Eli Lilly (LLY) reported second quarter earnings per share of $1.24, easily surpassing the year-earlier earnings of $1.12 and the Zacks Consensus Estimate of $1.11. Revenues also exceeded expectations. Revenues came in at $5.75 billion, topping the Zacks Consensus Revenue Estimate of $5.60 billion and 9% above the year-earlier revenues of $5.29 billion. Revenues were driven by an increase in volume (5%) and prices (2%), as well as a favorable impact of foreign exchange (1%).

Revenue by Major Products

During the second quarter, Eli Lilly’s lead product Zyprexa recorded a 5% year-over-year growth to $1.3 billion. While U.S. sales increased 10%, international markets sales grew only 1%.

Several other products maintained their growth momentum: Cymbalta (17% growth to $867.7 million), Humalog (6% growth to $504.6 million), Alimta (43% growth to $551.8 million) and Cialis (15% growth to $418.7 million). Cymbalta sales benefited from recent launches in Japan and Canada.

Meanwhile, Gemzar recorded a 17% decline in revenues to $293.4 million due to the entry of generics in major international markets. Newly launched Effient posted sales of $22.9 million, with U.S. sales coming in at $16.3 million.

The U.S. market accounted for approximately 56.7% of Eli Lilly’s total revenues during the reported quarter. Revenues from the U.S. increased 8% to $3.26 billion due to higher prices and increased volume. The growth momentum was maintained in the international market, as well. Revenues increased 9% to $2.49 billion due to increased demand and the positive impact of foreign exchange rates outside the Euro zone. This was partially offset by lower prices. The U.S. healthcare reform impacted total revenues by approximately $70 million.

Expenses

On the operational front, expenses increased 7% during the quarter. R&D expenses were 14% higher, mainly due to increased late-stage clinical trial costs and development milestones. Apart from this, marketing, selling and administrative expenses increased 3% driven by higher expenses in international markets. This was partially offset by lower administrative expenses and cost-control efforts by the company.

Guidance Raised on Strong Results

Following the release of strong second quarter results, Eli Lilly raised its guidance for fiscal 2010. The company now expects earnings in the range of $4.50 – $4.65 per share, 10 cents above the earlier guidance of $4.40 – $4.55. The current Zacks Consensus Estimate of $4.49 is a penny shy of the lower end of the new guidance.

Eli Lilly maintained its revenue guidance and still expects volume-driven revenue growth by mid-single digits. Growth will be driven primarily by Alimta, Cymbalta, Humalog, Cialis and Effient.

Eli Lilly, however, tweaked other components of its guidance. The company now expects gross margin as a percent of revenue to be flat to increasing. Earlier the company was expecting was expecting gross margin as a percent of revenue to be flat to declining.

Meanwhile, marketing, selling and administrative expenses are expected to increase in the low-single digits (old guidance: low- to mid-single digits). Research and development expenses are still slated to grow in the low-double digits. Eli Lilly expects cash flows to be sufficient for funding capital expenditures of less than $900 million, acquisitions, and dividend.

Neutral on Eli Lilly

We currently have a Neutral recommendation on Eli Lilly, which is supported by the Zacks #3 Rank (Hold). Strong sales from key products such as Cymbalta, Cialis, the diabetes business and Alimta will be the fundamental strengths to revenue growth in 2010, with the ImClone deal providing incremental revenue growth.

However, we expect the top-and bottom-line to come under pressure from late 2011 with the loss of exclusivity on Zyprexa. Barring significant cost-cutting efforts or additional revenue catalysts, 2013 will be the beginning of a very challenging period, with Cymbalta losing U.S. patent protection during the year.

On the flip side, strong performance of the diabetes business, the ramp of Effient and upside from the ImClone deal should offer some downside support. We are also pleased to see Eli Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline.
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