SEC Filing | Eli Lilly and Company

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report Under Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the quarterly period ended March 31, 2020

COMMISSION FILE NUMBER 001-6351

ELI LILLY AND COMPANY

(Exact name of Registrant as specified in its charter)



Indiana		35-0470950
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Lilly Corporate Center, Indianapolis, Indiana 46285

(Address of principal executive offices)

Registrant’s telephone number, including area code (317) 276-2000

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of Each Class	Trading Symbol	Name of Each Exchange On Which Registered
Common Stock (no par value)	LLY	New York Stock Exchange
1.000% Notes due 2022	LLY22	New York Stock Exchange
7 1/8% Notes due 2025	LLY25	New York Stock Exchange
1.625% Notes due 2026	LLY26	New York Stock Exchange
2.125% Notes due 2030	LLY30	New York Stock Exchange
0.625% Notes due 2031	LLY31	New York Stock Exchange
6.77% Notes due 2036	LLY36	New York Stock Exchange
1.700% Notes due 2049	LLY49A	New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The number of shares of common stock outstanding as of April 27, 2020:



Class		Number of Shares Outstanding
Common		956,450,448

Eli Lilly and Company

Form 10-Q

For the Quarter Ended March 31, 2020

Table of Contents



		Page
PART I. Financial Information		4

Item 1.	Financial Statements	4
	Consolidated Condensed Statements of Operations	4
	Consolidated Condensed Statements of Comprehensive Income (Loss)	5
	Consolidated Condensed Balance Sheets	6
	Consolidated Condensed Statements of Equity	7
	Consolidated Condensed Statements of Cash Flows	8
	Notes to Consolidated Condensed Financial Statements	9
Item 2.	Management's Discussion and Analysis of Results of Operations and Financial Condition	32
	Executive Overview	32
	Revenue	40
	Gross Margin, Costs, and Expenses	43
	Financial Condition	44
	Financial Expectations	45
	Available Information on our Website	45
Item 4.	Controls and Procedures	46

PART II. Other Information		47

Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6.	Exhibits	48

Index to Exhibits		49
Signatures		49

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue,” or similar expressions.

In particular, information appearing under “Management's Discussion and Analysis of Results of Operations and Financial Condition” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we (Lilly or the Company) express an expectation or belief as to future results or events, it is based on management's current plans and expectations, expressed in good faith and believed to have a reasonable basis. However, we can give no assurance that any such expectation or belief will result or will be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:


•	uncertainties in the pharmaceutical research and development process, including with respect to the timing of anticipated regulatory approvals and launches of new products;


•	market uptake of recently launched products;


•	competitive developments affecting current products and our pipeline;


•	the expiration of intellectual property protection for certain of our products;


•	our ability to protect and enforce patents and other intellectual property;


•	the impact of actions of governmental and private payers affecting pricing of, reimbursement for, and access to pharmaceuticals;


•	regulatory compliance problems or government investigations;


•	regulatory actions regarding currently marketed products;


•	unexpected safety or efficacy concerns associated with our products;


•	issues with product supply stemming from manufacturing difficulties or disruptions;


•	regulatory changes or other developments;


•	changes in patent law or regulations related to data-package exclusivity;


•	litigation, investigations, or other similar proceedings involving past, current, or future products or commercial activities as we are largely self-insured;


•	unauthorized disclosure, misappropriation, or compromise of trade secrets or other confidential data stored in our information systems, networks, and facilities, or those of third parties with whom we share our data;


•	changes in tax law, including the impact of United States tax reform legislation enacted in December 2017 and related guidance, or events that differ from our assumptions related to tax positions;


•	changes in foreign currency exchange rates, interest rates, and inflation;


•	asset impairments and restructuring charges;


•	changes in accounting and reporting standards promulgated by the Financial Accounting Standards Board and the Securities and Exchange Commission (SEC);


•	acquisitions and business development transactions and related integration costs;


•	information technology system inadequacies or operating failures;


•	the impact of the evolving COVID-19 pandemic and the global response thereto;


•	reliance on third-party relationships and outsourcing arrangements; and


•	the impact of global macroeconomic conditions.

More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the SEC, including in Part II, Item 1A of this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019, particularly under the caption “Risk Factors”.

All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report.

PART I. Financial Information

Item 1. Financial Statements

Consolidated Condensed Statements of Operations

(Unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES

(Dollars and shares in millions, except per-share data)



	Three Months Ended March 31,
	2020			2019
Revenue (Note 2)	$	5,859.8		$	5,092.2
Costs, expenses, and other:
Cost of sales	1,215.1			1,138.7
Research and development	1,392.1			1,230.5
Marketing, selling, and administrative	1,549.6			1,517.1
Acquired in-process research and development (Note 3)	52.3			136.9
Asset impairment, restructuring, and other special charges (Note 6)	59.9			423.9
Other–net, (income) expense (Note 12)	(89.1		)	(86.0		)
	4,179.9			4,361.1
Income before income taxes	1,679.9			731.1
Income taxes (Note 8)	223.4			170.0
Net income from continuing operations	1,456.5			561.1
Net income from discontinued operations (Note 5)	—			3,680.5
Net income	$	1,456.5		$	4,241.6

Earnings per share:
Earnings from continuing operations - basic	$	1.60		$	0.57
Earnings from discontinued operations - basic	—			3.76
Earnings per share - basic	$	1.60		$	4.33

Earnings from continuing operations - diluted	$	1.60		$	0.57
Earnings from discontinued operations - diluted	—			3.74
Earnings per share - diluted	$	1.60		$	4.31

Shares used in calculation of earnings per share:
Basic	908.2			979.9
Diluted	911.7			984.0

See notes to consolidated condensed financial statements.

Consolidated Condensed Statements of Comprehensive Income (Loss)

(Unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES

(Dollars in millions)



	Three Months Ended March 31,
	2020			2019
Net income	$	1,456.5		$	4,241.6
Other comprehensive loss from continuing operations, net of tax (Note 11)	(362.3		)	(4.1		)
Other comprehensive income from discontinued operations, net of tax (Note 11)	—			56.8
Other comprehensive income (loss), net of tax (Note 11)	(362.3		)	52.7
Comprehensive income	$	1,094.2		$	4,294.3

See notes to consolidated condensed financial statements.

Consolidated Condensed Balance Sheets

ELI LILLY AND COMPANY AND SUBSIDIARIES

(Dollars in millions)



	March 31, 2020			December 31, 2019
Assets	(Unaudited)
Current Assets
Cash and cash equivalents (Note 7)	$	1,699.0		$	2,337.5
Short-term investments (Note 7)	78.4			101.0
Accounts receivable, net of allowances of $23.7 (2020) and $22.4 (2019)	5,106.1			4,547.3
Other receivables	1,246.4			994.2
Inventories	3,102.4			3,190.7
Prepaid expenses and other	2,761.9			2,538.9
Total current assets	13,994.2			13,709.6
Investments (Note 7)	2,148.7			1,962.4
Goodwill	3,779.1			3,679.4
Other intangibles, net	7,766.7			6,618.0
Deferred tax assets	2,471.6			2,572.6
Property and equipment, net of accumulated depreciation of $9,141.5 (2020) and $9,161.6 (2019)	7,897.9			7,872.9
Other noncurrent assets	3,044.6			2,871.2
Total assets	$	41,102.8		$	39,286.1
Liabilities and Equity
Current Liabilities
Short-term borrowings and current maturities of long-term debt	$	3,248.0		$	1,499.3
Accounts payable	1,207.7			1,405.3
Employee compensation	565.8			915.5
Sales rebates and discounts	4,703.9			4,933.6
Dividends payable	—			671.5
Income taxes payable	667.4			160.6
Other current liabilities	2,217.4			2,189.4
Total current liabilities	12,610.2			11,775.2
Other Liabilities
Long-term debt	13,982.3			13,817.9
Accrued retirement benefits (Note 9)	3,632.0			3,698.2
Long-term income taxes payable	3,621.9			3,607.2
Deferred tax liabilities	2,186.2			2,187.5
Other noncurrent liabilities	1,873.0			1,501.0
Total other liabilities	25,295.4			24,811.8
Commitments and Contingencies (Note 10)
Eli Lilly and Company Shareholders’ Equity
Common stock	598.1			598.8
Additional paid-in capital	6,556.1			6,685.3
Retained earnings	5,879.4			4,920.4
Employee benefit trust	(3,013.2		)	(3,013.2		)
Accumulated other comprehensive loss (Note 11)	(6,885.9		)	(6,523.6		)
Cost of common stock in treasury	(55.7		)	(60.8		)
Total Eli Lilly and Company shareholders’ equity	3,078.8			2,606.9
Noncontrolling interests	118.4			92.2
Total equity	3,197.2			2,699.1
Total liabilities and equity	$	41,102.8		$	39,286.1

See notes to consolidated condensed financial statements.

Consolidated Condensed Statements of Equity

(Unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES



	Equity of Eli Lilly and Company Shareholders
(Dollars in millions and shares in thousands)	Common Stock					Additional Paid-in Capital			Retained Earnings			Employee Benefit Trust			Accumulated Other Comprehensive Loss			Common Stock in Treasury					Noncontrolling Interests
(Dollars in millions and shares in thousands)	Shares		Amount			Additional Paid-in Capital			Retained Earnings			Employee Benefit Trust			Accumulated Other Comprehensive Loss			Shares		Amount			Noncontrolling Interests
Balance at January 1, 2019	1,057,639		$	661.0		$	6,583.6		$	11,395.9		$	(3,013.2	)	$	(5,729.2	)	604		$	(69.4	)	$	1,080.4
Net income									4,241.6														22.2
Other comprehensive income, net of tax															41.7								11.0
Retirement of treasury shares	(89,197	)	(55.7		)				(10,771.8		)							(89,197	)	10,827.5
Purchase of treasury shares						(700.0		)										24,196		(2,800.0		)
Issuance of stock under employee stock plans, net	2,921		1.8			(202.8		)										(63	)	7.3
Stock-based compensation						75.8
Acquisition of common stock in exchange offer																		65,001		(8,027.5		)
Deconsolidation of Elanco																							(1,028.9		)
Other									13.7
Balance at March 31, 2019	971,363		$	607.1		$	5,756.6		$	4,879.4		$	(3,013.2	)	$	(5,687.5	)	541		$	(62.1	)	$	84.7

Balance at January 1, 2020	958,056		$	598.8		$	6,685.3		$	4,920.4		$	(3,013.2	)	$	(6,523.6	)	530		$	(60.8	)	$	92.2
Net income									1,456.5														26.2
Other comprehensive loss, net of tax															(362.3		)
Retirement of treasury shares	(3,627	)	(2.3		)				(497.7		)							(3,627	)	500.0
Purchase of treasury shares⁽¹⁾																		3,627		(500.0		)
Issuance of stock under employee stock plans, net	2,500		1.6			(201.0		)										(43	)	5.1
Stock-based compensation						71.8
Other									0.2
Balance at March 31, 2020	956,929		$	598.1		$	6,556.1		$	5,879.4		$	(3,013.2	)	$	(6,885.9	)	487		$	(55.7	)	$	118.4

⁽¹⁾ As of March 31, 2020, there was $1.00 billion remaining under our $8.00 billion share repurchase program authorized in June 2018.

See notes to consolidated condensed financial statements.

Consolidated Condensed Statements of Cash Flows

(Unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES

(Dollars in millions)



	Three Months Ended March 31,
	2020			2019
Cash Flows from Operating Activities
Net income	$	1,456.5		$	4,241.6
Adjustments to Reconcile Net Income to Cash Flows from Operating Activities:
Gain related to disposition of Elanco (Note 5)	—			(3,680.5		)
Depreciation and amortization	273.6			356.5
Change in deferred income taxes	11.2			(72.4		)
Stock-based compensation expense	71.8			75.8
Acquired in-process research and development (Note 3)	52.3			136.9
Other changes in operating assets and liabilities, net of acquisitions and divestitures	(1,408.1		)	(714.3		)
Other non-cash operating activities, net	(74.9		)	(32.3		)
Net Cash Provided by Operating Activities	382.4			311.3
Cash Flows from Investing Activities
Net purchases of property and equipment	(258.3		)	(203.7		)
Proceeds from sales and maturities of short-term investments	36.8			35.9
Purchases of short-term investments	—			(33.7		)
Proceeds from sales of noncurrent investments	54.5			83.6
Purchases of noncurrent investments	(83.0		)	(60.6		)
Cash paid for acquisitions, net of cash acquired (Note 3)	(849.3		)	(6,917.7		)
Purchases of in-process research and development	(13.0		)	(196.9		)
Other investing activities, net	51.4			(385.6		)
Net Cash Used for Investing Activities	(1,060.9		)	(7,678.7		)
Cash Flows from Financing Activities
Dividends paid	(671.3		)	(637.2		)
Net change in short-term borrowings	1,748.7			1,850.4
Proceeds from issuance of long-term debt	—			4,448.3
Repayments of long-term debt	(276.3		)	(600.0		)
Purchases of common stock	(500.0		)	(3,500.0		)
Other financing activities, net	(194.4		)	(193.7		)
Net Cash Provided by Financing Activities	106.7			1,367.8
Effect of exchange rate changes on cash and cash equivalents	(66.7		)	37.8

Net decrease in cash and cash equivalents	(638.5		)	(5,961.8		)
Cash and cash equivalents at January 1 (2019 includes $677.5 of discontinued operations)	2,337.5			7,998.2
Cash and Cash Equivalents at March 31	$	1,699.0		$	2,036.4

See notes to consolidated condensed financial statements.

Notes to Consolidated Condensed Financial Statements

(Tables present dollars in millions, except per-share data)

Note 1: Basis of Presentation

We have prepared the accompanying unaudited consolidated condensed financial statements in accordance with the requirements of Form 10-Q and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States (GAAP). In our opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair presentation of the results of operations for the periods shown. In preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2019. We issue our financial statements by filing them with the Securities and Exchange Commission and have evaluated subsequent events up to the time of the filing of our Form 10-Q.

All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis, that is, based on the weighted-average number of outstanding common shares plus the effect of incremental shares from our stock-based compensation programs.

We operate as a single operating segment engaged in the discovery, development, manufacturing, marketing, and sales of pharmaceutical products worldwide. A global research and development organization and a supply chain organization are responsible for the discovery, development, manufacturing, and supply of our products. Regional commercial organizations market, distribute, and sell the products. The business is also supported by global corporate staff functions. Our determination that we operate as a single segment is consistent with the financial information regularly reviewed by the chief operating decision maker for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting for future periods.

Note 2: Revenue

The following table summarizes our revenue recognized in our consolidated condensed statements of operations:



	Three Months Ended March 31,
	2020		2019
Net product revenue	$	5,403.5	$	4,692.3
Collaboration and other revenue ⁽¹⁾	456.3		399.9
Revenue	$	5,859.8	$	5,092.2

⁽¹⁾Collaboration and other revenue associated with prior period transfers of intellectual property was $35.4 million and $35.5 million during the three months ended March 31, 2020 and 2019, respectively.

We recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements. Revenue recognized from collaborations and other arrangements includes our share of profits from the collaboration, as well as royalties, upfront and milestone payments we receive under these types of contracts. See Note 4 for additional information related to certain of our collaborations and other arrangements. Collaboration and other revenue disclosed above includes the revenue from the Trajenta^® and Jardiance^® families of products resulting from our collaboration with Boehringer Ingelheim discussed in Note 4. Substantially all of the remainder of collaboration and other revenue is related to contracts accounted for as contracts with customers.

Adjustments to Revenue

Adjustments to revenue recognized as a result of changes in estimates for our most significant U.S. sales returns, rebates, and discounts liability balances for products shipped in previous periods were approximately 2 percent and 3 percent of U.S. revenue during the three months ended March 31, 2020 and 2019, respectively.

Contract Liabilities

Our contract liabilities result from arrangements where we have received payment in advance of performance under the contract and do not include sales returns, rebates, and discounts. Changes in contract liabilities are generally due to either receipt of additional advance payments or our performance under the contract.

The following table summarizes contract liability balances:



	March 31, 2020		December 31, 2019
Contract liabilities	$	307.8	$	264.6

During the three months ended March 31, 2020 and 2019, revenue recognized from contract liabilities as of the beginning of the year was not material. Revenue expected to be recognized in the future from contract liabilities as the related performance obligations are satisfied is not expected to be material in any one year.

Disaggregation of Revenue

The following table summarizes revenue by product:



	Three Months Ended March 31,
	2020							2019
	United States (U.S.) ⁽¹⁾			Outside U.S.		Total		U.S. ⁽¹⁾		Outside U.S.		Total
Revenue—to unaffiliated customers:
Diabetes:
Trulicity^®	$	929.5		$	299.9	$	1,229.4	$	665.6	$	214.1	$	879.7
Humalog^{® (2)}	398.6			297.2		695.8		448.6		282.2		730.8
Humulin^®	214.1			101.5		315.7		201.3		96.4		297.7
Basaglar^®	230.4			73.3		303.7		198.2		53.2		251.4
Jardiance ⁽³⁾	144.6			122.9		267.5		125.2		78.4		203.6
Trajenta ⁽⁴⁾	28.7			64.5		93.2		47.4		84.6		131.9
Other Diabetes	45.3			18.4		63.6		33.1		24.7		57.9
Total Diabetes	1,991.2			977.7		2,968.9		1,719.4		833.6		2,553.0

Oncology:
Alimta^®	324.2			235.8		560.1		281.8		217.4		499.2
Cyramza^®	89.1			149.9		239.0		75.1		123.2		198.3
Verzenio^®	129.4			58.6		188.0		93.5		15.9		109.4
Erbitux^®	117.8			13.0		130.8		113.3		5.1		118.4
Other Oncology	(2.6		)	86.3		83.6		30.2		57.3		87.4
Total Oncology	657.9			543.6		1,201.5		593.9		418.9		1,012.7

Immunology:
Taltz^®	327.5			116.0		443.5		180.8		71.7		252.5
Olumiant^®	11.3			128.4		139.7		6.4		75.7		82.1
Other Immunology	2.6			—		2.6		—		—		—
Total Immunology	341.4			244.4		585.8		187.2		147.4		334.7

Neuroscience:
Cymbalta^®	11.6			198.8		210.4		10.3		153.8		164.1
Zyprexa^®	11.2			87.2		98.4		9.3		97.9		107.2
Emgality^®	67.3			6.7		74.0		12.2		2.1		14.2
Other Neuroscience	20.2			60.5		80.7		19.3		88.2		107.6
Total Neuroscience	110.3			353.2		463.5		51.1		342.0		393.1

Other:
Forteo^®	122.5			149.8		272.4		125.9		187.0		312.9
Cialis^®	26.1			167.0		193.0		143.2