Eli Lilly and Company — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statements are unaudited and prepared under U.S. GAAP. Lilly operates as one pharmaceutical segment.
Financial performance
- Revenue: Q2 revenue was $8.31 billion, up 28% year over year; first-half revenue was $15.27 billion, up 7%. Growth reflected higher volume, partly offset by lower realized prices and foreign exchange headwinds.
- Products and revenue mix: Q2 Mounjaro revenue was $979.7 million, versus $16.0 million a year earlier; Verzenio rose 57% to $926.8 million and Jardiance rose 45% to $668.3 million. Trulicity declined 5% to $1.81 billion. First-half revenue included no COVID-19 antibody sales, compared with $1.60 billion in the prior-year period, and Alimta sales fell 79% to $119.1 million following generic entry.
- One-time revenue item: Q2 and first-half revenue included $579 million, primarily the gain on the June sale of Baqsimi rights. Lilly received $500 million at closing and is due another $125 million at the one-year anniversary; up to $450 million of additional sales-based milestones are contingent.
- Profit and margins: Q2 net income was $1.76 billion, up 85%, and diluted EPS was $1.95 versus $1.05. First-half net income was $3.11 billion, up 9%, and diluted EPS was $3.44 versus $3.16. Gross margin was 78.3% in Q2 versus 78.0%, and 77.5% for the first half versus 75.5%.
- Costs and taxes: First-half R&D expense increased 28% to $4.34 billion, and marketing, selling and administrative expense increased 15% to $3.67 billion. First-half acquired IPR&D charges fell to $202.1 million from $606.0 million. The effective tax rate was 14.1% for the first half, versus 9.2% in 2022; 2023 reflected the new Puerto Rico tax regime and Baqsimi sale.
- Cash flow: First-half operating cash flow was $2.36 billion, down from $3.71 billion. Capital expenditures were $1.41 billion, up from $736.4 million. Cash and cash equivalents increased to $2.69 billion from $2.07 billion at year-end.
- Debt and liquidity: Total debt was $18.82 billion at June 30, up from $16.24 billion at year-end. Lilly issued $3.96 billion of long-term notes in February, at fixed rates of 4.700%–5.000%, and used proceeds for general purposes, including commercial-paper repayment. Total investments were $2.88 billion. Unused committed bank credit facilities were $7.33 billion, including $7.00 billion supporting commercial paper. Current assets were $21.33 billion and current liabilities $18.92 billion.
- Capital returns: Lilly paid $2.04 billion in dividends during the first half ($2.26 per share) and repurchased $750 million of shares. $2.50 billion remained under its $5.00 billion repurchase authorization.
Changes, outlook and management commentary
- Management attributed revenue growth mainly to product volume, including Mounjaro, Verzenio and Jardiance. Q2 U.S. revenue rose 41%; outside the U.S. it rose 9%. Revenue was adversely affected by foreign exchange by 1% for Q2 and 2% for the first half.
- The filing provides no numerical full-year revenue or EPS guidance. Management said strong demand for incretin medicines is straining supply: intermittent U.S. order delays for Mounjaro and Trulicity and international Trulicity disruptions were expected to persist while new capacity is brought online. Additional manufacturing capacity is expected to become operational over the next several years.
- Lilly expects more than $8 billion of capital expenditures over the next several years for manufacturing investments. Contract manufacturing and supply agreements could require up to approximately $6.5 billion of payments if specified purchase volumes are not met over contract terms generally ranging from two to eight years.
- The company agreed to acquire DICE Therapeutics for approximately $2.4 billion, subject to closing conditions, and anticipated a third-quarter 2023 close. Approximately $1 billion of other pending business-development payments was also subject to closing conditions and/or approvals. In July, after quarter-end, Lilly sold olanzapine rights for $1.05 billion upfront, with another $305 million due after one year and up to $50 million in milestones.
- Pipeline developments included U.S. submission of tirzepatide for obesity, FDA Priority Review designation, and reported positive Phase III results; donanemab was submitted for traditional U.S. approval. These are subject to regulatory review and clinical and commercial uncertainty.
Risks, contingencies and unusual items
- Pricing and reimbursement pressure remains a significant risk. Lilly said the Inflation Reduction Act’s government price-setting provisions begin in 2026 and may affect significant products; the impact remains uncertain. It also cited payer bargaining power, global cost-containment measures and insulin price competition.
- Product supply, manufacturing capacity, regulatory approvals, safety or efficacy findings, foreign exchange, inflation, cybersecurity, and dependence on key products are among the stated risks. Lilly noted that Humalog revenue is expected to face continuing price declines amid affordability programs and competition.
- The company is involved in numerous lawsuits, investigations and proceedings, including insulin-pricing matters, 340B disputes, product-liability claims, and patent litigation. Lilly said it is self-insured for litigation liability losses on current and former products. It believes resolution should not materially affect consolidated financial position or liquidity, but could materially affect results in an individual period.
- Specific matters include an adverse jury verdict for Teva in Emgality patent litigation, with post-trial proceedings and appeal contemplated; a Brazil labor case with an adjusted award of approximately $238 million and a separate security requirement of approximately $21 million; and Research Corporation Technologies litigation for which potential damages could be material but are not reasonably estimable. The filing states that maximum exposure or a possible-loss range cannot be reasonably estimated for certain matters.
- The Baqsimi rights sale materially benefited reported Q2 revenue and gross margin. First-half 2022 comparisons were also affected by substantial COVID-19 antibody revenue and larger acquired IPR&D and equity-investment losses.
Important facts for investors to verify
- Whether Mounjaro uptake and other growth products can offset Trulicity pricing, generic erosion, and the absence of COVID-19 antibody revenue—and whether reported growth is sustainable apart from the Baqsimi rights-sale gain.
- Progress in resolving incretin supply constraints, the timing and cost of manufacturing expansion, and exposure under the approximately $6.5 billion minimum-purchase agreements.
- Cash generation relative to capital spending, planned acquisitions, dividends and debt service, including the funding and closing of DICE and other pending transactions.
- Developments in drug pricing policy and reimbursement, and outcomes or potential financial impacts of material litigation and government investigations.
- Regulatory outcomes and confirmatory-trial progress for key pipeline candidates, including tirzepatide for obesity and donanemab.