Eli Lilly and Company — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; filed October 27, 2021. Lilly operates as a single global pharmaceutical segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $6.77 billion (+18%) | $5.74 billion | $20.32 billion (+19%) | $17.10 billion |
| Gross margin as % of revenue | 78.9% (+2.0 pts) | 76.9% | 74.1% (-3.9 pts) | 78.0% |
| Net income | $1.11 billion (-8%) | $1.21 billion | $3.86 billion (-5%) | $4.08 billion |
| Diluted EPS | $1.22 (-8%) | $1.33 | $4.23 (-5%) | $4.47 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $5.10 billion | $4.68 billion |
Revenue growth was primarily volume-driven. Nine-month revenue increased across major growth products, including Trulicity ($4.59 billion, +29%), Taltz ($1.57 billion, +21%), Verzenio ($946 million, +50%), and Jardiance ($1.06 billion, +26%). COVID-19 antibody revenue was $1.18 billion for the nine months, versus none in the comparable 2020 period. Alimta revenue fell 3% for the nine months, with generic competition already affecting markets outside the U.S.
Research and development expense rose 17% in Q3 to $1.71 billion and 19% for nine months to $5.07 billion, mainly due to late-stage development. Marketing, selling, and administrative expense was $1.58 billion in Q3 (+1%) and $4.84 billion year to date (+6%).
Cash, debt, and liquidity
- Cash and equivalents were $3.79 billion at September 30, 2021, versus $3.66 billion at year-end 2020. Investments totaled $3.39 billion; cash plus investments were approximately $7.14 billion.
- Nine-month operating cash flow was $5.10 billion. Investing cash outflow was $2.38 billion and financing cash outflow was $2.60 billion. Capital spending was $1.02 billion; dividends paid were $2.31 billion.
- Total debt was $17.09 billion, up $490 million from year-end 2020. Current borrowings and maturities were $1.56 billion; long-term debt was $15.52 billion.
- Lilly reported $5.24 billion of unused committed bank credit facilities, including $5.00 billion available to support commercial paper. Management stated available cash, operating cash generation, and borrowing access should fund planned needs.
Material changes and unusual items
- Q3 other-net expense was $635.9 million, versus $158.9 million of income a year earlier. It included a $405.2 million debt-extinguishment loss and $246.8 million of equity-investment losses. For nine months, other-net expense was $124.3 million, versus $694.9 million of income in 2020.
- Nine-month cost of sales included a $435.1 million net inventory impairment on COVID-19 antibodies, reflecting changed government demand and near-term product expiry. This contributed to the year-to-date gross-margin decline.
- Acquired in-process R&D charges were $498.3 million for nine months, including payments associated with business-development transactions. Asset impairment, restructuring, and other special charges were $211.6 million, primarily related to the Qbrexza rights sale and Prevail acquisition/integration costs.
- In September, Lilly issued euro- and pound-denominated long-dated notes, including notes intended to fund eligible ESG projects. Proceeds also funded redemption of $1.50 billion principal amount of higher-rate U.S. dollar debt and prefunding of 2022 maturities.
- Cash dividends declared for the first nine months were $1.70 per share. In October, Lilly declared a Q4 dividend of $0.85 per share, payable December 10, 2021.
Guidance, outlook, and risks
Lilly raised 2021 reported revenue guidance to $27.2–$27.6 billion and diluted EPS guidance to $6.38–$6.48. Estimated COVID-19 antibody revenue was raised to $1.3 billion. Gross margin guidance remained approximately 75%; R&D expense remained $6.9–$7.1 billion; marketing, selling, and administrative expense remained $6.2–$6.4 billion. Acquired IPR&D was expected to be $498.3 million, other-net expense $150–$250 million, and the effective tax rate approximately 11%.
- COVID-19 antibody demand and effectiveness are uncertain: competition, vaccines, viral variants, regulatory changes, and expiry could reduce sales or cause further inventory impairments. Lilly reported that most U.S. prescriptions and major-market healthcare operations had largely returned to pre-pandemic levels by quarter-end, while noting renewed pandemic waves could affect demand, supply, and commercialization.
- Alimta’s European and Japanese vitamin-regimen patent protection expired in June 2021; Lilly expects rapid, severe revenue erosion. In the U.S., limited generic entry was expected from February 2022 and unrestricted entry from April 2022.
- Other cited risks include pharmaceutical pricing and reimbursement pressure, competition and patent loss, product safety or manufacturing issues, foreign-exchange exposure, taxes, and ongoing legal and government matters.
- Pipeline updates included U.S. submission of tirzepatide for type 2 diabetes and initiation of a rolling U.S. accelerated-approval submission for donanemab. After quarter-end, Lilly and Pfizer discontinued tanezumab development following an FDA Complete Response Letter and negative EMA opinion; Lilly also discontinued zagotenemab after a Phase II trial missed its primary endpoint.
- Legal matters include insulin-pricing litigation and investigations, 340B disputes, and other product and patent cases. A Brazil facility labor judgment was stated at approximately $175 million, subject to ongoing proceedings. In October 2021, a court ruled for Research Corporation Technologies on certain issues involving a disputed royalty; potential damages after appeal could be material but were not reasonably estimable.
Key facts for investors to verify
- Whether revenue and EPS guidance were achieved, and how much growth came from core products versus COVID-19 therapies.
- Further COVID-19 antibody demand, inventory impairment, government purchasing, and variant-related effectiveness developments.
- The pace of Alimta erosion and the impact of U.S. generic entry beginning in 2022.
- Cash conversion, debt maturities and refinancing, and the effect of debt and investment-market movements on reported earnings.
- Developments and potential financial exposure in the RCT, Brazil, pricing, 340B, product-liability, and patent proceedings.