On April 18, 2011, Eli Lilly and Co. reported first- quarter profits for 2011 of $.95 per share. Analysts projected earnings to be $1.16 or $1.17 per share. However, Lilly reported non- GAAP earnings per share of $1.24. Lilly states that non- GAAP results are presented in order to provide additional insights into the underlying trends in the company’s business. Lilly’s stock price on Friday, April 15, was $35.99. Early Monday morning, the price fell to $35.40 (a 1.6% drop), but recovered slightly to close at $35.60.

Other Information:
On January 11, 2011, Lilly announced a strategic alliance with Boehringer Ingelheim to jointly develop and commercialize a portfolio of diabetes compounds currently in mid- and late- stage development. Under the terms of the agreement, Lilly will make a one- time payment to Boehringer Ingelheim of 300 million euros. Lilly expects 2011 earnings dilution of approximately $.45 for 2011 earnings and approximately $.27 per share for the one- time payment. One of Lilly’s best- selling drugs, Zyprexa, will lose patent protection in October 2011. Another product, Cymbalta, will face generic competition in the next three years.

Required:
Read Lilly’s first- quarter earnings release (http://investor.lilly.com/financials.cfm). Under financial information, click on “quarterly results.” Then click on “Lilly Reports First- Quarter 2011 Results.”
1. Using GAAP, examine Lilly’s gross margin in dollars and as a percentage of sales for the current quarter versus the previous quarter. Is this a positive trend?
2. Using GAAP and non- GAAP measures, examine Lilly’s operating profit in dollars and as a percentage of sales. Which items does Lilly exclude from earnings in computing non- GAAP operating earnings? Do you agree that these items should be excluded in evaluating the earnings of Lilly?
3. Do you think that the analyst’s forecast included or excluded these items?
4. How do you explain the drop in Lilly’s stock price?
5. The financial report includes a listing of key products and their growth in revenues in 2011, as well as a summary of some of the reasons. The prior year includes a similar listing and summary. Comment on the change from 2010 to 2011 by product, and briefly discuss the underlying factors responsible for the most significant shifts.