Lilly Optimistic Despite Profit Dip

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Indianapolis-based Eli Lilly and Co. (NYSE: LLY) is reporting fourth quarter net income of $428.5 million, compared to $727.5 million during the same quarter the previous year. Chief Executive Officer John Lechleiter says earnings were again impacted by patent expirations, but adds the company is "moving to a period of growth led by diabetes, oncology and animal health."

January 30, 2015

News Release

Indianapolis, Ind. -- Eli Lilly and Company (NYSE: LLY) today announced financial results for the fourth quarter and full year of 2014.

Certain financial information for 2014 and 2013 is 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 2015 financial guidance is also being provided on both a reported and a non-GAAP basis.

"While Lilly's fourth-quarter 2014 results continue to reflect the impact of patent expirations, we are moving to a period of growth led by diabetes, oncology and animal health," said John C. Lechleiter, Ph.D., Lilly's chairman, president and chief executive officer. "Despite the loss of significant revenue for Cymbalta and Evista following the expiration of our U.S. patents, we saw strong performance from many other products. At the same time, we made excellent progress with our innovation-based strategy, and we continue to advance our pipeline. Throughout the balance of this decade, we aim to drive revenue growth and expand margins as we offer new medicines to the people who need them."

Key Events Over the Last Three Months

The acquisition of Novartis Animal Health was completed on January 1, 2015 in an all-cash transaction of approximately $5.4 billion. As part of the approval, certain animal health assets in the U.S. relating to the Sentinel canine parasiticide franchise were divested to Virbac for approximately $410 million.

The U.S. Food and Drug Administration (FDA) approved and the company launched Cyramza (ramucirumab) in combination with docetaxel, for the treatment of patients with metastatic non-small cell lung cancer (NSCLC) with disease progression on or after platinum-based chemotherapy.

The FDA approved and the company launched Cyramza in combination with paclitaxel as a treatment for people with advanced or metastatic gastric (stomach) or gastroesophageal junction (GEJ) adenocarcinoma whose cancer has progressed on or after prior fluoropyrimidine- or platinum-containing chemotherapy.

The European Commission approved and the company launched Cyramza in combination with paclitaxel for the treatment of advanced gastric or GEJ adenocarcinoma following prior chemotherapy and as a monotherapy in this setting where treatment in combination with paclitaxel is not appropriate.

The company completed its rolling FDA submission and the European submission for necitumumab in combination with gemcitabine and cisplatin for the first-line treatment of patients with locally advanced or metastatic squamous non-small cell lung cancer.

The European Commission approved Trulicity (dulaglutide), a once-weekly GLP-1 receptor agonist treatment to help improve glycemic control in adults with type 2 diabetes. Trulicity has now launched in the U.S. and Europe.

The company announced a worldwide licensing collaboration with Adocia focused on developing an ultra-rapid insulin, known as BioChaperone Lispro, for treatment in people with type 1 and type 2 diabetes. BioChaperone Lispro is currently in Phase Ib studies.

The company announced an oncology clinical trial collaboration with Merck to evaluate the safety, tolerability and preliminary efficacy of Keytruda (pembrolizumab), Merck's anti-PD-1 therapy, in combination with Lilly's pemetrexed (Alimta), ramucirumab (Cyramza) and necitumumab in multiple clinical trials.

The company announced a clinical trial collaboration with Bristol-Myers Squibb to evaluate the safety, tolerability and preliminary efficacy of Bristol-Myers Squibb's immunotherapy Opdivo (nivolumab) in combination with Lilly's galunisertib (LY2157299) in multiple tumor types.

The company and its partner, Boehringer Ingelheim, announced a change to the operational and financial structure of their diabetes alliance. Under the revised agreement, Lilly and Boehringer Ingelheim will continue co-promotion in 17 countries, representing approximately 90 percent of the alliance's anticipated market opportunity. In all other countries, the companies will exclusively commercialize the respective molecules they brought to the alliance.

The company and Incyte Corporation announced that the primary endpoint of improved ACR20 response compared to placebo was met in the Phase III study of baricitinib in patients with moderately-to-severely active rheumatoid arthritis who previously failed one or more TNF inhibitors. The companies will share results of several ongoing Phase III studies in various disclosures in 2015.

The company announced a dividend for the first quarter of 2015 of $0.50 per share on outstanding common stock representing a 2 percent increase. The annual indicated rate is now $2.00 per share.

As part of its previously-announced share repurchase program, the company repurchased approximately $300 million in company stock in the fourth quarter of 2014. For the full year 2014, the company returned approximately $2.9 billion in cash to shareholders through both its dividend and share repurchase program.

Fourth-Quarter Reported Results

In the fourth quarter of 2014, worldwide total revenue was $5.121 billion, a decrease of 12 percent compared with the fourth quarter of 2013. The revenue decline was comprised of 9 percent due to lower volume and 4 percent due to the unfavorable impact of foreign exchange rates, partially offset 1 percent due to higher prices. The 9 percent decrease in worldwide volume was driven by the loss of U.S. patent exclusivity for Cymbalta in December 2013 and Evista in March 2014, partially offset by volume gains for several other products. Total revenue in the U.S. decreased 19 percent to $2.453 billion, driven by lower demand for Cymbalta and Evista following patent expirations as well as wholesaler buying patterns. Total revenue outside the U.S. decreased 3 percent to $2.669 billion, primarily driven by the unfavorable impact of foreign exchange rates, partially offset by higher volume, including the impact of products acquired from Lohmann Animal Health.

Gross margin decreased 13 percent to $3.868 billion in the fourth quarter of 2014 compared to the fourth quarter of 2013, driven by lower sales of Cymbalta and Evista due to the loss of U.S. patent protection. Gross margin as a percent of total revenue was 75.5 percent, a decrease of 0.6 percentage points compared with the fourth quarter of 2013. The decrease in gross margin percent was primarily due to lower sales of Cymbalta and Evista following U.S. patent expirations, largely offset by the favorable impact of foreign exchange rates on international inventories sold.

Total operating expenses in the fourth quarter of 2014, defined as the sum of research and development, and marketing, selling and administrative expenses, were $2.986 billion, a decrease of 13 percent compared with the fourth quarter of 2013. Research and development expenses decreased 20 percent to $1.186 billion, or 23.2 percent of total revenue, driven primarily by lower late-stage clinical development costs in the fourth quarter of 2014. Marketing, selling and administrative expenses decreased 8 percent to $1.800 billion, due primarily to a reduction in s