Lilly (LLY) Misses On Q3 Earnings, Sales; Animal Health Hurts

Eli Lilly and Company’s (NYSE:LLY) third-quarter results were below expectations with both earnings and sales missing the Zacks Consensus Estimate. The company revised certain elements of its 2016 outlook. Shares declined 1% in pre-market trading.

Earnings Miss

Third-quarter 2016 adjusted earnings per share of 88 cents missed the Zacks Consensus Estimate of 96 cents by 8.3%.

Earnings also declined 1% from the year-ago quarter. A softer top-line performance, higher operating costs and lower other income hurt earnings in the quarter.

Reported earnings (including special items) declined 3% to 73 cents per share in the third quarter.

Revenue Miss

Third-quarter revenues grew 5% to $5.19 billion. However, sales missed the Zacks Consensus Estimate of $5.35 billion by almost 3%.

Lower outside U.S. sales, sluggish sales of blockbuster diabetes drug Humalog and a weak performance by animal health products offset a strong performance of the recently-launched drugs.

Higher volumes and a slightly favorable impact of foreign currency (1%) were partially offset by lower realized prices.

Volumes rose 4% as higher volumes of new products like Trulicity, Cyramza, Taltz and Jardiance was offset by lower volumes of established products like Zyprexa, Alimta and Cialis as well as the Animal Health division.

U.S. revenues grew 12% to $2.84 billion reflecting higher volume for newer products like Trulicity, Cyramza, Taltz and Jardiance, as well as Erbitux and Humalog. However, the Animal Health business and drugs like Zyprexa and Cialis recorded lower volumes in the quarter. Moreover, lower realized prices for Humalog restricted sales growth.

Ex-U.S. revenues declined 3% to $2.35 billion, mainly due to lower volumes and realized prices. Higher volumes of newer products like Cyramza and Trulicity were partially offset lower volumes of Zyprexa, Cymbalta and Alimta due to the loss of exclusivity of these drugs. Exclusivity has been lost by Cymbalta in Europe and Canada, Zyprexa in Japan and Alimta in several countries.

Erbitux sales increased 115% to $184.6 million in the quarter.

Other products that recorded growth during the quarter include Forteo (up 12% to $391.2 million), Humulin (up 2% to $322.0 million), Strattera (up 1% to $198.8 million) and Cymbalta (up 29% to $313.5 million).

However, Humalog’s sales decreased 9% to $640.8 million in the quarter reflecting lower realized prices in the U.S. (which offset higher demand) and lower outside U.S. sales.

Though erectile dysfunction medicine Cialis’ sales increased 4% to $588.2 million backed by higher realized prices in the U.S, the drug witnessed lower demand. Moreover, outside U.S. sales of Cialis also declined due to decreased volumes.

Alimta sales declined 9% to $570.4 million, reflecting lower demand in the U.S. due to competitive pressure mainly from immuno-oncology agents. Outside U.S. sales of Alimta were hurt by loss of exclusivity in several countries.

Zyprexa sales declined 37% to $148.9 million. Loss of exclusivity is affecting sales of Zyprexa.

Lilly's Animal Health segment sales declined 9% to $706.2 million. Unfavorable wholesaler buying patterns for companion animal products and decreased revenues for food animal products in the U.S. and lower food animal products’ sales outside U.S. following unfavorable macroeconomic conditions in Latin America hurt the segment’s sales.

Among new products, Trulicity generated revenues of $243.6 million with U.S. revenues benefiting from the acceleration in growth of the GLP-1 market and increased market share. Cyramza revenues were $159 million, up 43% year over year with U.S. revenues being negatively impacted by competition in the non-small cell lung cancer indication. Ex-U.S. revenues benefited from a strong uptake for the gastric cancer indication in Japan.

Jardiance sales ($47.5 million) were driven by increased market share within the growing SGLT2 class. Basaglar recorded revenues of $19.4 million, driven by an early uptake in Japan and various European countries. Basaglar is set to launch in the U.S. on Dec 15, 2016.

Portrazza, launched in Dec 2015, brought in sales of $5.3 million while Taltz, brought in sales of $32.5 million. Taltz was launched in the U.S. in April and started being introduced in Europe in July.

Gross Margins & Operating Income Decline

Adjusted gross margin of 76.4% in the quarter declined 140 basis points on lower inventory benefit from currency rates.

Operating income decreased 1% to $1.17 billion due to higher research and development costs.

Updated 2016 Outlook

The company revised the revenue guidance to a range of $ $20.8 billion to $21.2 billion from $20.6 billion to $21.1 billion.

Lilly continues to expect earnings per share in the range of $3.50 to $3.60. The Zacks Consensus Estimate for earnings and revenues is $3.59 per share and $21.20 billion, respectively.

While the company expects to spend $6.2 billion to $6.4 billion (previously $6.1 billion to $6.3 billion) on marketing, selling and administration, research and development expenses are expected in the range of $4.9 billion and $5.1 billion (maintained).

Adjusted gross margin is expected to be 76% in 2016.

Lilly expects to launch 20 new products in a 10-year timeframe from 2014 to 2023 and could launch at least two new indications/line extensions on average every year.

Products like Trajenta, Cialis, Forteo, Strattera, Erbitux and the Animal Health segment should drive growth while revenues from new products like Cyramza, Jardiance, Trulicity, Portrazza, Basaglar and Taltz will pick up. However, Alimta will continue to be impacted by competition.

Lilly carries a Zacks Rank #3 (Hold).

LILLY ELI & CO Price, Consensus and EPS Surprise

LILLY ELI & CO Price, Consensus and EPS Surprise | LILLY ELI & CO Quote

Another large-cap pharma company, Merck & Co., Inc. (NYSE:MRK) reported third-quarter results before market opened today. Merck, which carries a Zacks Rank #2 (Buy), beat the estimates for both earnings and sales.

Stocks to Consider

Some better-ranked stocks in the healthcare sector include BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) and Exelixis, Inc. (NASDAQ:EXEL) . Both the stocks have a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Exelixis has an average positive surprise of 9.10% over the trailing four quarters. Its share price has jumped 100% year to date. The loss estimates for both 2016 and 2017 have narrowed over the past 60 days.

Loss estimates for BioMarin have narrowed from 27 cents to 25 cents for 2016 and from $1.16 to $1.11 for 2017 over the last 30 days. BioMarin has a long-term earnings growth rate of 13.2%.

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