Eli Lilly and Company — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Lilly is a global pharmaceutical company reporting as a single operating segment. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $6.49 billion | $6.74 billion | $14.30 billion | $13.55 billion |
| Gross margin | $5.06 billion; 78.0% of revenue | $4.79 billion; 71.0% | $10.80 billion; 75.5% | $9.71 billion; 71.7% |
| Net income | $952.5 million | $1.39 billion | $2.86 billion | $2.75 billion |
| Diluted EPS | $1.05 | $1.53 | $3.16 | $3.01 |
| Operating cash flow | Not separately provided | Not separately provided | $3.32 billion | $3.47 billion |
- Q2 revenue declined 4%, while first-half revenue rose 6%. First-half growth reflected higher volume, partly offset by lower realized prices and unfavorable foreign exchange; Q2’s decline also reflected these price and currency effects.
- Q2 net income and diluted EPS each fell 31%. First-half net income increased 4% and diluted EPS increased 5%.
- Q2 gross-margin percentage improved 7.0 percentage points; first-half margin improved 3.8 points. Lilly attributed the increase primarily to COVID-19 antibody inventory impairments recorded in 2021, plus product mix and prior-year foreign-exchange effects, partly offset by lower realized prices.
- R&D expense was $1.78 billion in Q2, up 8%, and $3.39 billion for the first half, up 2%, mainly reflecting higher late-stage development spending. Marketing, selling and administrative expense declined 4% in Q2 and 2% in the first half.
- Other-net expense was $119.2 million in Q2 and $469.9 million in the first half, versus other-net income of $190.5 million and $511.6 million, respectively, in 2021. The shift primarily reflected equity investment losses in 2022 versus gains in 2021.
- At June 30, cash and cash equivalents were $2.62 billion, down from $3.82 billion at year-end 2021; investments totaled $2.70 billion. Total debt was $16.81 billion, broadly comparable with $16.88 billion at year-end. Current assets were $17.12 billion and current liabilities $15.62 billion.
- For the first half, operating cash flow was $3.32 billion; investing cash outflow was $1.48 billion and financing cash outflow was $3.00 billion. Uses included $1.77 billion of dividends, $1.50 billion of share repurchases, and $1.56 billion of long-term debt repayments; short-term borrowings increased by $2.12 billion.
Material changes and operating developments
- U.S. revenue rose 6% in Q2 and 19% in the first half; outside-U.S. revenue declined 16% and 12%, respectively. Lilly cited lower realized prices and foreign exchange, including pricing effects in China and volume-based procurement for Humalog.
- Q2 growth included Trulicity revenue of $1.91 billion, up 25%; Verzenio of $588.5 million, up 72%; and Jardiance of $461.0 million, up 29%. Alimta declined 63% to $227.7 million, reflecting generic competition; Humalog declined 26% to $447.1 million, mainly due to pricing and mix.
- First-half COVID-19 antibody revenue was $1.60 billion, up from $959.1 million. Q2 antibody revenue was $129.1 million, down from $148.9 million. Lilly cautioned that demand may fall as competing therapies, vaccines, and virus variants affect use and authorization.
- U.S. approval of tirzepatide (Mounjaro) for type 2 diabetes occurred in Q2. The filing also reports progress in the pipeline, including Phase III obesity trial results for tirzepatide, and a U.S. submission and Priority Review for donanemab. Lilly said it would not pursue a U.S. submission for sintilimab in its then-current form after the FDA requested an additional multiregional study.
- Generic entry following loss of exclusivity materially reduced Alimta revenue and is expected to continue eroding sales. Lilly also expects ongoing pressure on Humalog from competition and pricing, and further Forteo declines from generic and biosimilar competition.
Outlook, risks and unusual items
- Management said cash, operating cash generation and access to borrowing were sufficient for existing and planned capital needs. Planned investments include more than $2 billion over several years in two Indiana facilities, more than $1 billion in a North Carolina facility, and more than €400 million in an Ireland facility.
- Lilly estimated that the 2022 tax-law requirement to capitalize and amortize R&D expenses could increase 2022 cash tax payments by up to $1.50 billion. If that provision is deferred or repealed for 2022, Lilly expected a 2022 effective tax rate of approximately 13%–14%. The filing does not provide clear consolidated revenue or earnings guidance.
- Q2 acquired in-process R&D and development-milestone charges were $440.4 million; first-half charges were $606.0 million. The principal item was a $333.8 million payment to buy out substantially all future Petra Pharma milestone rights; first-half charges also included a $110 million Priority Review Voucher purchase.
- Supply constraints may challenge the company’s ability to meet international Trulicity demand. Lilly expects high utilization of supply resources until announced capacity expansions, and potentially further investment, become operational over the next several years.
- Risks highlighted include drug pricing and reimbursement pressure, patent expiry and competition, foreign exchange, product supply and manufacturing, regulatory and safety outcomes, tax changes, and the uncertain trajectory and regulatory treatment of COVID-19 therapies. Lilly reported no material changes to the risk factors in its 2021 Form 10-K.
- Legal matters include insulin-pricing and 340B disputes and investigations, patent cases, and other proceedings. Lilly said it could not reasonably estimate maximum exposure or losses above accruals; it does not expect the matters collectively to materially affect financial position or liquidity, but they could materially affect results in an individual period. Potential damages in the RCT manufacturing-process litigation could be material but were not reasonably estimable.
Most important facts for investors to verify
- Whether growth in Trulicity, Verzenio and Jardiance can offset Alimta’s generic-driven decline and continued pricing pressure on insulin products.
- How much COVID-19 antibody revenue persists, given the sharp Q2 year-over-year decline and changing demand, variants and authorizations.
- Whether product pricing, foreign exchange and regional demand continue to weigh on revenue, especially outside the U.S.
- The timing and cost of manufacturing expansion, and whether supply capacity can meet Trulicity and broader portfolio demand.
- The cash-flow and tax consequences of the R&D capitalization rule, alongside dividends, repurchases, debt and investment commitments.
- Developments in material litigation and investigations, including the RCT case, insulin pricing and 340B matters; potential outcomes and financial exposures remain uncertain.