Eli Lilly and Company — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Lilly is a global pharmaceutical and animal-health company; its 2018 results include Elanco, which remained consolidated after its September 2018 IPO.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $24.56 billion | $22.87 billion |
| Gross margin | $18.13 billion; 73.8% of revenue | $16.72 billion; 73.1% |
| Income before income taxes | $3.80 billion | $2.20 billion |
| Income taxes | $563.7 million; 14.9% effective rate | $2.40 billion; 109.3% effective rate |
| Net income (loss) | $3.23 billion | $(204.1) million |
| Diluted EPS | $3.13 | $(0.19) |
| Cash from operating activities | $5.52 billion | $5.62 billion |
| Capital expenditures | $1.21 billion | $1.08 billion |
| Cash and cash equivalents | $8.00 billion | $6.54 billion |
| Total debt | $12.77 billion | $13.65 billion |
| Current assets / current liabilities | $20.55 billion / $11.89 billion | $19.20 billion / $14.54 billion |
Derived operating cash flow less capital expenditures was approximately $4.31 billion in 2018. Investing activities provided $1.91 billion, reflecting substantial investment-sale and maturity proceeds. Lilly paid $2.31 billion in dividends and repurchased $4.15 billion of shares during the year. The board authorized an $8 billion repurchase program, with $5.90 billion remaining at year-end.
Fourth-quarter revenue was $6.44 billion, compared with $6.16 billion in Q4 2017. Fourth-quarter net income was $1.13 billion, versus a loss of $1.66 billion; diluted EPS was $1.10 versus $(1.58). The 2017 quarter included a large provisional tax charge related to U.S. tax reform.
Business developments and comparison with prior period
- Annual revenue rose 7%: volume increased 8%, while price reduced growth by 1%; foreign exchange added 1% overall. U.S. revenue grew 8% and revenue outside the U.S. grew 6%.
- Growth was led by newer medicines, including Trulicity (+58% worldwide), Taltz (+68%), Basaglar (+85%), and Jardiance (+47%). Cialis fell 20%, Strattera 27%, and Forteo 10%, primarily amid generic competition or declining demand.
- R&D expense decreased 1% to $5.31 billion and marketing, selling, and administrative expense decreased 1% to $6.63 billion. Gross margin improved 0.7 percentage points, principally from manufacturing efficiencies and lower amortization.
- Acquired in-process R&D charges increased to $1.98 billion from $1.11 billion, principally associated with ARMO and Dicerna. Restructuring, impairment, and other special charges declined to $482 million from $1.67 billion.
- Elanco completed an IPO of 19.8% of its shares; Lilly retained control and consolidated it. Lilly planned to divest its remaining stake through an exchange offer or subsequent transactions, subject to conditions including intended tax treatment.
Outlook, risks, and unusual items
- 2019 guidance: Revenue of $25.1–$25.6 billion; EPS of $4.57–$4.67; gross margin of approximately 75%; R&D expense of $5.8–$6.0 billion; marketing, selling, and administrative expense of $6.4–$6.7 billion; and an effective tax rate of approximately 16.5%. Guidance includes both Lilly and Elanco and reflects expected Loxo acquisition and Lartruvo impacts.
- Patent expirations and competition: Cialis exclusivity ended in the U.S. in 2018, and Forteo U.S. use patents were due to expire in August 2019. Lilly expected revenue declines. Alimta’s vitamin-regimen patents were challenged in multiple jurisdictions; an unfavorable outcome could materially harm results, liquidity, and financial position. Similar insulin lispro products were already entering markets, with Lilly anticipating pricing and share pressure.
- Lartruvo: In January 2019, Lilly reported that the confirmatory trial did not meet its primary overall-survival endpoint, suspended promotion, and began discussions with regulators. 2018 revenue was $304.7 million; Lilly estimated an approximately $80 million pretax charge in Q1 2019.
- Acquisitions and pipeline: Lilly acquired Loxo Oncology in February 2019 for approximately $8 billion, funded through cash and debt. Development and regulatory outcomes remain uncertain across the pipeline, including late-stage candidates.
- Pricing and reimbursement: Government and private payer pressure, rebates, formulary restrictions, and policy changes may constrain prices and access. Lilly estimated the higher Medicare Part D coverage-gap discount would reduce 2019 results by approximately $200 million.
- Legal and regulatory exposure: Matters include Alimta patent disputes; insulin and glucagon pricing litigation and investigations; product-liability claims; and an employee case in Brazil with estimated impact of approximately $130 million at year-end exchange rates. Lilly said it could not reasonably estimate maximum exposure or loss ranges for certain contingencies; outcomes could materially affect an individual period.
- Other financial risks: Foreign exchange, tax-law developments, manufacturing or supplier interruptions, product safety findings, and cyber or data-security events could adversely affect operations. A 5% change in accrued global returns, rebates, and discounts would affect pretax income by approximately $275 million.
Important facts for investors to verify
- Whether newer-product growth can offset expected losses from patent expirations and generic or biosimilar competition.
- Progress and outcomes of Alimta patent challenges, and the timing and scale of generic entry for Alimta and Forteo.
- Regulatory decisions and any further financial effects following the Lartruvo trial result.
- Whether 2019 guidance is achieved, particularly given payer pricing pressure, Medicare discounts, acquisition costs, and pipeline investment.
- Terms, completion, and tax treatment of the planned Elanco divestiture, alongside the effects of the Loxo acquisition on debt and cash use.
- Developments in material litigation and investigations, including insulin pricing matters and the Brazil employee litigation.