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How Eli Lilly Waved Goodbye to $3.1 Billion

zyprexa.jpgEli Lilly employed a technical accounting term to describe the $1.4 billion Zyprexa settlement as "not-meaningful." While the payout to states over lawsuits that allege the drug was mismarketed is obviously very meaningful -- the company reported a net loss of $465.6 million this quarter -- the term highlights the way that drug companies try to persuade investors to look the other way when they stumble.

The term can be found as a footnote to Lilly's income statement. In the statement, Lilly generally gives percentage changes or ratios for items it wants you to pay attenton to. Thus its sales -- $5.2 billion -- are labelled as up by 14 percent. But lower down the statement, on the line that notes one-time charges and other so-called non-recurring items that the company wants you to believe won't be there in three months, the percentage change column is marked "NM." The footnote gives the translation. This quarter, the $1.4 billion Zyprexa payout forms the bulk of Lilly's "not meaningful" expenses.

The funny thing is, these "not meaningful" numbers have appeared on pretty much every Lilly earnings statement going back to the last quarter of 2006. None of them have been expressed as a percentage change from previous quarters, or as a portion of Lilly's sales. So let's do the math:

Since the Q4 2006, Lilly has labelled as "not-meaningful" charges and asset impairments totalling $3.1 billion. In most quarters, Lilly's revenues take a 2 or 3 percent hit from "not meaningful" items. In two quarters, including this one, "not meaningful" payouts cost the company 22 percent and 32 percent of its revenue.

Here's the list. Dollar numbers in millions:

  • Period "NM" % of Revs
  • 4q06 945.2 22%
  • 1q07 123 3%
  • 2q07 0.00 0%
  • 3q07 81.3 2%
  • 4q07 98.2 2%
  • 1q08 145.7 3%
  • 2q08 88.9 2%
  • 3q08 1,659.40 32%
The bulk of these charges -- the two big hits in that list -- were legal costs for Zyprexa. The drug may sell $1 billion a quarter, but the company's net income is being eaten up by those "not meaningful" costs at an average of 8 percent of total revenues per quarter. That's the rough equivalent of not having Strattera on the books.
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