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Eli Lilly & Company (LLY - Analyst Report) reported third quarter 2013 adjusted earnings per share of $1.11, well above the Zacks Consensus Estimate of $1.05 and 41% above the year-ago earnings of 79 cents. Year-over-year growth was attributable to the strong performance of several key products, cost control, a lower tax rate as well as a lower share count.

Third quarter revenues increased 6% to $5.77 billion, marginally above the Zacks Consensus Estimate of $5.76 billion. Revenues increased despite the impact of the Zyprexa patent expiry due to the strong performance of key products.

Reported earnings (including special items) declined 6% to $1.11 per share in the third quarter of 2013.

Quarterly Details

Third quarter revenues increased 6% reflecting price increases (5%) and higher volume (3%) that were partially offset by unfavorable currency fluctuation (2%). The higher volume was mainly due to the strong performance of several products like Humalog, Alimta, Trajenta and Forteo and the Animal Health segment. This was partially offset by the loss of exclusivity for Zyprexa, which is facing competition from several generic players as well as volume declines for Cymbalta.

U.S. revenues grew 11% to $3.3 billion mainly due to price increases, especially for Cymbalta. Ex- U.S. revenues remained flat at $2.5 billion mainly due to the unfavorable impact of the depreciation of the Japanese yen.

During the third quarter, Zyprexa recorded a 26% decline in revenues, which came in at $278.7 million. U.S. revenues fell 51% due to lower prices. International revenues decreased 20%, mainly due to the loss of market exclusivity in major markets apart from Japan. Zyprexa sales in Japan were affected by the weakening yen.

Products which performed well in the third quarter included Alimta (up 7% to $690.5 million), Humalog (up 7% to $616 million), Cialis (up 9% to $526.7 million), Forteo (up 6% to $306.7 million) and Strattera (19% growth to $173.2 million) among others.

Cymbalta sales increased 11% to $1.4 billion. However, growth was driven mainly by price increases. With the Cymbalta patent expiry coming up (Dec 11), inventory levels were down both at the wholesale and retail channels. The company expects U.S. sales to drop to about $500 million in the fourth quarter.

Eli Lilly’s Animal Health segment contributed $530.3 million (up 11%) to revenues. Sales benefited from the withdrawal of Merck’s (MRK - Analyst Report) food animal product from the U.S. market.

Effient revenues increased 14% to $124.9 million. While U.S. revenues grew 15% to $92.7 million, due to higher prices, ex- U.S. revenues increased 10% to $32.2 million driven by higher volume and favorable currency movement.


Eli Lilly’s adjusted operating expenses declined 2% to $3 billion. Research and development (R&D) expenses increased 3% to $1.4 billion. Marketing, selling and administrative expenses declined 6% to $1.7 billion reflecting the company’s cost control efforts. The company has cut down its sales and marketing activities in the U.S. for Cymbalta and Evista, due to impending generic competition.

EPS Guidance Narrowed

Eli Lilly narrowed its 2013 earnings guidance to $4.10 to $4.15 per share (old guidance: $4.05 - $4.15 per share). Revenue guidance remained unchanged at $22.6 billion - $23.4 billion. The Zacks Consensus Estimate for earnings and revenues is currently $4.12 per share and $22.9 billion, respectively.

Eli Lilly continues to expect marketing, selling and administrative expenses of $7.0 - $7.2 billion and R&D expenses of $5.3 - $5.5 billion.

Eli Lilly will start buying back shares under its new $5 billion share repurchase program shortly.

Our Take

Eli Lilly’s third quarter results were once again better-than-expected with products like Cialis, Humalog, Alimta, Forteo and the animal health segment managing to offset the negative impact of the genericization of Zyprexa.

Eli Lilly expects revenues to remain flat or increase by about 3.5% in 2013 despite the expected loss of U.S. exclusivity for Cymbalta later this year.

While revenues will be impacted by the loss of Cymbalta exclusivity and the loss of the 15% royalty on exenatide sales, products like Humalog, Humulin, Cialis, Strattera, Forteo, Alimta, Cymbalta (outside the U.S.), Effient, Tradjenta and Axiron, and the animal health segment should contribute to sales. Emerging markets, especially China, should also drive sales. However, revenue growth in Japan could be adversely affected by the weak yen.

Eli Lilly is also working on controlling costs. Earlier this year, Eli Lilly had announced a restructuring initiative to help lessen the impact of the upcoming loss of patent exclusivity for Cymbalta and Evista, changing consumer needs and the change in the U.S. healthcare environment.

Eli Lilly currently carries a Zacks Rank #3 (Hold). Pharma stocks that currently look attractive include Roche (RHHBY - Analyst Report) and Johnson & Johnson (JNJ - Analyst Report). While Roche carries a Zacks Rank #1 (Strong Buy), Johnson & Johnson is a Zacks Rank #2 (Buy) stock.

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