Eli Lilly And Company Analysis

Eli Lilly and Company Analysis

Overview of Eli Lilly:

Eli Lilly and Company is a pharmaceutical company that integrates many departments and supply-chain management. The company in itself discovers, develops, manufactures, and sells its drug. The company’s smaller segment also includes animal health business. They manufactures and distribute its products through either leased or owned facilities throughout the United States, Puerto Rico, and several other countries (25), selling in approximately 140 countries.

The principle products are neurosciences type, which its largest selling product currently is Zyprexa for the treatment of schizophrenia, “bipolar mania and bipolar maintenance.” Recently in 2004 it released Cymbalta, a major depressive disorder treatment drug projecting sales to carry the company’s growth in stead of Zyprexa. Other lesser branches of research also include oncology products such as Gemzar, and Cardiovascular agents including ReoPro.

Profitability Analysis: ROA

The return on assets increased 3.0 percentage points to 11.4% in the past fiscal year showing a positive growth due to increases in both profit margins from 13.67% to 16.47% and Asset Turnover rate of .59 to .67.

• The slight increase in Profit Margin can be attributed to the decrease in cogs/sales with a slight offset in increasing SG&A/Sales. The decrease in cogs/sales is reassuring to us because this is indicating a higher efficiency and lower cost of inventory goods. An increase in SG&A/Sales is acceptable due to the increase in advertising cost.

• The A/R turnover and inventory turnover also increase slightly from 6.7 to 6.8 and 1.66 to 1.77 respectively. The increase in A/R turnover means that they are recovering receivables faster, and an increase in inventory turnover indicates a faster pace at which inventory are sold off or leave the warehouse.

• Fixed asset turnover increased, but only slightly enough to be considered statistically insignificant. Pharmaceutical company such as Eli Lilly does not depend on fixed assets being the core part of their business. Eli Lilly is now focusing more towards investing in R&D and increasing efficient uses of existing fixed assets rather than increasing them.

The decreasing cost of goods sold to sales percentage, coupled with an increasing inventory turnover indicates a strong economic condition, which in turn allows the price to increase. With the increasing popularity of Cymbalta medicine, Eli Lilly will be able to increase the profit margin even further in the future and replace their inventory faster due to the success Cymbalta has shown just recently by breaking the “blockbuster mark” of 1 billion.

Overall, the ROA has also been increasing due to the payment of long-term debt in 2006 of $2.78 billion. The impact of the new pension accounting rule also result in an addition of more “other comprehensive losses” to the balance sheet, thus reducing the assets. The income has been increasing also due to the restructuring of Zyprexa product liability settlements.

Profitability Analysis: ROCE

Return on Shareholder’s Equity is largely based on ROA calculation multiplied by the capital structure leverage (equity multiplier). The capital structure leverage declines only slightly in relative to the increase in ROA вЂ" resulting in a higher ROCE overall by 6 percentage points. I believe the