Lilly (LLY) Q3 Earnings Top Estimates, Sales Lag, Stock Down

Eli Lilly & Company (NYSE:LLY) reported third-quarter 2019 adjusted earnings per share of $1.48, which beat the Zacks Consensus Estimate of $1.43. Earnings rose 10% year over year as higher operating costs were partially offset by slightly higher revenues, a lower tax rate and reduction in shares outstanding due to buybacks.

Quarter in Detail

Revenues of $5.48 billion missed the Zacks Consensus Estimate of $5.56 billion. Sales however grew 3% 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 due to the loss of U.S. exclusivity and the impact of Lartruvo’s product withdrawal. Lilly has suspended promotion of its advanced soft tissue sarcoma drug, Lartruvo due to the failure of the ANNOUNCE confirmatory study.

Foreign exchange hurt sales growth by 1% in the quarter. Also, lower realized prices had a negative impact of 4% 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 8%.

New pharma products (products launched since 2014) drove 12% of volume growth and represented nearly 44% total revenues, up from 43% in the previous quarter. U.S. revenues were flat at $3.06 billion while ex-U.S. revenues rose 8% to $2.42 billion.

Among the established products, Forteo sales declined 5%to $370.7million. Alimta declined 2%to $508.2million. Humalog sales dropped 2% to $648.9million. Humulin sales were flat at $321.8million.

Cialis sales declined 61% to $184.3 million as U.S. sales were hurt by entry of generic products. Outside U.S. sales were also hurt by generic competition, lower realized prices and currency headwinds.

Among the new products, Trulicity generated revenues of $1.01 billion, up 24% 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 $240.0 million, up 21% year over year driven by higher sales in both U.S. and international markets.

Jardiance sales surged 44% to $240.7 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 $263.2 million, up 31% year over year. In the United States, sales rose 29%, benefiting from higher demand and the impact of higher realized prices. Outside U.S. sales growth of 39% was driven by increased volume.

Taltz brought in sales of $340.0 million, up 29% year over year as U.S. sales gained from higher demand, which offset the impact of lower realized prices due to changes in estimates for rebates and discounts. Ex-U.S. sales were driven by increased volume from launches in new countries. In August, Taltz gained FDA approval for its third indication — active ankylosing spondylitis, which expanded the drug’s eligible patient population.

New rheumatoid arthritis drug, Olumiant generated sales of $114.6 million in the quarter compared with $102.4 million in the previous quarter backed by increased demand in international markets. In the United States, Olumiant recorded sales of $12.1 million, higher than $10.7 million in the previous quarter.

New advanced breast cancer treatment medicine, Verzenio generated sales of $157.2 million in the quarter, up from $133.9 million in the previous quarter. This was because of increased demand and higher realized prices in the United States.

The newly launched CGRP antibody, Emgality generated revenues of $47.7 million in the quarter compared with $34.3 million in the previous quarter. In the United States, Emgality sales were $45.8 million compared with $33.8 million in the previous quarter. Emgality was launched in some international markets in the first quarter, which brought sales of $1.9 million in the third quarter.

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 79.6% in the quarter was down 60 basis points. Operating income rose 3% year over year to $1.57 billion.

2019 Earnings Guidance

Lilly raised its expectations for full-year earnings while keeping its revenue guidance intact. The earnings forecast was increased from a range of $5.67 to $5.77 per share to $5.75 to $5.85 taking into account a lower tax rate.

The revenue guidance was maintained in the range of $22.0 billion - $22.5 billion, which indicates 5% growth, at mid-point, over 2018 level on a constant currency basis.

Gross margin is still expected to be approximately 80%. Adjusted tax rate is expected to be in the range of 12%-13% versus 13%-14% expected previously.

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

Our Take

Just like the second quarter, Lilly beat estimates for third-quarter earnings but missed the same for sales. The stock was down more than 3% in pre-market trading probably due to Lilly’s lukewarm sales performance in the quarter and absence of an increase in sales guidance. In fact, so far this year, shares of Lilly have declined 5.1% against the industry’s decrease of 0.3%.

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. 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.

Nonetheless, Lilly has made significant pipeline progress in the past year with several positive late-stage data readouts, multiple approvals and regulatory submissions. Earlier this month, the FDA granted approval to Lilly’s lasmiditan oral tablets to treat acute migraine, with or without aura, in adults. Lasmiditan will be marketed by the trade name of Reyvow and will be available in doses of 50 mg, 100 mg, and 200 mg, once launched. 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 GlaxoSmithKline (NYSE:GSK) , which has a Zacks Rank #2 (Buy). Glaxo’s earnings estimates for 2019 have gone up 2.8% while that for 2020 have increased 1% over the past 60 days. Glaxo stock has rallied 11.3% so far in 2019.

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