Eli Lilly & Co., Q2 2007 Earnings Call, Jul-24-2007 - NYSE:LLY

NYSE:LLY

Phil Johnson [Executives] 💬

Phil Johnson made several statements during the earnings call. Here’s a detailed summary:

Opening Remarks

Introduction:
- Introduced himself as the Executive Director of Investor Relations at Eli Lilly and Company.
- Mentioned the presence of John Lechleiter (President and COO), Derica Rice (CFO), and Jim Greffet (Manager of Investor Relations).
- Directed listeners to the earnings press release, supporting materials, live webcast, and internet-based replay available on the company's website (lilly.com).
- Noted that the replay and supporting materials would be available online through August 24th, 2007.
Forward-Looking Statements:
- Reminded listeners that the call would include projections and forward-looking statements based on management's current expectations.
- Highlighted various factors that could cause actual results to differ materially, including competitive developments, new product launches, regulatory and legal matters, patent disputes, government investigations, pricing and reimbursement changes, tax law changes, acquisitions, business development transactions, and currency exchange rates.
- Advised listeners to refer to the company's Forms 10-K and 10-Q for additional information about factors affecting the business.

Key Events Overview (Slide Five)

Regulatory and Pipeline Achievements:
- Mentioned the European Commission's approval of Cialis for once-a-day use in treating erectile dysfunction.
- Noted the expanded Forsteo label for the treatment of osteoporosis in men and the reduction of nonvertebral fractures in postmenopausal women.
- Discussed the reversal of NICE’s previous ruling on Alimta reimbursement within the UK's National Health Service, recommending Alimta for patients with advanced mesothelioma.
- Announced the submission of a New Drug Application for the olanzapine long-acting injection in the US and EU.
- Provided an update on the TRITON study for prasugrel, noting the completion of the last patient visit and the focus on processing and locking the database for data presentation at the American Heart Association meeting in November and submission to the FDA by the end of the year.
- Mentioned the legal ruling by the Canadian Federal Court and the German Patent Court allowing the introduction of generic olanzapine.
- Announced the acquisition of Ivy Animal Health, a company focused on the animal health industry.

Financial Results Overview

Worldwide Sales Growth:
- Noted that worldwide sales grew by 14% to $4.631 billion.
- Transitioned to a review of specific product sales performance and other lines of the income statement.

Product Sales Performance

Zyprexa Sales:
- Highlighted the 9% increase in worldwide Zyprexa sales to $1.213 billion.
- Explained the 4% increase in U.S. sales to $564 million, driven primarily by higher prices and offset by lower demand.
- Mentioned the 14% increase in international sales to $649 million, due to increased demand and favorable exchange rates.
- Provided context on the impact of generic competition in Canada and the expected impact in Germany, specifying Zyprexa sales in these countries and the portion represented by Zydis.
Cymbalta Sales:
- Reported a 67% increase in Cymbalta sales to $520 million.
- Detailed the 70% increase in U.S. sales to $458 million, driven by strong demand.
- Mentioned the 53% increase in international sales to $62 million.
Byetta Sales:
- Noted the 54% increase in worldwide Byetta sales for the quarter to $152 million.
- Mentioned the 54% increase in total Byetta sales recognized in Lilly's income statement to $80 million.
Humalog Sales:
- Highlighted the 12% increase in Humalog sales to $358 million, reflecting increased volume in the U.S. and internationally, increased prices in the U.S., and favorable exchange rates.
- Emphasized the progress made in reaccelerating the Humalog brand.
Humulin Sales:
- Reported a 10% increase in Humulin sales to $243 million, driven primarily by higher prices in the U.S., increased volume outside the U.S., and favorable exchange rates.
Cialis Sales:
- Mentioned the 26% increase in global Cialis sales to $293 million, reflecting strong global demand.
- Detailed the 17% increase in U.S. sales to $110 million and the 32% increase in international sales to $183 million.
Forteo Sales:
- Reported a 21% increase in quarterly Forteo sales to $177 million.
- Mentioned the 22% increase in U.S. sales to $124 million, benefiting from access to medical coverage through Medicare Part D and decreased utilization of the company's U.S. patient assistance program.
- Noted the 19% increase in international sales to $54 million.
Alimta Sales:
- Reported a 35% increase in Alimta sales to $207 million.
- Mentioned the 22% increase in U.S. sales to $107 million, driven primarily by increased demand.
- Noted the 53% increase in sales outside the U.S. to $100 million.
Launched Products Sales:
- Reported a 61% increase in sales of products launched this decade, reaching $1.5 billion or 32% of total sales on a reported basis.
- Mentioned a 34% increase on a pro forma basis.

Price, Exchange Rates, and Volume Impact

Geographic Summary:
- Noted that the 14% sales growth was driven by an 8% volume impact, a 3% favorable price impact, and a 3% favorable exchange rate impact.

Income Statement Review

Reported vs. Pro Forma Adjusted Results:
- Explained the complexities arising from the ICOS acquisition and the different views of the results provided to facilitate analysis.
- Described the reported results as including all financial results as reported according to generally accepted accounting principles.
- Mentioned the pro forma adjusted results intended to show trends in ongoing operations and provide comparable data across years, adjusted for the impact of the ICOS acquisition.
Gross Margin and Operating Expenses:
- Reported an 80 basis point increase in gross margin as a percentage of sales to 78.4%.
- Mentioned the primary drivers of the increase, including manufacturing expenses growing at a slower rate than sales and higher prices, offset by the amortization of intangible assets acquired in the ICOS acquisition and the impact of foreign exchange rates.
- Noted the 11% increase in overall operating expenses, with SG&A up 14% to $1.5 billion and R&D expense up 6% to $854 million.

Adjustments to Reported Earnings

Pro Forma Adjusted Earnings Per Share:
- Detailed the adjustments made to reported earnings per share to arrive at pro forma adjusted earnings per share, including charges for in-process research and development related to acquisitions.

Closing Remarks

Transitioned to Derica Rice:
- Concluded his remarks by turning the call back to Derica Rice for an update on financial guidance.

Derica Rice [Executives] 💬

Derica Rice provided extensive commentary during the Q2 2007 earnings call. Here’s a detailed summary of her remarks:

Opening Remarks

Positive Trends: She highlighted the company’s positive trends in the business, emphasizing improvements in execution.
Pro Forma Adjusted Results: She focused on pro forma adjusted results, assuming ownership of ICOS since January 1, 2006, and excluding certain items.
Financial Highlights:
- Earnings Per Share (EPS): Pro forma adjusted EPS of $0.90, a 25% increase over Q2 2006.
- Sales Growth: Double-digit sales growth.
- Operating Income Growth: 26% growth in operating income.
- Guidance Increase: Raised the pro forma adjusted EPS guidance to $3.40 to $3.50, an increase of $0.11.

Key Financial Achievements

Volume Growth: Worldwide volume growth more than doubled price growth.
U.S. and International Volume Trends: Positive volume trends in the U.S. and internationally.
Cost Management: Total sales grew 14%, three percentage points faster than total operating expenses.
Gross Margin Improvement: Improvement in gross margin percentage.
Operating Income Growth: Strong operating income growth of 26% in Q2.
Capacity for Investment: Capacity to invest in commercial and R&D initiatives to drive future growth.
Cash Flow and Balance Sheet Strength: Enabled continued business development activities, such as the Hypnion and Ivy acquisitions.

Product Performance

Cymbalta:
- Strong Growth: Consistently gaining both new prescription and total prescription market share.
- Brand Preference Surveys: Positive trends in brand preference surveys.
- Promotion Expansion: Promotion of DPMP indications to primary care physicians.
- Fibromyalgia Submission: Upcoming submission for fibromyalgia.
Zyprexa:
- Revenue Growth: Modest revenue growth in the U.S. and robust international performance.
- Product Liability Cases: Settlement of additional product liability cases.
- Patient Focus: Focus on patients who can benefit most from Zyprexa’s efficacy.
- Worldwide Sales Growth: Modest worldwide Zyprexa sales growth expected for 2007, incorporating generic competition in Canada and Germany.
- Long-Acting Injectable Formulation: Submitted applications for the long-acting injectable formulation in the U.S. and E.U.
Humalog:
- New Prescription Share: Gained new prescription share in the U.S.
- Sales Force Expansion: Announced sales force expansion in Q1.
- Customer Focus: Bringing knowledgeable sales representatives to customers.
- Patient-Centric Solutions: Innovative pen devices and patient-centric materials to improve outcomes.
- Brand Equity: Improvement in Humalog brand equity scores.

Key Fundamentals

U.S. Volume Growth: Steady improvement in U.S. volume growth since 2005.
Product Contribution: All major products contributed positively to the 14% pro forma sales growth.
Q2 Performance Overview: Detailed explanation of the positive trends in both gross margin percentage and the sales to OPEX spread.

Financial Guidance

Sales Growth: Low double-digit sales growth expected for the full year 2007.
Gross Margin: Slight improvement expected compared to 2006.
Operating Expenses: Low double-digit growth expected, with investments to drive future growth.
Other Income: Contribution of less than $100 million.
Effective Tax Rate: Approximately 22%.
Pro Forma Adjusted EPS Guidance: Raised to $3.40 to $3.50.
Capital Expenditures: Approximately $1.1 billion.
Quarterly EPS Guidance: No longer providing quarterly EPS guidance starting in 2008.

Question and Answer Session

Zyprexa Depot Formulation: Addressed questions regarding the potential impact of the depot formulation on foreign markets.
Price and Volume Trends: Explained the impact of M&A pricing benefits on U.S. Zyprexa, expecting the benefit to dissipate in the second half of the year.
Capital Structure: Consideration of leveraging the balance sheet for business development opportunities, R&D efforts, and potentially returning cash to shareholders.
Second Half Guidance: Explained factors contributing to the difference in performance between the first and second halves of the year, including generic competition, planned maintenance shutdowns, and additional investments.
Rebate Accruals: Provided an update on the impact of rebate accruals related to Medicare and Medicaid, indicating that the residual benefit from M&A on pricing should dissipate in the second half of 2007 and 2008.

Closing Remarks

Pipeline Progress: Mentioned key pipeline catalysts, including the Evista advisory committee meeting, Cymbalta fibromyalgia submission, prasugrel submission, and Byetta LAR study results.
Robust Pipeline: Highlighted the robust pipeline with a mix of novel approaches and established mechanisms of action.

Summary

Performance: Delighted with the second quarter results and the progress in improving execution.
Future Outlook: Continued investment in the business to drive future growth, with increasing cash flow and a strong balance sheet.

Jim Greffet [Executives] 💬

Here is a detailed summary of the statements made by Jim Greffet during the Q2 2007 Earnings Call:

Byetta Sales and Efforts:
- Worldwide Byetta sales for the quarter were $152 million, a 54% increase driven by demand.
- Total Byetta sales recognized in Lilly's income statement were $80 million, a 54% increase.
- Noted that Lilly reports half of the gross margin from U.S. sales of Byetta plus sales of pen to Amylin.
- Mentioned the sales force expansion for Byetta, increasing the volume of interactions by 30% compared to the fourth quarter of the previous year.
Humalog Sales and Trends:
- Humalog sales grew 12% to $358 million, reflecting increased volume in the U.S. and internationally, increased prices in the U.S., and foreign exchange rates.
- Stated that Humalog gained new prescription share in each month of Q2, reflecting the support behind the brand.
Humulin Sales:
- Humulin sales for the quarter were up 10% to $243 million, driven primarily by higher prices in the U.S., increased volume outside the U.S., and favorable foreign exchange rates.
Cialis Sales:
- Global Cialis sales were up 26% to $293 million in the quarter, reflecting strong global demand.
- Sales in the U.S. were up 17% to $110 million, while sales outside the U.S. increased 32% to $183 million.
Forteo Sales:
- Quarterly Forteo sales were $177 million, up 21% over Q2 of the previous year.
- U.S. sales were up 22% to $124 million, benefiting from access to medical coverage through the Medicare Part D program and decreased utilization of the Company's U.S. patient assistance program.
- International sales of Forteo were up 19% to $54 million.
Alimta Sales:
- Alimta sales in the second quarter were $207 million, an increase of 35% over Q2 2006.
- U.S. sales increased 22% to $107 million, due primarily to increased demand.
- Sales outside the U.S. were up 53% to $100 million, due to increased demand and favorable exchange rates.
TRITON Study for Prasugrel:
- Noted that the last patient visit was completed in the TRITON study for prasugrel.
- Efforts are now focused on processing and locking the database with the goal of presenting the data at the American Heart Association meeting in November and submitting to the FDA by year-end.
Zyprexa Long-Acting Injection (LA):
- Expected data from Phase III studies of the Zyprexa LA in the early part of the next year.
Byetta LAR Data Release:
- Indicated that the Byetta LAR data would likely be released via a press release or conference call in Q4 of that year, referencing the Phase II data release pattern.
European Regulatory Strategy for Byetta LAR:
- Mentioned that Lilly is responsible for filings outside the U.S. for Byetta LAR and that more clarity on the timing would be provided as the process progresses.
Response to Question on Byetta Growth:
- Addressed the growth trends of Byetta, noting market share gains for the quarter in both new prescriptions and total prescriptions.
- Highlighted double-digit growth in the 10 microgram prescription, indicating encouragement by the resurgence of growth trends.
Response to Question on Byetta LAR Data Release and European Regulatory Strategy:
- Reiterated the expected release of Byetta LAR data in Q4 of that year.
- Provided a reference point for the release pattern based on the Phase II data release.
- Noted that Lilly is excited about the opportunity and will move quickly on the European regulatory strategy, with more details to follow.

These summaries capture the key points made by Jim Greffet during the earnings call.