Eli Lilly and Company — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are U.S. dollars unless stated otherwise. Comparisons are with the corresponding 2021 periods.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $6.94 billion | $6.77 billion | $21.24 billion | $20.32 billion |
| Gross margin | $5.36 billion; 77.3% | $5.34 billion; 78.9% | $16.16 billion; 76.1% | $15.06 billion; 74.1% |
| Net income | $1.45 billion | $1.11 billion | $4.31 billion | $3.86 billion |
| Diluted EPS | $1.61 | $1.22 | $4.76 | $4.23 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $5.50 billion | $5.10 billion |
Q3 revenue rose 2% and nine-month revenue rose 5%. Growth reflected higher volumes, partly offset by lower realized prices and unfavorable foreign exchange. U.S. revenue increased 11% in Q3 and 16% year to date; outside-U.S. revenue declined 9% and 11%, respectively. Q3 net income increased 31%; nine-month net income increased 12%.
Cash and cash equivalents were $2.62 billion at September 30, down from $3.82 billion at year-end 2021; investments totaled $2.70 billion. Total debt was $15.89 billion, down about $1.00 billion from year-end. Current assets were $17.64 billion and current liabilities $15.65 billion. Nine-month capital spending on property and equipment was $1.35 billion; operating cash flow less that spending was approximately $4.15 billion. Lilly paid $2.65 billion in dividends and repurchased $1.50 billion of shares during the nine months.
Drivers and changes versus prior year
- Growth products included Trulicity (Q3 revenue $1.85 billion, up 16%), Verzenio ($618 million, up 84%), and Jardiance ($573 million, up 47%). Mounjaro, launched in the U.S. in Q2, generated $187 million in Q3.
- Alimta revenue fell 74% in Q3 and 58% for the nine months amid generic competition following loss of exclusivity. Humalog declined 29% in Q3, primarily from lower realized prices; Olumiant fell 55% in Q3, partly reflecting lower COVID-19 treatment use.
- COVID-19 antibody revenue was $387 million in Q3 and $1.99 billion for the nine months. The filing cautions that demand and product effectiveness may be affected by competing therapies and viral variants.
- Q3 gross margin percentage decreased 1.6 percentage points, principally because Q3 2021 benefited from a partial reversal of COVID-19 antibody inventory impairments. Nine-month gross margin percentage increased 2.0 points, largely because of the 2021 inventory impairment.
- Research and development expense increased 6% in Q3 and 3% year to date, mainly due to late-stage development spending. Q3 marketing, selling, and administrative expense rose 2%, including Mounjaro launch costs; nine-month expense declined 1%.
Outlook, risks, and unusual items
- The filing gives no explicit earnings or revenue forecast. Management says it believes cash, operating cash generation, and borrowing access are sufficient for planned requirements. It expects higher-than-recent capital spending for several years, including planned facilities in Indiana, North Carolina, and Ireland.
- Management reported strong Trulicity demand and supply constraints in the U.S. and international markets. Mounjaro uptake was strong; additional manufacturing capacity is expected to come online over the next several years, with significant expansion in 2023.
- Lilly reported a $206.5 million impairment, primarily tied to the Prevail-acquired PR001 gene-therapy asset after delays in estimated launch timing. Nine-month acquired IPR&D and milestone charges were $668.4 million, including a $333.8 million buyout of substantially all future contingent obligations related to a PI3K-alpha inhibitor and a $110 million priority review voucher.
- Nine-month other expense included $667.6 million of net investment losses on equity securities. The effective tax rates were 7.3% for Q3 and 8.6% year to date. Management said 2022 tax payments could be affected by up to $1.50 billion by the requirement to capitalize and amortize R&D for tax purposes; it estimated a 2022 effective tax rate of 13%–14% if that provision were deferred or repealed.
- Key risks include generic competition, pricing and reimbursement pressures, foreign exchange, inflation and supply constraints, clinical and regulatory uncertainty, and legal proceedings. The Inflation Reduction Act introduces Medicare drug-price negotiation and inflation-related provisions; effects remain uncertain. The filing describes substantial insulin-pricing litigation and investigations. Potential damages in the RCT manufacturing-process litigation could be material but were not reasonably estimable; a Brazil labor matter involved an adjusted award of approximately $185 million as of September 30, 2022.
- After quarter-end, Lilly agreed to acquire Akouos for $12.50 per share plus a contingent value right, with an expected purchase price of about $487 million and potential additional payments up to about $123 million, subject to closing conditions.
Investor verification points
- Assess whether Trulicity and Mounjaro demand can be met as manufacturing capacity expands, and how supply limitations affect growth.
- Track Alimta’s continued generic erosion, Humalog pricing pressure, and the durability of growth in Trulicity, Verzenio, and Jardiance.
- Monitor COVID-19 antibody demand, authorization status, and effectiveness against circulating variants.
- Review cash conversion, planned elevated capital expenditures, debt and liquidity, and the cash-tax impact of R&D amortization rules.
- Follow the material litigation, investigations, and patent matters, as well as the Akouos acquisition’s closing and contingent consideration.