Patent Loss Hits Lilly Profit

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Indianapolis-based Eli Lilly and Co. (NYSE: LLY) is reporting a lower fourth quarter profit, compared to the same period a year earlier. Chief Executive Officer John Lechleiter says the results reflect the initial impact of losing U.S. patent protection for Cymbalta. It loses protection for Evista in March and Lechleiter says that will result in a "substantial" decline in earnings and revenue this year. January 30, 2013

News Release

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

Certain financial information for 2013 and 2012 are presented on both a reported and a non-GAAP basis. Some numbers in this press release may not add due to rounding. Reported results were prepared in accordance with generally accepted accounting principles (GAAP) and include all revenue and expenses recognized during the period. Non-GAAP measures exclude the items described in the reconciliation tables later in the release. The non-GAAP measures are presented in order to provide additional insights into the underlying trends in the company's business. The company's 2014 financial guidance is also being provided on both a reported and a non-GAAP basis.

"Lilly's fourth-quarter 2013 results reflect the initial impact from the U.S. patent expiration for Cymbalta. The loss of the Cymbalta patent, along with the expiration of the U.S. patent for Evista in March of this year will result in a substantial decline in revenue and earnings in 2014," said John C. Lechleiter, Ph.D., Lilly's chairman, president and chief executive officer. "Yet, far from seeing 2014 as a trough year for Lilly, we see it as a moment of tremendous opportunity. We anticipate launching several new medicines this year and returning our company to growth in 2015 and beyond."

Key Events Over the Last Three Months

U.S. patent exclusivity for Cymbalta expired on December 11, 2013, resulting in the entry of several generic competitors.

As part of its previously-announced share repurchase program, the company repurchased approximately $500 million in company stock in the fourth quarter of 2013. For the full-year 2013, the company returned approximately $3.8 billion in cash to shareholders through its dividend and share repurchase program.

The company and its alliance partner, Boehringer Ingelheim, announced that the U.S. Food and Drug Administration accepted the filing of the New Drug Application for LY2963016, an investigational basal (long-acting) insulin. This new insulin glargine product was also submitted in Japan.

The company acquired all development and commercial rights from Arteaus Therapeutics for a calcitonin gene-related peptide (CGRP) antibody as a potential treatment for the prevention of frequent, recurrent migraine headaches, following a successful Phase II proof-of-concept study.

The company entered into a collaboration with Pfizer Inc. to co-develop and jointly commercialize tanezumab, a monoclonal antibody being investigated to treat moderate-to-severe chronic osteoarthritis pain, chronic low back pain, and cancer-related bone pain.

The company announced that results from three Phase III studies of edivoxetine did not achieve the primary study objective of superior efficacy in depression after eight weeks of treatment. While the safety and tolerability of edivoxetine were consistent with previous studies, the efficacy results do not support a regulatory submission for adjunctive treatment in patients with Major Depressive Disorder (MDD).

Fourth-Quarter Reported Results

In the fourth quarter of 2013, worldwide total revenue was $5.809 billion, a decrease of 2 percent compared with the fourth quarter of 2012. Revenue decline was comprised of 5 percent due to lower volume and 2 percent due to the unfavorable impact of foreign exchange rates, partially offset by an increase of 4 percent due to higher prices. The decrease in volume was driven by the loss of U.S. patent exclusivity for Cymbalta in December 2013, partially offset by volume gains for most other products. Total revenue in the U.S. decreased 6 percent to $3.044 billion driven by lower volume for Cymbalta, partially offset by higher prices. Total revenue outside the U.S. increased 1 percent to $2.765 billion, as higher volume was partially offset by the unfavorable impact of the continued weakening of the Japanese yen, and to a lesser extent, lower prices.

Gross margin decreased 6 percent to $4.422 billion in the fourth quarter of 2013, driven by the unfavorable impact of foreign exchange rates on international inventories sold and lower sales of Cymbalta due to the loss of U.S. patent exclusivity, partially offset by higher prices. Gross margin as a percent of total revenue was 76.1 percent, a decrease of 2.9 percentage points compared with the fourth quarter of 2012.

Total operating expenses in the fourth quarter of 2013, defined as the sum of research and development, marketing, selling and administrative expenses was $3.429 billion, which was essentially flat compared with the fourth quarter of 2012. Marketing, selling and administrative expenses decreased 1 percent to $1.954 billion, due to ongoing cost containment efforts, including the previously-announced reduction in U.S. sales and marketing activities in anticipation of the losses of patent exclusivity for Cymbalta and Evista, and the impact of foreign exchange rates, partially offset by increased marketing spend for other products. Research and development expenses increased 1 percent to $1.475 billion, or 25.4 percent of total revenue, driven by higher research and clinical development expenses, partially offset by lower milestone payments.

In the fourth quarter of 2013, the company recognized a charge of $57.1 million related to acquired in-process research and development associated with the acquisition of a CGRP antibody from Arteaus Therapeutics.

In the fourth quarter of 2013, the company recognized asset impairment, restructuring and other special charges of $35.4 million, primarily related to charges associated with restructuring to reduce the company's cost structure and global workforce. In the fourth quarter of 2012, the company recognized a $204.0 million charge for asset impairment, restructuring and other special charges, comprised primarily of $122.6 million related to an intangible asset impairment for liprotamase and $64.7 million related to restructuring to reduce the company's cost structure and global workforce.

Operating income in the fourth quarter of 2013 was $900.8 million, a decrease of 15 percent, compared to the fourth quarter of 2012, due to lower gross margin, partially offset by lower asset impairment, restructuring and other special charges compared with the fourth quarter of 2012.

Other income (expense) was income of $9.1 million in the fourth quarter of 2013, compared with expense of $52.0 million in the fourth quarter of 2012. This difference was due primarily to $40.0 million of milestones received from Boehringer Ingelheim for the regulatory submissions of the companies' new insulin glargine product in the United States and Japan.

The effective tax rate was 20.0 percent in the fourth quarter of 2013, reflecting the reinstatement of the R&D tax credit in the U.S. effective January 1, 2013. In the fourth quarter of 2012, the effective tax rate was 18.3 percent, reflecting a tax benefit related to the intangible asset impairment for liprotamase.

In the fourth quarter of 2013, net income decreased 12 percent and earnings per share decreased 9 percent to $727.5 million and $0.67, respectively, compared with fourth-quarter 2012 net income of $827.2 million and earnings per share of $0.74. The decreases in net income and earnings per share were driven by lower operating income and a higher effective tax rate in the fourth quarter of 2013, partially offset by increased other income.