Eli Lilly (LLY) reported fourth quarter earnings per share of $1.11, a penny above the Zacks Consensus Estimate and 22% above the year-ago earnings of 91 cents. Fourth quarter results were driven by higher revenues and a lower tax rate. Fourth quarter revenues increased 4% to $6.2 billion, slightly above the Zacks Consensus Revenue Estimate of $6.0 billion.
Full year earnings came in at $4.74 per share, 3 cents above the Zacks Consensus estimate and 7% above the year-ago results. Full year revenues increased 6% to $23.1 billion, beating the Zacks Consensus Estimate of $22.9 billion.
Quarterly Details
Fourth quarter revenues increased mainly due to a 3% volume growth and 2% price increase, which was offset by unfavorable foreign exchange fluctuations (1%). Healthcare reform impacted revenues by $70 million.
US revenues increased 5% to $3.4 billion mainly due to price increases and volume growth. Ex-US revenues increased 4% to $2.8 billion mainly due to higher demand that was partially offset by unfavorable foreign exchange fluctuations and lower prices.
During the fourth quarter, Eli Lilly's lead product Zyprexa recorded a 2% decline in revenues which came in at $1.3 billion. While US revenues increased 4%, international markets revenues declined 8%, mainly due to lower demand and unfavorable foreign exchange fluctuations.
Products contributing to fourth quarter growth included Cymbalta (19% growth to $984.6 million), Humulin (5% growth to $287.9 million), Alimta (9% growth to $569 million) and Cialis (6% growth to $465.9 million). Alimta continued to perform well in ex-US markets due to increased demand. Meanwhile, Humulin revenues benefited from increased demand thanks to Eli Lilly's new partnership deal with Wal-Mart (WMT).
Eli Lilly's Animal Health segment contributed $424.3 million (up 20%) to revenues. Higher demand and the impact of a recent acquisition helped boost Animal Health revenues.
Meanwhile, Gemzar recorded a 22% decline in revenues to $243.6 million due to the entry of generics in the US in mid-November. The product is also facing generic competition in major international markets. Effient posted revenues of $47 million with US revenues coming in at $35.8 million.
Expenses
On the operational front, expenses increased 8% during the quarter. R&D expenses were 18% higher, mainly due to costs associated with the termination of clinical studies and charges related to business development activities. Apart from this, marketing, selling and administrative expenses increased 2% to $1.9 billion, driven by higher ex-US marketing and selling expenses, which were partially offset by Eli Lilly's cost-control efforts and lower administrative expenses.
Guides In-Line With Expectations
Eli Lilly expects to earn $4.15 - $4.30 per share in 2011, down 9-12% from 2010. Revenue growth is expected to be flat or slightly up from 2010 levels. 2011 will be a challenging year for Eli Lilly with the company losing patent exclusivity on Zyprexa. Zyprexa sales should erode rapidly with the entry of generics. Moreover, we expect continued erosion of Gemzar sales due to genericization. Meanwhile, Strattera generics are not expected to enter the US market in 2011.
Eli Lilly expects the US health care reform to impact 2011 revenues by $400 - $500 million. The Zacks Consensus Estimate currently stands towards the higher end of the earnings guidance at $4.30 per share.
The company expects gross margin as a percentage of revenue to decline 2 percentage points. Meanwhile, marketing, selling and administrative expenses are expected to increase in the low–to mid-single digit range, and research and development expenses are expected to remain flat. Eli Lilly expects cash flows to be sufficient for funding capital expenditures of $800 - $900 million, acquisitions and dividend.
Neutral on Eli Lilly
We currently have a Neutral recommendation on Eli Lilly. We expect the top-and bottom-line to remain under pressure from late 2011 as the contraction in Zyprexa sales more than offsets growth in Cymbalta, diabetes and new product sales. Barring significant cost-cutting efforts or additional revenue catalysts, 2013 will be the beginning of a very challenging period with Cymbalta losing US patent protection during the year.
On the flip side, strong performance of the diabetes business should offer some downside support. The ramp of Effient and upside from the ImClone deal could also result in a short-term boost to revenue. We are also pleased to see Eli Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline.
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