Indianapolis-based Eli Lilly and Co. (NYSE: LLY) is reporting a “substantial decline” in net income for the second quarter. It says it earned $733.5 million in the quarter, compared to more than $1.2 billion during the same period one year ago. Chief Executive Officer John Lechleiter says patent expirations continue to take a toll, but says the strategy of “replenishing and advancing our pipeline” sets up the company for future growth. July 24, 2014

News Release

INDIANAPOLIS, Ind. – Eli Lilly and Company (NYSE: LLY) today announced financial results for the second quarter of 2014.

Certain financial information for 2014 and 2013 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 second-quarter results reflect a substantial decline in revenue and earnings resulting from recent patent expirations. At the same time, new product approvals and impending launches give us great confidence that Lilly is poised for growth in the years ahead,” said John C. Lechleiter, Ph.D., Lilly's chairman, president and chief executive officer. “We have stayed the course with our innovation-based strategy, replenishing and advancing our pipeline. We remain firm in our commitment to sustain and accelerate a flow of important new medicines that make life better for people around the world.”

Key Events Over the Last Three Months

The company launched Cyramza in the U.S. as a single-agent treatment for patients with advanced or metastatic gastric cancer or gastroesophageal junction (GEJ) adenocarcinoma with disease progression on or after prior fluoropyrimidine- or platinum-containing chemotherapy.

The company and its partner, Boehringer Ingelheim, announced that the European Commission granted marketing authorization for Jardiance (empagliflozin) tablets for the treatment of type 2 diabetes mellitus to improve glycemic control in adults. The companies anticipate launch of the product in European countries to begin in the third quarter of 2014.

The company and its partner, Boehringer Ingelheim, announced the Class 1 resubmission (two month review period) of a New Drug Application for empagliflozin for the treatment of adults with type 2 diabetes to the U.S. Food and Drug Administration (FDA).

The Committee for Medicinal Products for Human Use (CHMP) issued a positive opinion recommending approval for the investigational compound LY2963016, a new insulin glargine product from the company and its partner, Boehringer Ingelheim, for the treatment of type 1 and type 2 diabetes.

The company announced positive top-line results of three completed Phase III clinical trials in patients with type 2 diabetes for basal insulin peglispro (BIL), which is being studied as a once-daily treatment for both type 1 and type 2 diabetes.

The company announced that the Phase III REACH trial of Cyramza in patients with hepatocellular carcinoma, also known as liver cancer, did not meet its primary endpoint; overall survival favored the Cyramza arm but was not statistically significant. Encouraging single-agent Cyramza activity was observed, with meaningful improvements in key secondary endpoints of progression-free survival, overall response rate and time to progression.

The company submitted a Supplemental Biologics License Application to the FDA based upon the Cyramza RAINBOW results for use of Cyramza in combination with paclitaxel in second-line gastric cancer. In the European Union, the RAINBOW data was incorporated into the already-filed Cyramza regulatory submission that was initially based upon the results of REGARD, the monotherapy second-line gastric cancer trial.

The company completed the acquisition of Lohmann Animal Health effective April 30, 2014. In addition, the company reached an agreement, subject to certain closing conditions, to sell Lohmann's feed additives business to a Lohmann management-led group. This feed additives business is considered to be non-strategic to Lilly's Elanco animal health unit.

The English High Court determined that the vitamin dosage regimen patents for Alimta® (pemetrexed) in the U.K., France, Italy and Spain would not be infringed by a generic competitor that has stated an intent to market certain alternative salt forms of pemetrexed in those countries upon expiry of the Alimta compound patents in 2015. Lilly has appealed the ruling to the Court of Appeal.

A labor court in Sao Paulo, Brazil, ruled against the company's local subsidiary, Eli Lilly do Brasil, in a case alleging some employees were exposed to hazardous materials in a manufacturing facility formerly operated by the company. However, the alleged contaminants – benzene and heavy metals – were never used in the facility. The judge estimated the financial impact of the court's order to be approximately $450 million plus interest. The company strongly disagrees with the court's ruling, believes the decision is entirely without merit and has appealed the decision.

In July, the company announced a co-discovery and co-development collaboration with Immunocore Limited to research and potentially develop novel T cell-based cancer therapies. As a result of this transaction, the company expects to incur an in-process research and development charge of $45.0 million (pre-tax), or approximately $0.03 per share (after-tax) in the third quarter of 2014.

Second-Quarter Reported Results

In the second quarter of 2014, worldwide total revenue was $4.936 billion, a decrease of 17 percent compared with the second quarter of 2013. The revenue decrease was due to a 17 percent decline in volume; the impact of changes in price and foreign exchange rates on worldwide revenue was negligible. The decrease in worldwide volume was driven by the loss of U.S. patent exclusivity for Cymbalta®, and to a lesser extent Evista®, partially offset by volume gains for several other products. Total revenue in the U.S. decreased 30 percent to $2.380 billion, driven by lower demand for Cymbalta and Evista following their patent expiration. Total revenue outside the U.S. increased 1 percent to $2.556 billion, driven by higher volume, including the impact of the acquisition of Lohmann Animal Health in the second quarter of 2014, partially offset by lower prices.

Gross margin decreased 21 percent to $3.746 billion in the second quarter of 2014, driven by lower sales of Cymbalta due to the loss of U.S. patent exclusivity. Gross margin as a percent of total revenue was 75.9 percent, a decrease of 4.4 percentage points compared with the second quarter of 2013. The decrease in gross margin percent was primarily due to lower sales of Cymbalta and Evista following U.S. patent expirations.

Total operating expense in the second quarter of 2014, defined as the sum of research and development, marketing, selling and administrative expenses, was $2.859 billion, a decrease of 11 percent compared with the second quarter of 2013. Marketing, selling and administrative expenses decreased 11 percent to $1.664 billion, due primarily to the reduction in U.S. sales and marketing activities for Cymbalta and Evista as well as ongoing cost containment efforts. Research and development expenses decreased 10 percent to $1.195 billion, or 24.2 percent of total revenue, driven primarily by lower late-stage clinical development costs.

In the second quarter of 2013, the company recognized asset impairment, restructuring and other special cha

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