"Lilly's second-quarter financial results reflect the company's strategy of focusing on the areas of our business with the greatest growth potential," said John C. Lechleiter, Ph.D., Lilly's chairman, president and chief executive officer. "Despite the continued decline in Zyprexa sales following patent expiration late last year in most major markets outside Japan, we achieved strong growth for other products such as Cymbalta, Alimta, Forteo, Effient and our animal health portfolio. In addition, outside the U.S., we drove solid growth in both China and Japan."
Lechleiter continued, "Our strong underlying sales performance, combined with the favorable impact from a stronger dollar on our cost of goods sold, supports our decision to raise our 2012 EPS guidance. Even as we focus on growth opportunities, we also remain committed to reducing our expense base through productivity gains and cost cutting initiatives, and to advancing our pipeline of potential new medicines in development."
Derica Rice, Lilly executive vice president, global services and chief financial officer, commented on the company's longer-term financial performance expectations. "We remain on track to meet or exceed our mid-term financial minimum performance goals of at least $20 billion of revenue, $3 billion of net income and $4 billion of operating cash flow annually through 2014. After 2014, we anticipate a return to revenue and income growth, fueled in large part by our pipeline. This growth, combined with our continued focus on expense management, should lead to expanding margins. After 2014, we will look to return our research and development expense as a percent of revenue to levels more consistent with our historical averages, in the 18 percent to 20 percent range. For SG&A, it's reasonable to expect that within a few years post-2014, we will move more in line with industry averages in the range of 28 percent to 30 percent of revenue."
Key Events Over the Last Three Months
In the second quarter of 2012, worldwide total revenue was $5.601 billion, a decrease of 10 percent compared with the second quarter of 2011. This 10 percent revenue decline was comprised of a decrease of 9 percent due to lower volume and 2 percent due to the unfavorable effect of foreign exchange rates, partially offset by an increase of 1 percent due to price. The decrease in volume was driven by the loss of patent exclusivity for Zyprexa® in most major markets, partially offset by volume gains for other products. Total revenue in the U.S. decreased 10 percent to $3.012 billion due to the loss of patent exclusivity for Zyprexa, offset by increased prices and, to a lesser extent, increased volume in other products. Total revenue outside the U.S. decreased by 11 percent to $2.588 billion, driven by the loss of patent exclusivity for Zyprexa in markets outside of Japan, partially offset by increased volume in other products.
Gross margin decreased 11 percent to $4.454 billion in the second quarter of 2012. Gross margin as a percent of total revenue was 79.5 percent, reflecting a decrease of 0.9 percentage points compared with the second quarter of 2011. The decrease in gross margin percent was primarily due to lower sales of Zyprexa, largely offset by the impact of foreign exchange rates on international inventories sold which decreased cost of sales in the second quarter of 2012 and increased cost of sales in the second quarter of 2011.
Total operating expense, defined as the sum of research and development, marketing, selling and administrative expenses, decreased 2 percent compared with the second quarter of 2011. Marketing, selling and administrative expenses decreased 5 percent to $1.931 billion, driven primarily by lower marketing expense. Research and development expenses increased 5 percent to $1.321 billion, or 23.6 percent of total revenue, driven by expenses related to late-stage clinical trial costs.
In the second quarter of 2011, the company recognized a charge of $132.3 million for restructuring related to severance costs from previously announced strategic actions to reduce the company's cost structure.
Operating income in the second quarter of 2012 was $1.202 billion, a decrease of 24 percent compared to the second quarter of 2011, due primarily to lower gross margin resulting from the loss of patent exclusivity for Zyprexa, partially offset by the second quarter 2011 restructuring charge referred to above.
Other income (expense) was a net expense of $16.5 million, compared with net expense of $57.6 million in the second quarter of 2011. The decrease in other expense was driven by the second quarter 2011 partial impairment of the acquired in-process research and development asset related to liprotamase, partially offset by gains on the disposition of investment securities.
The effective tax rate was 22.1 percent in the second quarter of 2012, compared with an effective tax rate of 21.8 percent in the second quarter of 2011. The second quarter 2012 effective tax rate reflects the expiration of the R&D tax credit in the U.S. at the end of 2011, while the second quarter 2011 tax rate was negatively impacted by a lower tax benefit on restructuring charges.
Net income and earnings per share decreased to $923.6 million and $0.83, respectively, compared with second-quarter 2011 net income of $1.197 billion and earnings per share of $1.07. The decreases in net income and earnings per share were primarily driven by lower operating income.
About Eli Lilly and Company
Lilly, a leading innovation-driven corporation, is developing a growing portfolio of pharmaceutical products by applying the latest research from its own worldwide laboratories and from collaborations with eminent scientific organizations. Headquartered in Indianapolis, Ind., Lilly provides answers - through medicines and information - for some of the world's most urgent medical needs.