Eli Lilly and Company — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Lilly operates as a single pharmaceutical segment. Unless stated otherwise, figures are in U.S. dollars.
Financial results
- Q3 revenue: $5.741 billion, up 5% from $5.477 billion. Net product revenue was $5.281 billion; collaboration and other revenue was $460 million.
- Q3 earnings: Continuing-operations net income was $1.208 billion, down 4%; diluted EPS was $1.33, down 3%. Gross margin was $4.414 billion, or 76.9% of revenue, versus 78.5% a year earlier.
- Nine-month results: Revenue was $17.100 billion, up 6%; continuing-operations net income was $4.077 billion, up 30%; diluted EPS from continuing operations was $4.47, up 34%. Gross margin was $13.336 billion, or 78.0% of revenue, versus 78.8%.
- Costs: Q3 research and development expense rose 6% to $1.465 billion; marketing, selling, and administrative expense rose 11% to $1.569 billion. Nine-month acquired in-process R&D charges were $294 million. Q3 special charges were $101 million, primarily severance.
- Cash flow: For the first nine months, operating cash flow was $4.684 billion; capital expenditures were $933 million. Cash and cash equivalents were $3.595 billion at September 30, versus $2.338 billion at year-end 2019.
- Debt and liquidity: Total debt was $16.92 billion, up from $15.32 billion at year-end 2019. Cash plus investments totaled approximately $6.11 billion. Lilly reported $5.21 billion in committed bank credit facilities, including $5.00 billion available to support commercial paper.
Changes versus comparable periods
- Revenue growth reflected higher volume, partly offset by lower realized prices. For Q3, volume increased 9% and price declined 5% on a consolidated basis.
- Growth products included Trulicity, Taltz, Jardiance, Verzenio, and Emgality. Among notable declines, Forteo revenue fell 28% in Q3 and Trajenta fell 41%.
- Q3 net income and EPS declined despite revenue growth, mainly because of higher operating expenses and special charges; higher investment gains and gross margin partly offset these effects.
- Nine-month 2020 continuing-operations earnings improved, but the comparison in total net income is distorted by 2019’s approximately $3.7 billion Elanco disposition gain. Total net income fell 40% year over year, to $4.077 billion.
- Other income was $159 million in Q3 and $695 million for the nine months, driven primarily by investment gains. Nine-month net investment gains were $910 million.
Outlook, commentary, and risks
- 2020 guidance: Revenue of $23.7–$24.2 billion; diluted EPS of $6.20–$6.40; gross margin of approximately 78%; effective tax rate of approximately 14%. Management said reaching the high end of the revenue range likely requires moderate revenue from potential COVID-19 treatments, which was possible but uncertain.
- Management expected growth from several newer and established products, partly offset by products losing exclusivity and continued pricing pressure. U.S. net price decline was expected in the mid-single digits; price declines were also expected in China, Japan, and Europe.
- 2020 R&D expense guidance was $5.8–$5.9 billion, with expectations trending toward the high end, including approximately $400 million of full-year COVID-19 R&D spending. Management cited savings in selling and administrative costs from reduced travel, meetings, and promotion.
- COVID-19 had reduced new prescriptions and affected patient visits, payer mix, and affordability-program use. Lilly reported largely maintaining normal operations and said the pandemic had not materially impaired liquidity to date, but warned prolonged disruption could hurt demand, trials, supply, earnings, and cash flows.
- Pipeline developments included FDA accelerated approval and U.S. launch of Retevmo, ongoing Phase III trials for tirzepatide, and an emergency-use authorization request for bamlanivimab monotherapy. Regulatory outcomes and clinical benefit remain uncertain for investigational or accelerated-approval products.
- Patent exposure includes expected further Forteo erosion and potential Alimta generic competition as protection expires in 2021–2022. Pricing, reimbursement, foreign exchange, manufacturing and supply, product safety, regulatory, and litigation risks remain material.
- Significant legal matters include Alimta patent challenges, insulin pricing litigation and government inquiries, and Brazil litigation relating to a former facility. The filing says outcomes are uncertain; an unfavorable U.S. Alimta outcome could materially affect future results, liquidity, and financial position.
- After quarter-end, Lilly expanded its Tyvyt alliance, with a $200 million upfront payment expected to be expensed in Q4, and acquired Disarm for $135 million upfront plus potential future milestone payments.
Key facts for investors to verify
- Whether 2020 revenue and EPS guidance was achieved, particularly given its assumptions about healthcare activity, prescriptions, pricing, and COVID-19 treatment revenue.
- How much reported earnings and cash generation depend on investment gains, and whether those gains recur.
- Trends in volume, realized pricing, rebates, and affordability programs across major products and regions.
- Progress and regulatory outcomes for COVID-19 treatments and other pipeline assets, including confirmatory requirements for accelerated approvals.
- Developments in Alimta patent litigation and the timing and financial impact of generic competition and other exclusivity losses.
- Debt levels, cash deployment, and the effect of acquisition and milestone commitments on liquidity.