Eli Lilly and Company — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Lilly is a global pharmaceutical company reporting as one operating segment.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $5.50B | $5.64B | $11.36B | $10.73B |
| Gross margin | $4.28B; 77.8% | $4.51B; 80.0% | $8.92B; 78.5% | $8.47B; 78.9% |
| Net income from continuing operations | $1.41B | $1.33B | $2.87B | $1.89B |
| Diluted EPS from continuing operations | $1.55 | $1.44 | $3.15 | $1.98 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $2.88B | $1.36B |
Q2 revenue fell 2% year over year, reflecting lower realized prices partly offset by volume growth. First-half revenue rose 6%, primarily on volume growth, partly offset by lower prices and foreign exchange. Q2 continuing-operations net income increased 6% and diluted EPS increased 8%; higher investment-related income was a major contributor. First-half continuing-operations net income increased 52%, while total net income fell 48% because first-half 2019 included the approximately $3.7B Elanco disposition gain. First-half 2020 cash from operations benefited from the absence of that noncash gain and changes in operating assets and liabilities.
Q2 other-net income was $446.9M, compared with $32.4M of expense a year earlier; first-half other-net income was $536.0M versus $53.6M. Lilly attributed the improvement primarily to favorable mark-to-market gains on equity investments. Research and development expense was $1.39B for Q2 and $2.78B for the first half; marketing, selling, and administrative expense was $1.45B and $3.00B, respectively. Acquired in-process R&D charges were $241.8M in Q2 and $294.1M in the first half.
Liquidity, debt, and capital allocation
At June 30, 2020, cash and cash equivalents were $2.37B and total investments were $2.43B. Total debt was approximately $16.33B, up from $15.32B at year-end 2019, primarily following a $1.00B issuance of 2.25% notes due 2050. Current liabilities were $11.99B and current assets were $14.58B. Lilly reported $5.21B in committed bank credit facilities, including $5.00B available to support commercial paper. Management said cash generation, existing cash, and debt-market access should fund operating needs and other planned uses.
Operating cash flow for the first half was $2.88B; investing activities used $1.27B and financing activities used $1.57B. Lilly paid $1.35B in dividends and repurchased $500M of shares during the first half. No shares were repurchased in Q2; $1.00B remained under the authorized repurchase program at June 30. A third-quarter dividend of $0.74 per share was declared, payable September 10, 2020.
Business developments, outlook, and risks
- COVID-19: Lilly estimated a roughly $250M Q2 revenue impact from delayed new-patient prescriptions and a further roughly $250M from reduced customer buying that largely offset Q1 stocking. The first-half impact from delayed prescriptions was estimated at roughly $250M. Management reported that operations were largely maintained and liquidity had not been negatively affected, but warned that prolonged disruption could affect demand, supply, trials, profitability, and cash flows.
- 2020 outlook: Full-year revenue guidance remained $23.7B–$24.2B; diluted EPS guidance was $6.48–$6.68. Gross margin was expected to be approximately 78%; R&D expense $5.6B–$5.9B; marketing, selling, and administrative expense $6.0B–$6.2B; other-net income $350M–$500M; and the effective tax rate approximately 14%. Guidance depended on assumptions about healthcare activity and prescription recovery, clinical-trial resumption, and continued COVID-19 investment.
- Growth drivers and pipeline: Trulicity, Taltz, Verzenio, Jardiance, and Olumiant posted notable first-half growth. FDA approved Retevmo under accelerated approval and Tauvid in Q2; Lyumjev was approved in the U.S. Tirzepatide trials continued, while mirikizumab trials could be delayed by enrollment disruption. Management cited about 40 potential new drugs in human testing or regulatory review.
- Competition and pricing: U.S. price declines, rebates, affordability programs, payer mix, and international price controls weighed on realized prices. Generic competition and loss of exclusivity threaten products including Forteo, Alimta, and Cymbalta; Humalog also faces ongoing pricing and market-share pressure.
- Legal and other contingencies: Alimta patent disputes remain important; an unfavorable U.S. outcome could materially affect results, liquidity, and financial position. Other matters include Jardiance, Taltz, and Emgality patent litigation; insulin-pricing litigation and investigations; and Brazil litigation with an estimated impact of about 500M Brazilian real (approximately $90M), subject to ongoing proceedings. Lilly said outcomes and potential losses are not generally estimable, and it is self-insured for product liability.
Most important facts for investors to verify
- Whether delayed prescriptions and reduced customer buying persist, and whether the assumptions underlying 2020 guidance are achieved.
- How much reported earnings depend on investment mark-to-market gains, rather than product and operating performance.
- Progress and commercial uptake for growth products and late-stage pipeline assets, including Retevmo and tirzepatide.
- Developments in Alimta patent protection, product-pricing policy, and other material litigation or investigations.
- Debt and liquidity trends, including the impact of acquisitions, dividends, and share repurchases.