Lilly (LLY) Tops Q3 Earnings, Lifts 2018 Outlook, Stock Up

Eli Lilly & Company (NYSE:LLY) reported third-quarter 2018 adjusted earnings per share of $1.39, which beat the Zacks Consensus Estimate of $1.37 per share. Earnings rose 32% from the year-ago quarter backed by robust growth in new product sales and higher operating income.

Including acquisition-related in-process R&D charges, asset impairment, restructuring and other special charges, third-quarter earnings per share were $1.12 compared with 53 cents in the third-quarter of 2017.

Revenues in Detail

Quarterly revenues of $6.06 billion missed the Zacks Consensus Estimate of $6.11 billion. Sales grew 7% year over year backed by strong demand for its new drugs, which made up for lower sales of established products like Strattera, Cialis and Forteo.

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

Volumes rose 12% as increased demand for new products like Trulicity, Cyramza, Taltz, Basaglar, Jardiance and Verzenio offset lower volumes of some established products like Cialis, Strattera and Effient due to loss of exclusivity

While U.S. revenues grew 11% to $3.45 billion, ex-U.S. revenues rose 2% to $2.62 billion.

Pharmaceutical revenues rose 8% in the quarter. Established products that recorded growth during the quarter included Humulin (up 7% to $322.1 million) and Alimta (up 1% to $520.5 million). Sales of all other established products declined in the quarter.

Forteo sales declined 12% to $390.8 million. Cymbalta sales declined 6% to $172.0 million. Humalog sales dropped 5% to $664.6 million. Zyprexa sales were down 22% to $109.9 million. Erbitux sales declined 2% to $159.5 million.

Cialis (erectile dysfunction) sales declined 17% to $467.1 million as U.S. sales were hurt by lower demand due to the entry of generic sildenafil while outside U.S. sales were hurt by loss of exclusivity in Europe. In September, Teva Pharmaceuticals (NYSE:TEVA) announced the launch of a generic version of Cialis, which means sales of the drug could be significantly lower in the future quarters.

Strattera sales declined 28% to $98.7 million due to loss of exclusivity.

Among new products, Trulicity generated revenues of $816.2 million, up 55% year over year driven by higher demand.

Cyramza revenues were $198.4 million, up 1% year over year as higher international sales were offset by lower U.S. sales.

Jardiance sales surged 31% to $166.9 million, driven by increased demand trends within the SGLT2 class of diabetes medicines in the United States and increased volume outside the United States.

Basaglar recorded revenues of $201.2 million, up 38% year over year. In the United States, while sales benefitted from higher demand, lower realized prices and unfavorable changes to estimates for rebates and discounts hurt sales to some extent.

Taltz brought in sales of $263.9 million compared with $220.1 million in the previous quarter as U.S. sales gained from higher demand, which made up for lower realized prices while ex-U.S. sales were driven by increased volume from new launches. Taltz was launched for the second indication of psoriatic arthritis in late 2017/early 2018 in both the United States and Europe, which contributed to sales growth in the quarter.

Lartruvo (olaratumab) generated revenues of $76.9 million in the quarter, less than $79.9 million in the previous quarter.

Olumiant (baricitinib), for rheumatoid arthritis, was launched in select European countries and in Japan in 2017 while in the United States, a lower dose of the medicine was launched in June 2018.

The drug generated sales of $55.6 million in the quarter backed by launch uptake in new European markets, compared with $44.7 million in the previous quarter. In the United States, Olumiant recorded sales of $0.8 million, which was less than $1.7 million in the previous quarter.

Advanced breast cancer treatment, Verzenio, launched in the Unites States in late 2017, generated sales of $84.5 million in the quarter compared with $57.7 million in the previous quarter. In February, Verzenio gained FDA approval in first-line setting while the drug was approved in Europe in October. The line extensions must have contributed to the drug’s sales growth in the quarter.

Animal Health segment sales rose 4% to $772.7 million. Lilly divested its Elanco animal health unit as an independent publicly traded company - Elanco Animal Health Incorporated (NYSE:ELAN) - via an initial public offering (IPO) of a minority stake this year. Elanco Animal Health started trading on NYSE from Sep 20. Lilly owns 80.2% stake in the new company, which is expected to be divested through a “tax-efficient transaction” by 2019.

Gross Margin & Operating Income

Adjusted gross margin of 76.7% in the quarter rose 190 basis points driven by manufacturing efficiencies, favorable product mix and the positive effect of foreign exchange rates on international inventories sold, which offset the negative impact of lower prices.

Operating income increased 29% year over year to $1.69 billion due to higher revenues and lower operating costs. Total operating expenses (including research and development and marketing, selling and administrative expenses), as a percent of revenues, declined 270 basis points in the quarter to 48.8% due to the company’s cost saving efforts.

2018 EPS Guidance Upped

Adjusted earnings per share are now expected in the range of $5.55 to $5.60, higher than $5.40 to $5.50 expected previously.

The lower range of the revenue guidance was slightly upped to $24.3 billion to $24.5 billion from $24.0 billion to $24.5 billion expected previously.

The sales guidance increase was due to strong performance of pharmaceuticals products, especially Lilly’s diabetes drugs.

Gross margin is expected to be approximately 76%, same as previous expectations.

Adjusted tax rate is expected to be approximately 16% (previously 17%).

Marketing, selling and administrative expense guidance was raised from a range of $6.2–$6.5 billion to $6.3–$6.5 billion. Research and development expense guidance was kept intact in the range of $5.2–$5.4 billion.

Our Take

Lilly’s third-quarter results were mixed as it beat estimates for earnings but missed the same for sales. Lilly, however, raised its previously issued outlook for adjusted earnings while increasing the lower end of the total revenue guidance. Shares of the drug giant rose almost 3% in pre-market trading.

Year to date, Lilly’s shares have risen 30.4% compared with the industry’sincrease of 3.9%.

Going forward, new products like Trulicity, Taltz, Basaglar, Cyramza, Jardiance, Lartruvo, Verzenio and Olumiant are expected to drive revenues.

Lilly is also having a strong year in terms of its pipeline with several positive late-stage data readouts and regulatory nods. Late last month, Lilly gained FDA approval and the company launched Emgality (galcanezumab), its CGRP antibody, for the preventive treatment of migraine in adults, which could emerge as a significant contributor to long-term growth.

Lilly has also added promising new assets through business development deals including pancreatic cancer candidate, pegilodecakin, which was added after the acquisition of California-based immuno-oncology biotech, ARMO Biosciences in June.

However, competitive pressure on Lilly’s drugs is expected to rise this year. Challenges remain for the company in the form of generic competition for several drugs including Cialis and rising pricing pressure in the diabetes franchise. Also, newly approved Emgality faces strong competition from Teva’s and Amgen’s (NASDAQ:AMGN) CGRPs, Ajovy and Aimovig, respectively, which were also approved this year.

Lilly currently carries a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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