Business context and reporting period
Eli Lilly and Company’s unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The company reports human pharmaceutical and animal health products. The filing was signed July 28, 2017.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $5.824B | $5.405B | $11.053B | $10.270B |
| Gross margin | $4.273B; 73.4% | $3.940B; 72.9% | $8.173B; 73.9% | $7.482B; 72.9% |
| Net income | $1.008B | $747.7M | $897.2M | $1.188B |
| Diluted EPS | $0.95 | $0.71 | $0.85 | $1.12 |
| Operating cash flow | Not stated separately for the quarter | $1.991B | $1.183B |
Q2 revenue rose 8% and net income rose 35%; first-half revenue rose 8%, while net income and EPS fell 24%. First-half results included an $857.6M acquired in-process R&D charge for CoLucid’s lasmiditan, which was not tax-deductible. Excluding that charge, reported comparisons would differ; the filing does not provide an adjusted net-income or EPS figure. First-half effective tax rate was 32.1%, versus 21.4% a year earlier, largely reflecting that charge.
Growth was led by new products, particularly Trulicity and Taltz. First-half U.S. revenue increased 15%, while revenue outside the U.S. decreased 1%, including a 2% adverse foreign-exchange effect. Q2 research and development expense decreased 6% to $1.251B; marketing, selling, and administrative expense increased 5% to $1.707B. Management attributed higher gross margin mainly to manufacturing efficiencies and higher realized prices, partly offset by new-product support costs and unfavorable product mix.
For the first half, investing activities used $3.679B, including $882.1M for the BIVIVP acquisition and $831.8M for the CoLucid asset acquisition. Financing activities provided $184.2M, including $2.232B of long-term debt proceeds; dividends paid were $1.096B. Cash and cash equivalents were $3.070B at June 30, down from $4.582B at year-end. Total investments were $8.09B, versus $6.66B at year-end. Total debt increased to $12.31B from $10.31B; current liabilities were $11.29B and current assets $15.75B. Lilly said cash from operations and available cash should be sufficient for normal operating needs.
Material changes and notable items
- Revenue growth reflected new-product volume and price increases; Trulicity revenue was $480.2M in Q2, up from $201.3M, and Taltz revenue was $138.7M versus $19.3M.
- Established-product and animal-health pressures persisted. First-half Alimta revenue fell 13%, Zyprexa 32%, and animal health revenue 4%. Strattera’s U.S. exclusivity ended in May 2017, with generic competition causing a sharp decline.
- In January, Lilly acquired Boehringer Ingelheim Vetmedica’s U.S. animal-vaccine portfolio and related assets for $882.1M. In March, Lilly acquired CoLucid for net cash consideration of $831.8M and expensed $857.6M for lasmiditan IPR&D.
- Debt increased following a May issuance of $2.25B in fixed-rate notes, due 2022, 2027, and 2047. The company said proceeds were for general corporate purposes, including repayment of notes due in 2018 and 2019.
- First-half restructuring and special charges were $263.9M, primarily severance, integration, asset impairment, and site-closure costs. The comparable 2016 period included a $203.9M Venezuela-related charge.
Outlook, risks, and contingencies
Updated 2017 expectations: revenue of $22.0B–$22.5B; diluted EPS of $2.51–$2.61; gross margin of approximately 72.5%; R&D expense of $5.0B–$5.2B; marketing, selling, and administrative expense of $6.4B–$6.6B; other-net income of up to $100M; tax rate of approximately 23.5%; and capital expenditures of approximately $1.1B. Management expected growth from products including Trulicity, Taltz, Basaglar, Cyramza, Jardiance, Lartruvo, Trajenta, Forteo, and Humalog.
Key commercial risks include generic erosion and upcoming loss of exclusivity: Effient U.S. generic entry could begin as early as mid-August 2017; Cialis faces European patent expiry in November 2017, while U.S. exclusivity is expected to end no earlier than late September 2018; and Alimta’s effective patent protection remains contested. Lilly warned that generic entry could cause rapid, severe revenue declines. Pricing, reimbursement, foreign exchange, and healthcare-policy changes also pose risks.
Pipeline and legal developments include an FDA complete response letter for Olumiant; U.S. resubmission was not expected in 2017 and was anticipated to take at least 18 months. Lilly reported an estimated potential $305M Brazil employee-litigation exposure plus interest, while stating the outcome and range of reasonably possible loss could not be estimated. It warned that an unfavorable Alimta patent outcome could materially affect results, liquidity, and financial position. Other disclosed matters include product-liability claims and government inquiries concerning insulin pricing. Lilly is self-insured for product-liability losses. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress against the updated 2017 revenue and EPS outlook, including the effect of the non-deductible CoLucid charge and tax rate.
- Revenue and margin trends for growth products versus generic, pricing, and competitive erosion in Alimta, Cialis, Effient, Strattera, and animal health.
- Timing and financial impact of expected generic launches and outcomes of Alimta patent proceedings, including ongoing challenges to its vitamin-regimen patents.
- Olumiant’s U.S. regulatory path and the clinical, regulatory, and commercial prospects of late-stage pipeline assets.
- Debt, cash generation, acquisition-related spending, and the resolution of significant contingencies, particularly the Brazil litigation and insulin-pricing inquiries.