Eli Lilly and Company: 2019 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2019; the filing also reports unaudited fourth-quarter results. Lilly is a global human-pharmaceutical company operating as one segment. It completed the disposition of its remaining Elanco ownership in March 2019; Elanco is presented as discontinued operations for all periods shown.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $22.32 billion | $21.49 billion |
| Gross margin | $17.60 billion; 78.8% of revenue | $16.81 billion; 78.2% |
| Research and development | $5.60 billion | $5.05 billion |
| Marketing, selling and administrative | $6.21 billion | $5.98 billion |
| Income from continuing operations | $4.64 billion; diluted EPS $4.96 | $3.15 billion; diluted EPS $3.05 |
| Net income, including discontinued operations | $8.32 billion; diluted EPS $8.89 | $3.23 billion; diluted EPS $3.13 |
| Cash from operating activities | $4.84 billion | $5.52 billion |
| Cash and cash equivalents at year-end | $2.34 billion | $7.32 billion |
| Total debt at year-end | $15.32 billion | $10.30 billion |
At December 31, 2019, current assets were $13.71 billion and current liabilities were $11.78 billion. Lilly also held $2.06 billion of investments and had $5.21 billion of unused committed bank credit facilities. The filing states that cash, operating cash flow and available borrowing capacity should be sufficient for normal operating needs.
Fourth quarter: Revenue was $6.11 billion versus $5.64 billion in Q4 2018. Income from continuing operations was $1.50 billion versus $1.12 billion; diluted EPS from continuing operations was $1.64 versus $1.10.
Material changes and unusual items
- Annual revenue rose 4%, primarily on higher volume, partly offset by lower realized prices and unfavorable foreign exchange. U.S. revenue increased 3% and revenue outside the U.S. increased 5%.
- Growth products included Trulicity (+29% revenue), Taltz (+46%), Basaglar (+39%), and Jardiance (+43%). Revenue fell sharply for Cialis (-52%) and Strattera (-46%) amid generic competition; Forteo declined 11% and Humalog 6%.
- 2019 net income included a $3.7 billion gain from the Elanco disposition. The increase in net income and EPS therefore substantially reflects this one-time item; continuing-operations income is a more comparable measure. EPS also benefited from lower weighted-average shares following the exchange offer and share repurchases.
- Other notable items included $239.6 million of acquired in-process R&D charges, $575.6 million of impairment, restructuring and special charges (principally accelerated vesting of Loxo employee awards), a $309.8 million gain from selling the China antibiotics business, and a $252.5 million debt-extinguishment loss.
- Loxo was acquired for approximately $6.9 billion. The company reported $4.60 billion of acquired in-process R&D related to selpercatinib, then an investigational cancer medicine.
- Cash from operations declined year over year. Cash uses included the Loxo acquisition, $4.40 billion of share repurchases and $2.41 billion of dividends paid. Total debt increased by approximately $5.02 billion.
Outlook, risks and contingencies
For 2020, management expected revenue of $23.7–$24.2 billion and diluted EPS of $6.18–$6.28, including the anticipated Dermira acquisition. Expected revenue growth from newer products and the Reyvow launch was forecast to be partly offset by patent-loss products and low-single-digit net price declines in the U.S., as well as price declines in China, Japan and Europe. Expected gross margin was approximately 79%; R&D expense $5.6–$5.9 billion; marketing, selling and administrative expense $6.2–$6.4 billion; and an effective tax rate of approximately 15%.
- Patent and competition exposure: Generic competition is eroding Cialis and other products. Lilly expected further Forteo pressure and warned of future Alimta revenue declines. A U.S. settlement permits limited generic Alimta entry from February 2022 and unlimited entry from April 2022; challenges to other Alimta patents remained active.
- Pricing and access: Government rebates, payer bargaining, formulary restrictions and patient affordability programs pressure realized prices. Lilly faced insulin-pricing litigation and government inquiries and is self-insured for product liability losses.
- Legal matters: The filing describes ongoing patent, product-liability and pricing matters, as well as litigation concerning the former Cosmopolis facility in Brazil. The estimated financial impact of the Brazil ruling was approximately $125 million, subject to appeal and related proceedings. Management stated that, except for the Alimta matters noted, it could not estimate maximum exposure or possible losses beyond accruals.
- Pipeline and execution: Development and regulatory outcomes remain uncertain. The filing reported about 45 drug candidates in human testing or under regulatory review. A Phase III trial of solanezumab for dominantly inherited Alzheimer’s disease missed its primary endpoint; Lartruvo was withdrawn after its confirmatory trial failed to show clinical benefit.
- Other material risks include manufacturing or supplier disruption, product safety findings, foreign-exchange and tax uncertainty, cyber incidents, and the ability to develop commercially successful medicines before exclusivity losses.
Important facts for investors to verify
- Separate recurring pharmaceutical performance from the $3.7 billion Elanco disposition gain when assessing 2019 earnings and EPS.
- Track realized pricing, rebates and volume for Trulicity, insulin products and other key growth brands, alongside generic or biosimilar entry and patent litigation outcomes.
- Compare 2020 guidance with reported results, including the effect of Dermira and the assumed price declines and product launches.
- Monitor operating cash flow, debt, cash balances, share repurchases, dividends and acquisition-related spending.
- Review the progress and regulatory outcomes for late-stage pipeline assets, particularly selpercatinib, tirzepatide, tanezumab and ultra-rapid lispro, and developments in material litigation.