Eli Lilly and Company — Q3 2019 Form 10-Q
Business context and period: Quarter and nine months ended September 30, 2019. Following the March 11 disposition of its remaining Elanco stake, Lilly reports one operating segment focused on pharmaceutical products. Unless noted, financial figures are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $5.48 billion | $5.31 billion | $16.21 billion | $15.86 billion |
| Gross margin | $4.30 billion; 78.5% | $4.15 billion; 78.3% | $12.77 billion; 78.8% | $12.30 billion; 77.6% |
| Net income from continuing operations | $1.25 billion | $1.09 billion | $3.14 billion | $2.03 billion |
| Diluted EPS from continuing operations | $1.37 | $1.07 | $3.33 | $1.96 |
| Net income, including discontinued operations | $1.25 billion | $1.15 billion | $6.82 billion | $2.11 billion |
| Diluted EPS, including discontinued operations | $1.37 | $1.12 | $7.24 | $2.03 |
Q3 revenue increased 3%; nine-month revenue increased 2%. Growth was volume-led, partly offset by lower realized prices and foreign exchange. Q3 continuing-operations net income rose 15%; nine-month continuing-operations net income rose 55%. Nine-month reported net income and EPS also include a $3.7 billion gain on Elanco’s disposition.
Q3 research and development expense was $1.38 billion, up 8%; marketing, selling, and administrative expense was $1.41 billion, down 3%. For nine months, R&D was $4.01 billion, up 10%, and marketing, selling, and administrative expense was $4.52 billion, up 5%. Nine-month acquired in-process R&D charges were $239.6 million; special charges were $423.9 million, primarily related to Loxo employee equity awards.
Cash flow and liquidity: Nine-month operating cash flow was $2.87 billion, versus $4.08 billion a year earlier; the cash-flow reconciliation removes the $3.68 billion Elanco gain. Investing used $8.04 billion, including $6.92 billion for Loxo; financing used $1.21 billion. Cash and equivalents were $1.56 billion at September 30, down from $7.32 billion at year-end; investments totaled $1.91 billion. Total debt was $15.23 billion, versus $10.30 billion at year-end. The company reported $5.42 billion of committed bank facilities, with $5.00 billion available to support commercial paper.
Material changes and business developments
- Acquired Loxo Oncology for $6.92 billion net of cash in February; the acquisition added investigational medicines including selpercatinib and LOXO-305. The preliminary purchase accounting includes $4.67 billion of acquired IPR&D and $2.41 billion of goodwill.
- Completed the Elanco exchange offer in March, recognizing a $3.7 billion gain and reducing Lilly’s shares outstanding by approximately 65 million. Elanco is reported as discontinued operations.
- Product growth was led by Trulicity, Taltz, Basaglar, Jardiance, Verzenio, and Cyramza. Q3 sales included Trulicity of $1.01 billion (+24%), Verzenio of $157 million (+86%), and Jardiance of $241 million (+44%). Cialis fell 61% to $184 million amid generic competition.
- Repurchased $4.10 billion of shares in the first nine months under the $8.00 billion program; $1.80 billion remained at September 30. Nine-month dividends paid were $1.82 billion.
Outlook, commentary, and risks
Management maintained its 2019 revenue outlook of $22.0–$22.5 billion and raised its diluted EPS outlook to $8.59–$8.69. It continued to expect gross margin of about 79%, R&D expense of $5.5–$5.7 billion, and marketing, selling, and administrative expense of $5.9–$6.1 billion. The 2019 tax-rate outlook was revised to 13%–14%; other-net was expected to range from $50 million of income to $100 million of expense.
Management expects growth from newer products and Baqsimi, partly offset by lost-exclusivity products, foreign exchange, Lartruvo’s withdrawal, and U.S. net price declines expected in the mid-single digits, driven largely by rebates, Medicare Part D cost sharing, and patient affordability programs.
- Pipeline and unusual developments: Baqsimi launched in the U.S.; the FDA approved REYVOW in October 2019. Lilly expected to submit selpercatinib by year-end 2019. The Lartruvo confirmatory trial failed its primary endpoint; promotion was suspended and the product withdrawn in the U.S. Pegilodecakin’s Phase III pancreatic cancer trial also failed its primary endpoint in October 2019.
- Patent and pricing exposure: Lilly warned of expected revenue declines from generic competition for Cialis and Forteo, and further potential erosion for Alimta. Humalog faces competition and pricing pressure. U.S. and international pricing, reimbursement, and policy changes may further affect revenue and cash flow.
- Legal and regulatory contingencies: Alimta patent challenges could materially affect future results if resolved unfavorably. Brazil litigation related to a former facility had an estimated impact of about 500 million Brazilian real ($120 million); appeals and enforcement proceedings remained pending. Insulin-pricing litigation and government investigations were ongoing. Lilly said it is self-insured for product liability losses.
- Other stated risks include clinical and regulatory uncertainty, product safety, manufacturing and supply disruptions, foreign-exchange movements, tax-law changes, and intellectual-property disputes. Management reported effective disclosure controls and no material change in internal control over financial reporting during Q3.
Key facts for investors to verify
- Reconcile reported nine-month EPS of $7.24 with continuing-operations EPS of $3.33 and the Elanco disposition gain.
- Track whether 2019 revenue and EPS guidance was achieved, and whether U.S. net-price pressure and foreign exchange matched management’s assumptions.
- Monitor cash generation, debt and liquidity following the Loxo acquisition, and capital returns under the remaining share-repurchase authorization.
- Assess sales trends and loss-of-exclusivity exposure for Cialis, Forteo, Alimta, and Humalog, alongside uptake of newer products and pipeline progress.
- Follow the Alimta patent cases, Brazil litigation, insulin-pricing investigations, and the financial outcomes of other disclosed legal matters.