Lilly Reports Slight Profit Decrease

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Indianapolis-based Eli Lilly and Co. (NYSE: LLY) is reporting third quarter net income of $1.2 billion, compared to more than $1.3 billion during the same period a year earlier. The company is expecting revenue growth in emerging markets including China, but is bracing for the upcoming loss of U.S. patents, including Cymbalta. October 23, 2013

News Release

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

"As we navigate through a period of expiring patents for some of our largest products, Lilly continues to deliver solid financial results and to advance our late-stage pipeline, with four regulatory filings completed this year alone," said John C. Lechleiter, Ph.D., Lilly's chairman, president and chief executive officer. "We are successfully executing our strategy which will enable us to return to growth after 2014 by bringing to the market new medicines that make a real difference for patients."

"We remain committed to our innovation strategy and believe it will drive growth and expand margins post-2014," added Derica Rice, Lilly executive vice president, global services and chief financial officer. "We will also return substantial cash to shareholders by maintaining our dividend at least at its current level and by repurchasing shares under our recently-authorized $5 billion program."

Key Events Over the Last Three Months

-Dulaglutide was submitted for regulatory review in both the U.S. and Europe as a potential treatment for type 2 diabetes.

-The U.S. rolling submission was completed for ramucirumab as a single-agent treatment for patients with advanced gastric cancer who have had disease progression after initial chemotherapy. A submission for ramucirumab for the same indication was also made in Europe.

-Top-line results were announced from two global Phase III studies of ramucirumab. In the first study, ramucirumab, in combination with paclitaxel in patients with advanced gastric cancer, met its primary endpoint of improved overall survival and a secondary endpoint of improved progression-free survival. A second study of ramucirumab in women with locally recurrent or metastatic breast cancer did not meet its primary endpoint of progression-free survival.

-A recently completed Phase III study for necitumumab met its primary endpoint, finding that patients with stage IV metastatic squamous non-small cell lung cancer experienced increased overall survival when administered necitumumab in combination with gemcitabine and cisplatin as a first-line treatment, as compared to chemotherapy alone.

-The company announced plans to supplement its annual dividend with share repurchases totaling $5 billion over time.

-The company expressed its disappointment with the Centers for Medicare & Medicaid Services final decision to provide Coverage with Evidence Development for beta-amyloid imaging agents, including Amyvid™. The company believes the Medicare coverage decision for these agents is a significant setback for patients and the Alzheimer's disease community.

Third-Quarter Reported Results

In the third quarter of 2013, worldwide total revenue was $5.773 billion, an increase of 6 percent compared with the third quarter of 2012. Revenue growth was comprised of 3 percent due to higher volume and 5 percent due to higher prices, partially offset by a decrease of 2 percent due to the unfavorable impact of foreign exchange rates. The increase in volume was driven by Humalog, Alimta, Trajenta and Forteo, as well as Animal Health, partially offset by volume declines for Zyprexa and Cymbalta. Total revenue in the U.S. increased 11 percent to $3.312 billion driven by increased prices, primarily for Cymbalta. Total revenue outside the U.S. was relatively flat at $2.461 billion, as higher volume was largely offset by the unfavorable impact of the depreciation of the Japanese yen.

Gross margin increased 8 percent to $4.575 billion in the third 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 79.2 percent, an increase of 1.3 percentage points compared with the third quarter of 2012. The increase in gross margin percent was due to higher prices and lower manufacturing costs, partially offset by the impact of foreign exchange rates on international inventories sold.

Total operating expense in the third quarter of 2013, defined as the sum of research and development, marketing, selling and administrative expenses was $3.030 billion, a decrease of 2 percent compared with the third quarter of 2012. Marketing, selling and administrative expenses decreased 6 percent to $1.652 billion, due primarily to ongoing cost containment efforts, including the previously-announced reduction in U.S. sales and marketing activities related to the upcoming loss of patent exclusivity for Cymbalta and Evista®. Research and development expenses increased 3 percent to $1.377 billion, or approximately 24 percent of total revenue, driven by increased investment in early stage discovery and development .

In the third quarter of 2012, the company recognized asset impairment, restructuring and other special charges of $53.3 million, primarily related to the decision to stop development of a delivery device platform. There was no similar charge in the third quarter of 2013.

Operating income in the third quarter of 2013 was $1.545 billion, an increase of $458.5 million, or 42 percent, compared to the third quarter of 2012, due primarily to higher gross margin and lower operating expenses.

Other income (expense) was expense of $31.3 million in the third quarter of 2013, compared with income of $788.5 million in the third quarter of 2012. The decrease in other income (expense) was driven by income of $787.8 million recognized in the third quarter of 2012 for the early payment of the exenatide revenue-sharing obligation from Amylin Pharmaceuticals.

The effective tax rate was 20.5 percent in the third quarter of 2013, compared with an effective tax rate of 29.2 percent in the third quarter of 2012. The decrease in the third quarter 2013 effective tax rate reflects both the tax impact of the payment received from Amylin in the third quarter of 2012, and, to a lesser extent, the reinstatement of the R&D tax credit in the U.S. effective January 1, 2013.

In the third quarter of 2013, net income and earnings per share decreased to $1.203 billion and $1.11, respectively, compared with third-quarter 2012 net income of $1.327 billion and earnings per share of $1.18. The decreases in net income and earnings per share were driven by the early payment of the exenatide revenue-sharing obligation in the third quarter of 2012, partially offset by higher operating income and a lower effective tax rate in the third quarter of 2013. Earnings per share also benefited from a lower number of shares outstanding in the third quarter of 2013 compared to the third quarter of 2012.

Third-Quarter 2013 non-GAAP Measures

On a non-GAAP basis, third-quarter 2013 operating income increased $405.2 million, or 36 percent, to $1.545 billion, due to higher gross margin and lower operating expenses. The effective tax rate decreased to 20.5 percent, compared with 22.1 percent in the third 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 increased to $1.203 billion and $1.11, respectively, compared with $888.3 million and $0.79 during the third quarter of 2012.

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

Non-GAAP measures exclude items totaling $0.39 per share of incom