Eli Lilly and Company Earnings Call Nuggets: Gross Margins, Alimta O.U.S.

On Wednesday, Eli Lilly and Company (NYSE:LLY) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed to investors and analysts.

Gross Margins

Jami Rubin – Goldman Sachs: Phil, maybe it’s time to upgrade your technology. I had a question related to gross margins. The gross margin this quarter came in well ahead of what we were expecting. Going back, when the company initially gave guidance for the year, back in early January. The Street was, I think at around 3.60 and you guided to 3.10 to 3.20, in large part because of generic Zyprexa, which of course wasn’t new. Now you are raising that guidance again by a dime, and the gross margin came in well ahead of what I think people are looking for. So maybe, Derica, if you could just talk to some of the variables that have driven your guidance and help us to think about the evolution of gross margins? I mean, at least, that’s what we missed this quarter, but you are not changing your gross margin guidance, so would you expect Q2 and Q3 because of the onslaught of generic competition to be meaningfully below your average guidance of 77%? Maybe if you could just add color there? Just on another note, with animal health, which performed very well. If you could talk about the variables that are driving that, and also, if you could remind us what the Janssen acquisition provided for this quarter. Thanks.

Derica W. Rice – EVP, Global Services, and CFO: This is Derica, and thanks for your question. In regards to gross margins, just a few things to keep in mind. One, as we move throughout the year, with each quarter of 2012, we will have further declining Zyprexa revenue. So in 2012, we expect Q1 to have the greatest share of our Zyprexa revenue and then with each subsequent quarter it will decline. With the decline, it has an increasingly negative effect on our gross margin, so that’s going to be bringing our gross margins down, as we move through the period. Secondly, you also saw that in the first quarter, we had a slightly favorable impact just from exchange rate. So as the euro has been weakening against the dollar, and we have talked about this on past calls, you see that that has a favorable impact on our cost of goods sold of inventories during the period, which obviously has a favorable impact on gross margin. Don’t know if that’s sustainable. The third piece is just when you look at the price effect element of it, we did see in the first quarter, as Travis said, there was some gross to net adjustment. So as we were looking at our AMP calculations and based upon new insights, we were able to – we made some adjustments to our gross to net reserves on the books, which turned out to be come out. And it’s favorable in terms of price. Now that’s what’s highlighting and driving our gross margin, as we look through the remainder of the year. Regard to your second question around animal health and what are some of the key things that’s driving our guidance and our increase, what we saw in the first quarter, was very strong revenue growth relative to our expectations. Animal health alone grew 33%, of which volume growth of that was 31%. Within that volume growth, it was primarily driven by both our companion animal business, as well as our food animal business. In the companion animal segment, we continue to experience an outstanding launch of Trifexis. This is our flea and heartworm product, as well as we continue actually have good sales of Comfortis, and there likewise we’ve seen good performance on the food animal side as well. Regards to the Janssen acquisition, as well as ChemGen which we completed earlier this year, that attributed about one third of that total growth and so if you look at the 33%, two thirds of that was organically driven.

Eli Lilly Earnings Cheat Sheet>>

Philip Johnson – IR: Jami this is Phil, one thing I might add in terms of the gross margin percent, as you aware for a while now, we’ve been providing a backup slide, and this will be a Slide 18 in this quarter’s deck that strips out from each of the quarter’s results, this FX effect on international inventory story. These are two lines of numbers at the bottom of that chart. What that will show is, actually in Q1 of last year, we had nearly one percentage point reduction in the gross margin percent due to FX. So our true underlying base was 80.7%. When you look at this quarter, we’re actually seeing a 2.4 percentage point reduction in the gross margin percent, so very substantial. It seemed to be in line with what people had been expecting, and I’m wondering actually with people, they were looking at the base, to see what they are declined off of, may have been looking at the base that included that negative effect from FX last year, that wouldn’t necessarily have been the appropriate base to take it down from. As Derica mentioned, we do expect to see further deterioration through the year, particularly given the Zyprexa erosion that we anticipate largely here in the U.S. We’ve now entered I think as of today or yesterday, the period where multiple generics can now come to market, and that will bring different dynamics than we saw in the first quarter.

Derica W. Rice – EVP, Global Services, and CFO: The last thing I’ll leave you with Jami is that, we were able to drive outside of the Zyprexa patent erosion and the remaining elements of Gemzar, good volume growth across the other elements of our business. So in addition to the animal health, we saw good growth in China, 41%, as well as key brands like Cymbalta, 23% and even in insulins which grew, Humalog grew 12%. So that was always part of our strategy in terms of those three strategic levers, making sure that we were driving growth in those areas where we weren’t experiencing patent expiration.

Alimta O.U.S.

Marc Goodman – UBS: Couple of questions. First, can you just tell us what were the key products impacted by that gross to net adjustment. Second, Alimta O-U.S. looks like it flattened out and I was wondering if you could just give us a little bit of insight, what was going on there. Then third I get this question, so I figured I’ll ask you is if solanezumab ends up being positive data later this year, what do you do dutifully as a company with respect to R&D, SG&A and if it fails what do you do dutifully as a company with respect to spending?

Philip Johnson – IR: Martin, this is Phil. I’ll take your first two and then maybe Derica will take a crack, or John, at the last one. So the products on the gross to net adjustments, it really was across the board. This was – it’s a phenomenon market that we’ve seen each and quarter, sometimes it’s a slight benefit, sometimes it’s a slight headwind. This quarter was a little benefit than we had in some prior periods due to the size of the adjustments, that would have contributed about three percentage points of growth that shows up in the price column to our U.S. sales. Slowdown in Alimta O.U.S. the primary driver compared to prior quarter really is FX, if you go back sort of mid last year, you had FX contributing double-digits, I think in Q2 for example peak maybe the 11% contribution to overall growth, where it actually reduced sales by one percentage point this quarter. We also have seen the volume growth in percentage terms begin to decrease somewhat as we have a larger base that we’re comparing against. The last thing I’d highlight is we did have price reduction that go in effect for the public April 1, actually going effect for us in sales to wholesalers as of March 1st in Japan as part of the biannual price adjustment process and Alimta had a substantial price reduction on a order of magnitude of 25%. So we saw one month of that in the quarter. Market regards to your question around solanezumab and how does that affect Lilly in terms of potential outcomes? It does – in terms of our overall strategy it doesn’t affect us significantly at all. We stated all along that solanezumab was not the homerun deck for Lilly and is one of 12 molecules that we have in Phase III development. So, therefore, if we are unsuccessful with solanezumab, we continue with our action plans as stated. We will continue to progress the remaining 11 molecules that we have in clinical development in Phase III as well as the other 21 in Phase II, and we will continue to try to invest to drive the growth in our key growth opportunities. Obviously, if it’s successful, given the low probability of technical success, it represents upside for the firm. But R&D innovation is still going to be the cornerstone of our strategy, so it doesn’t lessen our focus still on those remaining 11 molecules on Phase III.