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Eli Lilly Reports 2008 Results

Eli Lilly and Company (Eli Lilly) has reported net sales of $20.3 billion for the full year of 2008, compared with the net sales of $18.6 billion in the previous year-end. It has also reported net loss of $2.072 billion or $1.89 per share, for the full year of 2008, compared with the net income of $2.953 billion or $2.71 per share, in the previous year-end.

Fourth-quarter highlights

Sales of $5.210 billion were essentially flat compared with the fourth quarter of 2007.

The company recorded pre-tax charges of $4.730 billion related to the acquisition of ImClone Systems.

Primarily as a result of the ImClone acquisition charges, the company reported a net loss of $3.629 billion and a loss per share of $3.31, compared with fourth-quarter 2007 net income of $854.4 million and earnings per share of $.78. On a pro forma non-GAAP basis, excluding significant items totaling $4.38 per share, earnings rose 19% to $1.07 per share.

2008 Highlights

Products launched this decade collectively grew 22% on a reported basis, to $7.310 billion, and accounted for 36% of total sales, compared with 32% of total sales in 2007.

As a result of the ImClone acquisition charges and the charges related to the resolution of Zyprexa investigations by the US Attorney for the Eastern District of Pennsylvania (EDPA) and multiple states, the company reported a net loss of $2.072 billion and a loss per share of $1.89, compared with 2007 net income of $2.953 billion and earnings per share of $2.71. On a pro forma non-GAAP basis, excluding significant items totaling $5.91 per share, earnings rose 14% to $4.02 per share.

“2008 was a year of significant transformation for our company,” commented John C. Lechleiter, chairman and chief executive officer. “Throughout the year, Lilly executed well on its operational and strategic priorities. Despite a tempering of sales growth in the fourth quarter due to unfavorable exchange rates, moderation in U.S. demand and some variations in wholesaler and retailer buying patterns, the company delivered 9% sales growth for the year, with a record 8 products each achieving over $1 billion in sales. Our solid financial performance, driven by volume-based sales growth, improved gross margins and better productivity, allowed us to make important investments to advance our pipeline of promising molecules, resolve much of the uncertainty surrounding product litigation, and complete several strategic business development transactions, most notably the ImClone acquisition. We enter 2009 with an unprecedented 60 molecules in clinical development, and an unwavering commitment to deliver improved outcomes for individual patients.”

Worldwide sales for the quarter were $5.210 billion, essentially flat compared with the fourth quarter of 2007. U.S. sales grew 3% to $2.938 billion, while sales outside the U.S. declined 3% to $2.272 billion. Increased net effective selling prices in the U.S. and increased volume outside the US were offset by the unfavorable impact of foreign exchange rates and, to a lesser extent, lower US volume caused in part by variations in wholesaler buying patterns for Zyprexa. Worldwide sales volume increased 1% and selling prices contributed 2%age points of sales growth, while the impact of exchange rates decreased sales growth by 3%.

Gross margin as percentage of sales increased by 6.9%age points, to 82.4%. Substantially all of this increase was due to the impact of the rapid decline in the Euro compared to the US Dollar during the fourth quarter of 2008, resulting in a benefit to cost of sales.

Marketing, selling and administrative expenses decreased 2%, to $1.727 billion. This decrease was due to the impact of foreign exchange rates and decreased advertising costs, partially offset by increased prasugrel pre-launch activities, as well as funding for the Lilly Foundation. Research and development expenses were $1.059 billion, or 20% of sales. Compared with the fourth quarter of 2007, research and development expenses grew 11% due primarily to increased late-stage clinical trial and discovery research costs.

The company recognized a charge of $4.685 billion in the fourth quarter of 2008 for acquired in-process research and development associated with the acquisition of ImClone Systems. In the fourth quarter of 2007, the company recognized a charge of $89.0 million for acquired in-process research and development associated with the MacroGenics and Glenmark in-licensings.

The company recognized asset impairments, restructuring, and other special charges of $80.0 million in the fourth quarter of 2008. In the fourth quarter of 2007, the company recognized asset impairments, restructuring, and other special charges of $98.2 million.

Full-Year 2008 Results

Worldwide sales for 2008 were $20.378 billion, an increase of 9% compared with 2007. Sales volume increased 5%, while exchange rates contributed 3% of worldwide sales growth and selling prices contributed 2% (numbers do not add due to rounding).

Gross margin as a% of sales increased by 1.3%age points, to 78.5%. This increase was primarily due to the favorable effect of foreign exchange rates.

Marketing, selling and administrative expenses rose 9%, to $6.626 billion. This increase was due to increased marketing and selling expenses, including prasugrel pre-launch activities and marketing costs associated with Cymbalta and Evista(R), the impact of foreign exchange rates and increased litigation-related expenses. Research and development expenses were $3.841 billion, or 19% of sales. Compared with the full-year 2007, research and development expenses grew 10%. This increase was primarily due to increased late-stage clinical trial and discovery research costs.

The company recognized charges of $4.835 billion in 2008 for acquired in-process research and development associated with the ImClone and SGX acquisitions and the in-licensing arrangements with BioMS and Transpharma Medical. In 2007, the company recognized a charge of $745.6 million for acquired in-process research and development associated with the acquisitions of ICOS, Hypnion and Ivy, and the in-licensing arrangements with MacroGenics, Glenmark and OSI.

The company recognized asset impairments, restructuring, and other special charges of $1.974 billion in 2008, primarily associated with charges totaling $1.477 billion related to Zyprexa investigations with the U.S. Attorney for the Eastern District of Pennsylvania and multiple states. In 2007, the company recognized asset impairments, restructuring, and other special charges of $302.5 million.

Other income decreased by $148.1 million in 2008, to a net expense of $26.1 million, primarily due to lower out-licensing income and a net loss on investment securities (the majority of which are unrealized).

The company recognized income tax expense of $764.3 million in 2008 despite having a loss before income taxes of $1.308 billion. The company’s net loss was driven by the $4.685 billion in-process research and development charge for ImClone and the $1.415 billion Zyprexa investigation settlement. The in-process research and development charge was not tax deductible, while the Zyprexa investigation settlement was partially deductible. In addition, the company recorded tax expense associated with the ImClone acquisition, as well as a discrete income tax benefit of $210.3 million for the resolution of the IRS audit. The effective tax rate was 23.8% in 2007.

As a result of the charges for the ImClone acquisition and Zyprexa investigation settlements, on a reported basis the company recorded a 2008 net loss of $2.072 billion, or $1.89 loss per share, compared with 2007 net income of $2.953 billion and earnings per share of $2.71.

On a pro forma non-GAAP basis, the company recorded net income of $4.399 billion, or $4.02 per share for the full-year 2008, compared with full-year 2007 net income of $3.863 billion, or $3.54 per share.