Lilly (LLY) Q2 Earnings Beat, New Drugs Drive Sales, Stock Up

Eli Lilly & Company (NYSE:LLY) reported second-quarter 2019 adjusted earnings per share of $1.50, which beat the Zacks Consensus Estimate of $1.46. Earnings rose 1% year over year as higher operating costs were partially offset by a lower tax rate and reduction in shares outstanding due to share repurchase.

Quarter in Detail

Lilly reported revenues of $5.64 billion, which missed the Zacks Consensus Estimate of $5.65 billion. Sales however grew 1% year over year, backed by strong demand for its newer drugs, namely Trulicity, Taltz, Jardiance, Basaglar, Olumiant and Verzenio, which compensated for lower sales of older products like Cialis.

Foreign exchange hurt sales growth by 2% in the quarter. Also, lower realized prices had a negative impact of 3% on sales. Volumes rose 6%.

New pharma products (products launched since 2014) drove 13% of volume growth and represented nearly 43% total revenues, up from 39% in the previous quarter. U.S. revenues were flat at $3.25 billion while ex-U.S. revenues rose 2% to $2.38 billion.

Among the established products, Forteo sales declined 17%to $360.8million. Alimta sales rose 4%to $577.8million. Humalog sales dropped 12% to $677.6million. Humulin sales declined 7% to $322.6 million.

Cialis sales declined 63% to $200.2million as U.S. sales were hurt by entry of generic products. Lilly lost exclusivity for Cialis in September 2018 and generic versions entered the market in the same month, resulting in rapid erosion of sales. Outside U.S. sales were also hurt by generic competition, lower realized prices and currency headwinds.

Among the new products, Trulicity generated revenues of $1.03 billion, up 32% 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.

Cyramza revenues were $241.8 million, up 11% year over year driven by higher sales in both U.S. and international markets. In May, Cyramza gained FDA approval for second-line liver cancer, which expanded the drug’s eligible patient population.

Jardiance sales surged 58% to $231.9 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 $290.7 million, up 44% year over year. In the United States, sales rose 48%, benefiting from higher demand and the impact of higher realized prices. Outside U.S. sales growth of 29% was driven by increased volume, which offset the impact of lower realized prices.

Taltz brought in sales of $353.8 million, up 61% year over year as U.S. sales gained from higher demand. Ex-U.S. sales were driven by increased volume from launches in new countries, which offset the impact of currency headwinds.

New rheumatoid arthritis drug, Olumiant generated sales of $102.4 million in the quarter backed by increased demand, compared with $82.1 million in the previous quarter. In the United States, Olumiant recorded sales of $10.7 million, higher than $6.4 million in the previous quarter.

New advanced breast cancer treatment medicine, Verzenio generated sales of $133.9 million in the quarter, which was more than $109.4 million in the previous quarter. This was because of increased demand in the United States.

The newly launched CGRP antibody, Emgality generated revenues of $34.3million in the quarter, compared with$14.2million generated in the previous quarter. In the United States, Emgality sales were $33.8 million. In June, Emgality was granted FDA approval for the preventive treatment of episodic cluster headache in adult patients.

Amgen’s (NASDAQ:AMGN) Aimovig and Teva’s (NYSE:TEVA) Ajovy were two other CGRP antibodies launched last year, which pose strong competition to Emgality.

Adjusted gross margin of 81% in the quarter expanded 120 basis points. Operating income decreased 7% year over year to $1.58 billion on higher operating expenses.

2019 Earnings Outlook Upped

Lilly raised its expectations for full-year earnings while keeping its revenue guidance intact. The earnings forecast was increased from a range of $5.60 to $5.70 per share to $5.67 to $5.77. The revenue guidance was maintained in the range of $22.0 billion - $22.5 billion.

Gross margin is still expected to be approximately 80%. Adjusted tax rate is expected to be in the range of 13%-14% versus 14%-15% expected previously.

Marketing, selling and administrative expense are expected to be in a range of $5.9 billion to $6.1 billion versus $5.7 billion to $6.0 billion expected previously. Research and development expense is still expected to be in the range of $5.5 billion to $5.7 billion.

Positive Overall Survival Data from MONARCH 2 study

In a separate press release, Lilly announced that treatment with Verzenio in combination with fulvestrant led to a statistically significant improvement in overall survival (OS) in the phase III MONARCH 2 study. The study evaluated Verzenio plus fulvestrant in HR+, HER2- advanced breast cancer patients who experienced disease progression following endocrine therapy. Please note that Verzenio plus fulvestrant is already approved for the above patient population on the basis of progression-free survival data from the same study. Lilly will now look to get approval for OS data from the study to be included on the drug’s label.

Our Take

Lilly beat estimates for second-quarter earnings but missed the same for sales by a whisker. The stock was up around 1% in pre-market trading on the second-quarter earnings beat and raised earnings guidance for the full year. However, so far this year, shares of Lilly have declined 6% against the industry’s increase of 0.1%.

In 2019, revenue growth is expected to be driven by higher demand for its newer drugs including Trulicity, Jardiance, Taltz, Verzenio, Basaglar and Emgality. However, competitive pressure on Lilly’s drugs is rising. Generic competition for several drugs including Cialis, rising pricing pressure in the United States due to rebates and legislated increases in Medicare Part D cost sharing, price cuts in some international markets, currency headwinds and the impact of the failed Lartruvo study are expected to put pressure on the top line.

We remind investors that in February, due to the failure of the ANNOUNCE confirmatory study, Lilly suspended promotion of advanced soft tissue sarcoma drug Lartruvo. Sales of the drug have declined sharply thereafter.

Nonetheless, Lilly has made significant pipeline progress in the past year with several positive late-stage data readouts, multiple approvals and regulatory submissions. In the second quarter, Lilly gained FDA approval for Baqsimi, its glucagon nasal powder to treat severe hypoglycemia in diabetes patients and new indications for Cyramza and Emgality. Lilly regularly adds promising new pipeline assets through business development deals.

Zacks Rank

Lilly currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A better-ranked large-cap pharma stock is Novartis (NYSE:NVS) , which has a Zacks Rank #2 (Buy). Novartis’ earnings estimates for 2019 have gone up by 0.8% while that for 2020 have increased 2% over the past seven days. Novartis stock has rallied 7.4% so far in 2019.

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