Eli Lilly and Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Lilly operates as a single worldwide pharmaceutical segment. Unless otherwise stated, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $6.806 billion | $5.860 billion; up 16% |
| Net product revenue | $6.320 billion | $5.404 billion |
| Gross margin | $4.927 billion; 72.4% of revenue | $4.645 billion; 79.3% of revenue |
| Research and development expense | $1.685 billion | $1.392 billion; up 21% |
| Marketing, selling, and administrative expense | $1.576 billion | $1.550 billion; up 2% |
| Net income | $1.355 billion | $1.457 billion; down 7% |
| Diluted EPS | $1.49 | $1.60; down 7% |
| Cash provided by operating activities | $1.697 billion | $382 million |
- Revenue growth reflected increased volume and favorable foreign exchange, partly offset by lower realized prices. U.S. revenue grew 18%; revenue outside the U.S. grew 13%.
- Gross margin percentage fell 6.9 percentage points, primarily due to product mix, including COVID-19 antibody sales, foreign-exchange effects on international inventories, higher Retevmo intangible amortization, excess COVID-19 antibody inventory charges, and lower realized prices.
- Other-net income was $321 million, including $302 million of net gains on equity securities. The effective tax rate was 8.2%, versus 13.3%, reflecting larger net discrete tax benefits.
- Cash and cash equivalents were $3.002 billion at March 31, down from $3.657 billion at year-end. Total investments were $3.232 billion, versus $2.967 billion. Cash declined by $655 million during the quarter.
- Total debt was $16.204 billion, down from $16.595 billion at December 31, 2020. Current liabilities were $11.714 billion and current assets were $16.605 billion. Lilly reported $5.24 billion of unused committed bank credit facilities, including $5.00 billion available to support commercial paper.
- Capital uses included $747 million, net of cash acquired, for the Prevail acquisition; $774.8 million of dividends paid; and $300 million of property and equipment purchases. No shares were repurchased during the quarter; $1.00 billion remained under the repurchase authorization.
Material changes and notable items
- COVID-19 antibody revenue was $810 million, recognized under Emergency Use Authorizations (EUAs); there was no comparable revenue in Q1 2020. Trulicity revenue rose 18%, Verzenio 43%, Olumiant 39%, Emgality 61%, and Tyvyt 91% year over year.
- Revenue declined for several established products, including Humalog (11%), Basaglar (19%), Forteo (27%), Cymbalta (16%), and Cialis (34%). Lilly cited competition, pricing pressure, demand changes, and loss of exclusivity as applicable.
- Net income was lower despite revenue growth, mainly due to higher R&D expense, acquired in-process R&D charges of $299 million (versus $52 million), and special charges of $212 million (versus $60 million). Special charges included a $108 million Qbrexza impairment following the decision to sell its rights and Prevail acquisition and integration costs.
- Operating cash flow increased from the prior-year quarter. The filing reports a much larger favorable working-capital and other operating-asset/liability movement in Q1 2021 than in Q1 2020; cash-flow improvement should therefore be assessed alongside its components.
- Lilly acquired gene-therapy company Prevail in January for $747 million net of acquired cash, plus contingent value rights that could require up to approximately $160 million of additional payment, subject to conditions. The acquisition added programs for neurodegenerative diseases.
Guidance, outlook, risks, and contingencies
- 2021 guidance: Revenue of $26.6–$27.6 billion, including an estimated $1.0–$1.5 billion from COVID-19 therapies; diluted EPS of $7.03–$7.23; gross margin of approximately 77%; R&D expense of $6.9–$7.1 billion; and marketing, selling, and administrative expense of $6.2–$6.4 billion. The company expected other-net income of $150–$250 million and an effective tax rate of approximately 13%.
- Management expected mid-single-digit global net price declines in 2021, with low-to-mid-single-digit declines in the U.S. and declines in China, Japan, and Europe. Revenue growth was expected from several newer products and COVID-19 therapies, partly offset by products losing patent exclusivity.
- COVID-19 creates uncertainty for product demand, clinical trials, manufacturing, supply chains, and antibody effectiveness. Lilly noted that vaccines, coronavirus variants, regulatory decisions, and potential product returns could reduce antibody demand or value. The FDA revoked the EUA for bamlanivimab administered alone after Lilly requested revocation; the company said the request was not prompted by a new safety concern.
- Alimta patent protection was expected to end in Japan and major European markets in June 2021; generic entry was expected to cause a rapid and severe revenue decline. In the U.S., limited generic entry was scheduled from February 2022, with broader entry from April 2022. Lilly also cited ongoing pricing and reimbursement pressure and competition for insulin products.
- Legal and regulatory matters include product-liability, patent, pricing, and 340B disputes and investigations. Lilly stated it could not reasonably estimate maximum potential exposure or losses beyond accruals; it did not expect the resolution of proceedings to materially affect financial position or liquidity, but results of operations in an individual period could be materially affected. A Brazilian labor case included an approximately $165 million inflation- and interest-adjusted award as of March 31, 2021; appeals and related proceedings remained ongoing.
- Lilly said there had been no material changes to the risk factors disclosed in its 2020 Form 10-K. Its forward-looking statements remain subject to risks including regulatory approval, clinical development, patent expiry, pricing, product safety, litigation, manufacturing, foreign exchange, and tax changes.
Important facts for investors to verify
- Whether COVID-19 antibody sales and the updated $1.0–$1.5 billion full-year revenue assumption are supported by subsequent demand, authorization, and product-return developments.
- How much of the quarter’s operating-cash-flow increase reflects sustainable earnings versus timing and working-capital movements.
- Whether product mix, inventory charges, pricing, and foreign exchange continue to pressure gross margin and net prices.
- The pace and financial impact of Alimta generic entry and other patent expirations, together with growth and uptake of newer products and pipeline candidates.
- Developments in the disclosed litigation and investigations, including 340B matters, insulin pricing cases, and the Brazilian labor proceedings, as well as any changes to accrued exposure.