Eli Lilly and Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Comparisons are with Q1 2016 unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
Lilly operates human pharmaceutical and animal health businesses. Revenue increased 7%, led by volume growth in newer medicines, including Trulicity and Taltz, and by other pharmaceutical products. U.S. revenue rose 15%; revenue outside the U.S. declined 1%, reflecting foreign-exchange effects and generic competition.
- Revenue: $5.23 billion, up from $4.87 billion. Human pharmaceutical revenue was $4.46 billion; animal health revenue was $769 million.
- Product trends: Trulicity revenue rose to $373 million from $144 million; Humalog to $708 million from $606 million; Cyramza to $171 million from $131 million. Alimta fell to $490 million from $564 million, Zyprexa to $148 million from $213 million, and Cialis to $534 million from $577 million.
- Profitability: Gross margin was $3.90 billion, or 74.6% of revenue, versus $3.54 billion and 72.8%. Research and development expense was $1.24 billion; marketing, selling, and administrative expense was $1.54 billion.
- Net result: Net loss was $111 million, or $0.10 per diluted share, versus net income of $440 million, or $0.41 per diluted share. The principal driver was an $858 million acquired in-process research and development charge for CoLucid, which was not tax-deductible. Income tax expense was $172 million despite pretax income of $61 million.
- Cash flow: Operating cash flow was $340 million, compared with cash used of $219 million. Investing activities used $1.43 billion, including acquisition payments; financing activities used $876 million, including dividends of $547 million and long-term debt repayments of $630 million.
- Liquidity and debt: Cash and cash equivalents were $2.62 billion at quarter-end, down from $4.58 billion at year-end 2016. Cash plus total investments was $8.81 billion, versus $11.24 billion at year-end. Total debt was approximately $10.25 billion, compared with $10.31 billion. Lilly reported $5.17 billion of committed credit facilities, including $5.00 billion available to support commercial paper.
- Dividends and repurchases: Quarterly dividends paid were $0.52 per share. Lilly repurchased $60 million of shares and reported $2.35 billion remaining under its announced repurchase program.
Material changes and notable items
- CoLucid was acquired in March for $831.8 million, net of cash acquired; the acquisition principally added lasmiditan, a Phase III migraine candidate. The associated $857.6 million acquired IPR&D expense was charged immediately.
- Lilly acquired Boehringer Ingelheim Vetmedica’s U.S. feline, canine, and rabies vaccine portfolio and related assets for $882.1 million. The acquired business contributed $40.8 million of Q1 revenue; purchase accounting valuations remain preliminary.
- Restructuring and other special charges increased to $214 million from $131 million, primarily due to severance, integration costs, impairments, and site closures.
- Other-net was income of $15 million, versus expense of $149 million in Q1 2016, which included a $204 million Venezuela-related charge.
- Management attributed the gross-margin improvement primarily to manufacturing efficiencies. Operating expenses rose 3%, mainly reflecting higher marketing and selling costs for newer products.
Outlook, risks, and contingencies
- 2017 outlook: EPS guidance was revised to $2.60–$2.70, primarily due to severance costs. Revenue guidance remained $21.8–$22.3 billion; gross margin was expected to be approximately 73.5%. R&D expense guidance was $4.9–$5.1 billion, marketing, selling, and administrative expense $6.4–$6.6 billion, tax rate approximately 24.5%, and capital expenditures approximately $1.2 billion.
- Management expected growth from animal health and products including Trajenta, Forteo, Humalog, Trulicity, Taltz, Basaglar, Cyramza, Jardiance, and Lartruvo. These are expectations, not guarantees.
- Generic-entry exposure is significant: management identified upcoming U.S. loss of protection for Strattera (May 2017), Effient (October 2017, with an authorized generic potentially entering in August), and Cialis (November 2017); it expects affected-product revenues to decline rapidly. Alimta faces generic competition and ongoing patent challenges; an adverse outcome could materially affect results, liquidity, and financial position.
- Other material legal matters include Actos and Cymbalta product-liability claims, insulin-pricing litigation and government inquiries, and Brazilian employee litigation. For the Brazil matter, the court estimated a potential impact of approximately 1.0 billion Brazilian real (about $315 million at March 31, 2017) plus interest; Lilly disputes the ruling and cannot estimate its reasonably possible loss.
- Lilly stated that it is self-insured for product-liability losses on currently marketed products. Pricing, reimbursement, healthcare-policy, foreign-exchange, tax-law, and regulatory changes may also affect results. Management reported no material change to the risk factors in its 2016 Form 10-K.
- The FDA issued a complete response letter for Olumiant in the U.S. in Q2 2017, after quarter-end; timing of resubmission depends on further discussions with the FDA. The filing also noted ongoing late-stage pipeline trials, including for abemaciclib, galcanezumab, and lasmiditan.
Important facts for investors to verify
- Whether 2017 EPS guidance remains $2.60–$2.70 and revenue guidance $21.8–$22.3 billion, and how restructuring costs affect the outlook.
- Progress and commercial prospects for newer products and pipeline candidates, particularly the U.S. regulatory path for Olumiant.
- Timing and impact of generic competition for Strattera, Effient, Cialis, and Alimta, including outcomes of Alimta patent proceedings.
- Cash generation and liquidity after acquisitions, dividends, and debt repayments; confirm the composition and availability of reported investments and credit facilities.
- Final purchase accounting for the BIVIVP acquisition and developments in the Brazil litigation, insulin-pricing investigations, and other material legal matters.