FY2006: Zyprexa Stability and Cymbalta Boost Lilly

Solid Full-Year Sales Growth

Eli Lilly yesterday reported a solid set of financial results for the full-year 2006 on the back of stabilisation in Zyprexa (olanzapine) revenues, and growth from a number of the drug-maker’s newer products. Sales for the full-year 2006 rose by 7% to US$15.7 billion, compared with US$14.6 billion in the year-earlier period. This strong bottom-line performance was reflected in the drug-maker’s profits, which rose to US$2.7 billion in 2006 from US$2.0 billion in the year-earlier period. However, both these figures were heavily impacted by charges, making it difficult to use the numbers for comparative purposes. Nevertheless, using Global Insight's estimate of operating income as shown in the table below, its is possible to see quite clearly that Lilly’s continued focus on its efficiency allowed its revenues for the full year to rise faster than its overall cost base. As a result, operating income rose by 13% to US$4.1 billion, compared with just US$3.6 billion in 2005.

Charges Hit Q4

For the fourth quarter of 2006, Eli Lilly's net income slumped by 81% year-on-year (y/y) to US$132.3 million, compared with the comparable year-ago period, after the company's quarter was hit hard by charges. The company recorded a US$450.3-million restructuring charge, as well as a charge of US$494.9 million related to the company's recent settlement of around 18,000 Zyprexa product liability cases.

Cymbalta Growth Is Highlight of Lilly's 2006 Product Sales

Eli Lilly's newer products continue to play an ever more important part in the Indianapolis drug-maker’s product mix, and now account for fully 41% of Lilly's total revenues. However, it is still clear that revenues from Lilly’s best-selling product, the world's leading antipsychotic Zyprexa, are of critical importance to the company. Importantly, this drug recorded a reasonably solid sales performance through 2006, with Lilly managing to add another 4% in sales for Zyprexa compared with 2005. This sales gain, however, was achieved exclusively through Lilly charging higher prices for the drug, to offset lower demand. Although this appears to be a relatively successful short-term strategy to stem the waning demand for Zyprexa that has occurred over recent years due to the increased concern and awareness of the drug’s links to possible adverse metabolic effects, its does not represent a long-term solution to stabilising Zyprexa revenues. As a result, it seems likely that over the next few years the company will find maintaining these sorts of revenues from Zyprexa an increasingly challenging prospect.

However, of critical importance perhaps is the fact that following Lilly's victory in patent litigation, during which the U.S. courts found that Zyprexa's patents were valid and enforceable through 2011, it now looks relatively certain that the branded products’ exclusivity will remain bulletproof until that date. This represents a major positive for Lilly, but it also sets a definite time period by which the company needs to bring on stream significant revenues from newer products to replace those that it will ultimately lose from Zyprexa.

With this in mind, the near-term future is all about Lilly's anti-depressant drug Cymbalta (duloxetine HCl), which hit sales of US$1.3 billion for the full-year 2006, a 94% rise over the prior year, thereby tipping it over into "blockbuster" status. Sales in the United States increased by a massive 82% to US$1,159 million due to strong demand, whereas sales in territories outside of the United States were just US$157 million. This latter figure in particular, as well as the drug’s spectacular U.S. growth, demonstrates the huge potential that Lilly has for a further expansion of sales of this product over the next several years.

Outlook and Implications

The year 2006 has been an important transitional one for Lilly, as the company has enacted a number of strategic initiatives that it believes will not only allow it to achieve meaningful near-term earnings growth, but also that will, more importantly, leave it better suited to face a rapidly changing pharmaceutical market.

In the short term, Cymbalta appears to represent Lilly's main big ticket product that will drive the company's growth, and behind this analysts are closely watching the progress of the experimental blood-thinner prasugrel. Lilly representatives told analysts at a conference call yesterday that they intend to submit this experimental compound, which Lilly has been developing along with Japan's Daiichi Sankyo, for U.S. regulatory approval by the end of 2007.

However, of long-term importance to Lilly is the increasingly tough operating environment that currently exists for the pharmaceutical industry and the company over 2006 began to explain to observers how it intends to cope with these challenges. One of the major issues faced by a highly innovative company like Lilly is the high cost of research, which in 2006 accounted for just under 20% of the company's revenues. As a result of this Lilly is making significant strides to lower its costs of developing drugs and a key part of this strategy is Lilly's increased focus on outsourcing research where possible to cheaper parts of the world, particularly India and China. It also intends to combat the increasingly challenging payer environment by increasing its focus and capacity to make biotechnology products. This in turn should also allow the company to keep down some of its long-term exposure to generic challenges and as a result these products will become an increasingly important part of Lilly's portfolio over the next decade.

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