Higher Drug Alliance Costs See Eli Lilly's Q1 Profits Slump by 15%

US pharma major Eli Lilly registered a 6% rise in total revenues for the first quarter this year, ended 31 March, with higher product sales. Total pharmaceutical revenues reached USD5.32 billion, up 5% year-on-year (y/y), while animal health revenues were up by 28% y/y to USD369.8 million. The firm said that the rise in the topline figures can be attributed to volume-based revenue growth, including in international markets. In terms of the cost structure, research and development (R&D) costs were up notably—by 38.8% y/y—including acquired in-process research. Marketing, selling, and administrative costs were also up—by 11% y/y—reflecting the firm's continued restructuring activities, with 5,500 positions eliminated. In the first quarter of 2011, the firm recognised a charge of USD76.3 million for restructuring-related severance costs. Its recent diabetes alliance with Boehringer Ingelheim (Germany) resulted in a USD388-million in-process R&D charge. Operating income therefore dropped by 17.9% y/y to USD1.36 billion, while net income stood at USD1.05 billion, a drop of 15% y/y.

The revenue split through business segment reflects on the dominance of the pharmaceutical business in its contributions to topline growth. Animal Health, while contributing to volume-driven growth, is a much smaller business comparatively, with revenues of just USD369.8 million. Collaborations include contributions from royalties for its drug Erbitux (cetuximab) and Byetta (exenatide injection) among others. In terms of therapeutic area contributions, oncology has suffered primarily due to the genericisation of Gemzar (gemcitabine).

Product sales saw Zyprexa (olanzapine) once again topping the table with USD1.28 billion, of which US contributions stood at USD597.1 million. The latter was driven by higher prices, while in the international markets the drug saw higher volume and a favourable foreign-exchange rate impact. Cymbalta was also up by 13% y/y in global sales, with the United States contributing USD691.1 million, also due to higher prices. This was coupled with a strong contribution from international markets, driven by higher demand, particularly in Japan where it was recently launched, the firm said. Alimta (pemetrexed) and Cialis (tadalafil) also witnessed the same trend of higher demand in international markets and US sales, primarily driven by higher prices. Humulin (human insulin of recombinant DNA origin), on the other hand, grew by 13% y/y in the US market to USD120.4 million, primarily due to the firm's alliance with Walmart, which boosted demand.

Outlook and Implications

Eli Lilly's financial performance in the first quarter of 2011 had largely been expected, although the lower profits growth is disappointing. The figures depict a tough quarter, with higher costs emanating from restructuring activities and at the same time R&D investments aimed at aiding its growth trajectory in the short-to-medium term. Here, the alliance costs are attributed to the January 2011 alliance with Boehringer Ingelheim to develop diabetes drugs. In the year ahead, this theme of higher costs, especially as restructuring activities continue, is expected to be reflected in the ensuing financial quarters.

The firm has had a rough ride on the regulatory front in the first quarter, with two complete response letters (CRLs) for florbetapir and liprotamase. Eli Lilly is expected to provide a response to the US FDA on both these applications, but the CRLs will affect the potential commercialisation plan and subsequent contributions to overall sales in the short term. On the positive side, the firm has received recommendation for its Bydureon (exenatide) treatment for Type 2 diabetes from the European Medicines Agency. In 2011, the firm expected to gain regulatory approval for linagliptin, Cialis for benign prostatic hyperplasia, and Erbitux for first-line head and neck cancer.

In terms of 2011 guidance, Eli Lilly is expecting total revenues in the low single digits, with marketing, selling,and administrative costs seeing a low-to-mid single-digit increase. Earnings per share reported is expected to be in the USD3.86–4.01 range, a drop of 12–16% from 2010 figures.