter of 2013, the company recognized asset impairment, restructuring and other special charges of $63.5 million, related primarily to costs associated with the anticipated closure of a packaging and distribution facility in Germany.

Operating income in the second quarter of 2013 was $1.503 billion, an increase of 25 percent or $300.8 million, compared to the second quarter of 2012, due primarily to higher gross margin and lower operating expenses, partially offset by higher asset impairment, restructuring and other special charges.

Other income (expense) was income of $11.9 million in the second quarter of 2013, compared with expense of $16.5 million in the second quarter of 2012. This increase was primarily related to a gain on the sale of an investment during the second quarter of 2013.

The effective tax rate was 20.4 percent in the second quarter of 2013, compared with an effective tax rate of 22.1 percent in the second quarter of 2012. The decrease in the second quarter 2013 effective tax rate reflects the reinstatement of the R&D tax credit in the U.S. effective January 1, 2013.

In the second quarter of 2013, net income and earnings per share increased to $1.206 billion and $1.11, respectively, compared with second-quarter 2012 net income of $923.6 million and earnings per share of $0.83. The increases in net income and earnings per share were driven by higher operating income, and to a lesser extent, higher other income and a lower effective tax rate. Earnings per share also benefited from a lower number of shares outstanding in the second quarter of 2013 compared to the second quarter of 2012.

Second-Quarter 2013 non-GAAP Measures

On a non-GAAP basis, second-quarter 2013 operating income increased 30 percent to $1.566 billion, due primarily to higher gross margin and lower operating expenses. The effective tax rate decreased to 20.5 percent, compared with 22.1 percent in the second quarter of 2012, primarily driven by the reinstatement of the R&D tax credit in the U.S. effective January 1, 2013. Net income and earnings per share were $1.255 billion and $1.16, respectively, compared with $923.6 million and $0.83 during the second quarter of 2012.

The increases in net income and earnings per share were driven by higher operating income, and to a lesser extent, higher other income and a lower effective tax rate. Earnings per share also benefited from a lower number of shares outstanding in the second quarter of 2013 compared to the second quarter of 2012.

Non-GAAP measures in the second quarter of 2013 exclude items totaling $0.04 per share of expense. For further detail, see the reconciliation below as well as the Reconciliation of GAAP Reported to Selected Non-GAAP Adjusted Information table later in this press release.

Year-to-Date Results

For the first six months of 2013, worldwide total revenue was $11.532 billion, an increase of 3 percent compared with the same period in 2012. Reported net income and earnings per share were $2.754 billion and $2.53, respectively. Net income and earnings per share, on a non-GAAP basis, were $2.503 billion and $2.30, respectively.

Non-GAAP measures exclude items totaling $0.23 per share of income for the first six months of 2013 and $0.01 per share of expense for the fir