Eli Lilly and Company — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Lilly is now a single-segment pharmaceutical company following the March 11, 2019 disposition of its remaining Elanco ownership; Elanco is presented as discontinued operations.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $5.637 billion | $5.585 billion | $10.729 billion | $10.549 billion |
| Gross margin | $4.512 billion; 80.0% | $4.351 billion; 77.9% | $8.465 billion; 78.9% | $8.150 billion; 77.3% |
| Net income (loss) from continuing operations | $1.327 billion | $(231.6) million | $1.888 billion | $935.6 million |
| Diluted EPS from continuing operations | $1.44 | $(0.22) | $1.98 | $0.90 |
| Net income, including discontinued operations | $1.327 billion | $(259.9) million | $5.569 billion | $957.5 million |
| Diluted EPS, including discontinued operations | $1.44 | $(0.25) | $5.84 | $0.92 |
Q2 revenue rose 1%; six-month revenue rose 2%. Management attributed growth mainly to higher volume, partly offset by lower realized prices and unfavorable foreign exchange. Q2 U.S. revenue was $3.253 billion and outside-U.S. revenue was $2.384 billion.
- Q2 operating cash flow was $1.363 billion, versus $1.954 billion in the prior-year period. Capital spending was $444 million.
- Cash and cash equivalents were $2.290 billion at June 30, down from $7.321 billion at year-end 2018; investments totaled $1.930 billion.
- Total debt was $15.79 billion, up from $10.30 billion at year-end, principally reflecting $4.45 billion of February note issuance used to help fund the Loxo acquisition and for general corporate purposes. Current liabilities were $11.855 billion and current assets were $13.455 billion.
- R&D expense increased 10% to $1.402 billion for Q2; marketing, selling, and administrative expense increased 7% to $1.586 billion. Q2 operating income or operating margin is not separately presented in the filing.
Material changes and unusual items
- Gross margin percentage improved by 2.1 percentage points in Q2, helped by foreign exchange effects on international inventory, lower intangible amortization, and manufacturing efficiencies; lower prices and product mix partly offset the improvement.
- Q2 continuing-operations earnings improved substantially versus 2018, when $1.62 billion of acquired in-process R&D charges were recognized. Six-month 2019 net income also includes a $3.7 billion gain on the Elanco disposition; this gain makes reported net income and EPS substantially higher than continuing-operations results.
- Lilly acquired Loxo Oncology in February for $6.92 billion net of cash acquired. Six-month 2019 results included $161.9 million of acquired in-process R&D and $423.9 million of restructuring and special charges, primarily accelerated vesting of Loxo employee equity awards.
- Revenue growth from Trulicity, Taltz, Basaglar, Jardiance, Verzenio, and other newer products was partly offset by declines in Cialis, Humalog, Forteo, and other products. Cialis Q2 revenue fell 63% globally year over year; Humalog fell 12%, while Trulicity rose 32%, Taltz 61%, and Jardiance 58%.
Outlook and management commentary
For full-year 2019, Lilly expected revenue of $22.0–$22.5 billion and diluted EPS of $8.58–$8.68. It expected gross margin of approximately 79%; R&D expense of $5.5–$5.7 billion; marketing, selling, and administrative expense of $5.9–$6.1 billion; other-net expense of up to $150 million; and a tax rate of 14%–15%.
Management expected volume growth from several newer products to be partly offset by lost exclusivity, foreign exchange, U.S. realized price declines in the low- to mid-single digits, international pricing pressure, and Lartruvo’s planned withdrawal. Baqsimi was approved, with a U.S. launch expected in Q3 2019. Lilly also reported ongoing late-stage pipeline development, including tirzepatide and tanezumab; these programs carried development and regulatory uncertainty.
Risks, contingencies, and liquidity
- Generic competition and patent challenges pose material revenue risks, particularly for Alimta and Forteo; management anticipated a rapid and severe U.S. Forteo decline following patent expirations. Cialis had already experienced substantial generic-related erosion.
- Alimta patent litigation remained active across jurisdictions. Lilly stated an adverse U.S. outcome could materially affect future results, liquidity, and financial position; generic entry was already affecting some European revenue.
- Other disclosed matters include insulin-pricing lawsuits and government investigations; Adocia arbitration seeking approximately $1.39 billion, against which Lilly asserted approximately $188 million in counterclaims; and Brazil litigation with an estimated impact of about $130 million. Lilly said it could not reasonably estimate maximum exposure for many matters.
- Pricing, reimbursement, and access policies, foreign exchange, product safety or supply, R&D outcomes, and tax-law developments were identified as risks. The company is self-insured for product-liability losses.
- Lilly said operating cash generation, available cash, and commercial-paper access should support normal operating needs. It had $5.42 billion of committed bank credit facilities, including $5.00 billion available to support commercial paper, and $2.40 billion remaining under its $8.00 billion share-repurchase authorization.
Important facts for investors to verify
- Separate recurring pharmaceutical performance from the $3.7 billion Elanco disposition gain when assessing six-month earnings and EPS.
- Track whether growth in newer products can offset price pressure, currency effects, and erosion from generic competition.
- Monitor Loxo acquisition-related spending, pipeline progress, and the effect of increased debt and reduced cash balances.
- Follow outcomes in Alimta patent proceedings and the Brazil, insulin-pricing, and Adocia matters, including any changes to estimated exposure.
- Compare subsequent results with the 2019 guidance ranges and management’s assumptions for pricing, launches, foreign exchange, and Lartruvo withdrawal.