Lilly Reports Third-Quarter 2011 Results

LillyEli Lilly and Company (NYSE: LLY) announced financial results for the third quarter of 2011. In the third quarter of 2011, worldwide total revenue was $6.148 billion, an increase of 9 percent compared with the third quarter of 2010. This 9 percent revenue growth was comprised of increases of 4 percent in volume and 4 percent due to the impact of foreign exchange rates. Price had a negligible impact on revenue growth, reflecting the loss of U.S. patent exclusivity for Gemzar® in November 2010. Total revenue in the U.S. increased 4 percent to $3.273 billion due to higher prices and increased volume. Total revenue outside the U.S. increased 15 percent to $2.874 billion due to the positive impact of foreign exchange rates and increased volume. Third-quarter 2011 total revenue was reduced by approximately $130 million due to the impact of U.S. health care reform.

Gross margin increased 3.1 percent to $4.810 billion in the third quarter of 2011. Gross margin as a percent of total revenue was 78.2 percent, reflecting a decrease of 4.3 percentage points compared with the third quarter of 2010. The decrease in gross margin percent was due primarily to the impact of foreign exchange rates on inventories sold during the quarter.

Total operating expense, defined as the sum of research and development, marketing, selling and administrative expenses, increased 10 percent compared with the third quarter of 2010. Marketing, selling and administrative expenses increased 13 percent to $1.918 billion. Research and development expenses increased 5 percent to $1.281 billion, or 20.8 percent of total revenue. Total operating expense growth was driven by the recently-announced diabetes collaboration with Boehringer Ingelheim, including late-stage clinical trial costs, as well as the effect of foreign exchange rates. In addition, approximately $45 million of the increase in operating expense was due to the mandatory pharmaceutical manufacturers fee associated with U.S. health care reform.

In the third quarter of 2011, the company recognized a charge of $25.2 million for restructuring primarily related to severance costs from previously announced strategic actions that the company is taking to reduce its cost structure and global workforce. In the third quarter of 2010, the company recognized restructuring charges of $59.5 million, primarily related to the previously announced strategic actions.

Operating income in the third quarter of 2011 was $1.586 billion, a decrease of 6 percent compared to the third quarter of 2010, due primarily to lower gross margin percent and increased marketing, selling and administrative expenses.

Other income (expense) was a net expense of $83.4 million, compared to net expense of $21.7 million in the third quarter of 2010. The increase in third quarter 2011 expense was driven primarily by the partial impairment of an acquired in-process research and development asset related to Amyvid.

The effective tax rate was 17.7 percent in the third quarter of 2011, compared with an effective tax rate of 22.0 percent in the third quarter of 2010. The largest driver of the decrease in the effective tax rate was the recognition of a $45.4 million discrete benefit primarily as a result of the resolution of the IRS audit of the company's 2007 federal income tax return. For the full year 2011, the company expects the effective tax rate to be approximately 19.5 percent.

Net income and earnings per share decreased to $1.236 billion and $1.11, respectively, compared with third-quarter 2010 net income of $1.303 billion and earnings per share of $1.18. The decreases in net income and earnings per share were primarily driven by lower operating income and higher other expense, partially offset by a lower effective tax rate.

Third-Quarter 2011 non-GAAP Results
Operating income decreased 8 percent to $1.611 billion, due to lower gross margin percent and increased marketing, selling and administrative expenses. Net income decreased 7 percent to $1.254 billion, while earnings per share decreased 7 percent to $1.13. These decreases were primarily driven by lower operating income and higher other expense, partially offset by a lower net effective tax rate. Excluding the impact of changes in foreign exchange rates, earnings per share would have decreased approximately 1 percent.

For purposes of non-GAAP reporting, items totaling $.02 and $.03 per share in the third quarters of 2011 and 2010, respectively, have been excluded.

"In the third quarter Lilly continued to drive revenue growth for many key brands, including Cymbalta, Humalog, Forteo and Strattera, with strong growth also seen in animal health, Japan and China. This growth offset the continued erosion of Gemzar sales due to generic competition," said John C. Lechleiter, Ph.D., Lilly's chairman, president and chief executive officer. "As we face the loss of patent exclusivity for Zyprexa in most major markets, we are well-prepared as a company to meet the challenges before us. We remain committed to our innovation-based strategy and are focused on delivering the next wave of new medicines to patients in the coming years."

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.

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