A month has gone by since the last earnings report for Eli Lilly (LLY). Shares have lost about 11.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Lilly due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Lilly Q4 Earnings and Sales Top Estimates
Lilly reported fourth-quarter 2019 adjusted earnings per share of $1.73, which comprehensively beat the Zacks Consensus Estimate of $1.52. Earnings rose 31% year over year as higher R&D costs were offset by higher revenues, lower tax rate and reduction in shares outstanding due to buybacks.
Revenues in Detail
Revenues of $6.11 billion beat the Zacks Consensus Estimate of $6.07 billion. Sales grew 8% year over year, backed by strong volume trends for its newer drugs, namely Trulicity, Taltz, Jardiance, Basaglar, Emgality and Verzenio, which compensated for lower sales of older products like Cialis and Forteo and the impact of Lartruvo’s product withdrawal.
Foreign exchange hurt sales growth by 1% in the quarter. Lower realized prices had a negative impact of 1% on sales due to rebates and legislated increases in Medicare Part D cost sharing in the United States and price cuts in some international markets. Volumes rose 10%. Excluding Cialis’ loss of exclusivity and the impact of Lartruvo, volume grew nearly 15%.
New pharma products (products launched since 2014) generated $2.8 billion in revenues and contributed 14% of revenue growth and represented nearly 46% total revenues, up from 44% in the previous quarter. The loss of exclusivity hurt volumes by 400 basis points, primarily attributed to Cialis.
U.S. revenues rose 7% to $3.52 billion while ex-U.S. revenues rose 10% to $2.6 billion.
Among the established products, Forteo sales declined 18% to $360.2 million. Alimta declined 5% to $530.7 million. Humalog sales dropped 1% to $763.4 million. Humulin sales rose 3% to $348.0 million.
Cialis sales declined 44% to $197.8 million as U.S. sales were hurt by entry of generic products. Outside U.S. sales were hurt by currency headwinds, which offset the impact of higher realized prices.
Among the new products, Trulicity generated revenues of $1.21 billion, up 31% year over year driven by higher demand in the United States and higher volumes in ex-U.S. markets, which offset the impact of lower realized prices and changes in segment mix. The prices were lower mainly in the United States due to higher contracted rebates, changes in segment mix and increased coverage gap funding requirements in Medicare Part D.
Cyramza revenues were $245.1 million, up 11% year over year driven by higher sales in both U.S. and international markets.
Jardiance sales rose 39% to $268.0 million, driven by increased demand trends within the SGLT2 class of diabetes medicines in the United States and increased volume outside the United States, which offset the negative impact of currency.
Basaglar recorded revenues of $307.2 million, up 32% year over year. In the United States, sales rose 34%, benefiting from higher demand and the impact of higher realized prices. Outside U.S. sales growth of 28% was driven by increased volume, partially offset by lower realized prices and currency headwinds.
Taltz brought in sales of $420.1 million, up 37% year over year as U.S. sales gained from higher demand, which offset the impact of lower realized prices due to unfavorable segment mix. Ex-U.S. sales were driven by increased volume from launches in new countries.
Olumiant generated sales of $127.8 million in the quarter compared with $114.6 million in the previous quarter backed by increased demand in international markets. In the United States, Olumiant recorded sales of $13.0 million compared with $12.1 million in the previous quarter. Revenues outside the United States were $114.9 million compared with $102.5 million in the previous quarter.
Verzenio generated sales of $179.1 million in the quarter, up from $157.2 million in the previous quarter driven by increased demand in the United States.
Emgality generated revenues of $66.3 million in the quarter compared with $47.7 million in the previous quarter. In the United States, Emgality sales were $63.1 million compared with $45.8 million in the previous quarter. Emgality sales outside the United States were $3.2 million in the fourth quarter.
Emgality captured 47% share of the market for new prescriptions in the United States, compared with 46% from the end of third quarter.
Gross Margin & Operating Income
Adjusted gross margin of 79.9% in the quarter was down 70 basis points due to unfavorable effect of foreign exchange rates on international inventories sold, unfavorable product mix and negative impact of price on revenues.
Operating income rose 10% year over year to $1.61 billion. Operating margin was 26.3% in the quarter, up 40 bps year over year.
Total operating expenses (including research and development and marketing, selling and administrative expenses) rose 6% in the quarter. Marketing, selling and administrative expenses were flat due to cost control, partially offset by increased investment behind recent launches. R&D expense rose 14% in the quarter due to higher development expenses for late-stage assets.
Adjusted effective tax rate was 12.6%, lower than 15.6% in the year-ago quarter.
2019 Results
Full-year 2019 sales rose 4% to $22.32 billion, beating the Zacks Consensus Estimate of $22.29 billion by a slight margin. However, sales were within the guided range of $22.0 billion - $22.5 billion.
Adjusted earnings of $6.04 per share beat the Zacks Consensus Estimate of $5.80 and came ahead of the guided range of $5.75 to $5.85. Earnings rose 11% year over year.
2020 Guidance
Lilly re-affirmed its 2020 adjusted earnings guidance in the range of $6.70-$6.80 per share, which it had issued in December last year. The earnings guidance represents growth in the range of 11. However, the company slightly raised its 2020 revenue guidance from a range of $23.6 billion-$24.1 billion to $23.7 billion-$24.2 billion to include Qbrexza, which will be added from the pending Dermira acquisition. Lilly expects new products to help it achieve the sales growth target as the headwind from Cialis LOE and Lartruvo will abate in 2020.
Gross margin guidance was maintained at approximately 81%. Adjusted tax rate is expected to be approximately 15%. Adjusted operating margin is expected to be 31% in 2020 (maintained).
Marketing, selling and administrative expense is expected to be in the range of $6.2 to $6.4 billion compared with $6.1 billion to $6.3 billion previously. Research and development expense is still expected to be in the range of $5.6 billion to $5.9 billion.
Going forward, Lilly’s revenue growth is expected to be driven by higher demand for its newer drugs including Trulicity, Jardiance, Taltz, Verzenio, Basaglar, Emgality as well as newly launched glucagon nasal powder, Baqsimi and potential launch of newly approved oral tablets to treat acute migraine, Reyvow. However, generic competition for several drugs including the expected generic entry of Forteo, rising pricing pressure in the United States due to rebates and legislated increases in Medicare Part D cost sharing, and price cuts in some international markets like China, Japan and Europe are some top-line headwinds expected in 2020. In the United States, prices are expected to decline in a low-single digit range.
How Have Estimates Been Moving Since Then?
Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions. The consensus estimate has shifted -8.69% due to these changes.
VGM Scores
At this time, Lilly has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Lilly has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Eli Lilly and Company (NYSE:LLY): Free Stock Analysis Report
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