Eli Lilly and Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless stated otherwise. Following the March 11 disposition of its remaining Elanco Animal Health stake, Lilly reports as a single pharmaceutical operating segment. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $5.092 billion | $4.964 billion | Up 3%; volume growth was partly offset by lower realized prices and foreign exchange. |
| Gross margin | $3.954 billion; 77.6% of revenue | $3.799 billion; 76.5% | Margin rate increased 1.1 percentage points. |
| Research and development | $1.231 billion | $1.108 billion | Up 11%, primarily from late-stage development investment. |
| Marketing, selling, and administrative | $1.517 billion | $1.339 billion | Up 13%, primarily from marketing recent launches. |
| Continuing-operations net income | $561 million; diluted EPS $0.57 | $1.167 billion; diluted EPS $1.11 | Down 52% in net income; higher expenses and special items weighed on results. |
| Net income, including discontinued operations | $4.242 billion; diluted EPS $4.31 | $1.217 billion; diluted EPS $1.16 | 2019 includes a $3.681 billion gain on the Elanco disposition; not representative of recurring operating earnings. |
| Operating cash flow | $311 million | $437 million | Lower year over year. |
| Cash and cash equivalents | $2.036 billion | $7.321 billion at Dec. 31, 2018 | Quarter-end balance declined substantially. |
| Total debt | $15.97 billion | $10.30 billion at Dec. 31, 2018 | Increase primarily reflects $4.45 billion of notes issued in February. |
Cash used in investing activities was $7.679 billion, including $6.918 billion paid for Loxo Oncology, net of cash acquired. Cash provided by financing activities was $1.368 billion, including debt issuance, share repurchases, and dividends. Lilly reported $2.21 billion of investments at quarter-end and $5.42 billion of committed bank credit facilities, of which $5.00 billion supported its commercial paper program.
Material changes and business developments
- Revenue growth was led by Trulicity ($880 million, up 30%), Taltz ($253 million, up 72%), Basaglar ($251 million, up 51%), and Jardiance ($204 million, up 35%). Cialis revenue fell 38% to $308 million amid generic competition; Humalog fell 8% to $731 million. Figures may not sum due to rounding.
- Lilly completed its $6.92 billion net acquisition of Loxo Oncology in February. The acquired pipeline includes investigational medicines LOXO-292 and LOXO-305. Preliminary purchase accounting included $4.67 billion of acquired in-process research and development and $2.49 billion of goodwill.
- Lilly recognized $137 million of acquired in-process R&D charges for collaborations and $424 million of impairment, restructuring, and special charges, mostly reflecting accelerated vesting of Loxo employee awards.
- The Elanco disposition reduced shares outstanding by approximately 65 million. Lilly repurchased $2.80 billion of shares during Q1 and had $3.10 billion remaining under its $8.00 billion authorization at March 31.
Outlook, commentary, and risks
- 2019 guidance: Revenue of $22.0–$22.5 billion; diluted EPS of $8.57–$8.67; gross margin of approximately 79%; R&D expense of $5.5–$5.7 billion; marketing, selling, and administrative expense of $5.7–$6.0 billion; other-net expense of $100–$250 million; and an effective tax rate of 15%–16%. EPS guidance reflects benefits from the Elanco disposition.
- Management expects growth from Trulicity, Taltz, Basaglar, Jardiance, Verzenio, Cyramza, and Olumiant, with potential benefit from Emgality and other possible launches. Offsets include lost exclusivity, foreign exchange, U.S. realized-price declines, international price reductions, and the planned withdrawal of Lartruvo.
- Lartruvo’s confirmatory Phase III trial did not meet its primary endpoint; Lilly suspended promotion and announced plans to withdraw the product globally. Tanezumab results were mixed across trials, and management said it was reviewing the full clinical data with regulators.
- Key commercial risks include generic or biosimilar competition for Cialis, Forteo, and Alimta; pricing and reimbursement pressure; insulin affordability programs; foreign exchange; regulatory and pipeline uncertainty; and product supply or safety issues. Lilly identified Alimta patent disputes as potentially materially affecting results, liquidity, and financial position.
- Other significant legal exposures include an Adocia arbitration seeking approximately $1.30 billion, against which Lilly seeks approximately $188 million; a Brazil facility-related ruling estimated at approximately $130 million; and insulin-pricing litigation and investigations. The filing states outcomes are uncertain. Lilly is self-insured for product-liability losses on currently marketed products.
- The effective tax rate rose to 23.3% from 14.5%, primarily due to nondeductible Loxo equity-award vesting and tax expense associated with Lartruvo. Lilly said additional guidance on U.S. tax reform could affect its tax estimates.
Important facts for investors to verify
- Separate recurring pharmaceutical operating performance from the $3.681 billion Elanco disposition gain when assessing Q1 net income and EPS.
- Track whether volume-led growth in key products continues to offset lower realized prices, foreign exchange, and declining products.
- Monitor Loxo integration, final purchase-price allocation, pipeline progress, and the effect of acquisition financing and higher debt.
- Check progress on 2019 guidance, especially U.S. pricing, product launches, foreign exchange, and Lartruvo withdrawal assumptions.
- Follow Alimta patent challenges and generic launches, along with the outcomes or developments in the Adocia and Brazil matters and insulin-pricing investigations.
- Assess liquidity and capital allocation against lower quarter-end cash, ongoing dividends and repurchases, and the company’s stated expectation that operating cash and available funding will meet normal needs.