Eli Lilly and Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Lilly is a global pharmaceutical company reporting as one operating segment. Comparisons are with Q1 2019 unless noted.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $5.86 billion | $5.09 billion | +15%; volume growth partly offset by lower realized prices and foreign exchange |
| Gross profit / margin | $4.64 billion / 79.3% | $3.95 billion / 77.6% | Margin up 1.7 percentage points |
| Research and development expense | $1.39 billion | $1.23 billion | +13%, reflecting higher late-stage development costs |
| Net income from continuing operations | $1.46 billion | $561 million | 2020 comparison benefits from lower special charges in 2019-comparable operations |
| Diluted EPS from continuing operations | $1.60 | $0.57 | 2019 EPS also affected by Loxo-related charges and taxes |
| Net income / diluted EPS, total | $1.46 billion / $1.60 | $4.24 billion / $4.31 | 2019 included approximately $3.7 billion gain on Elanco disposition |
| Operating cash flow | $382 million | $311 million | Cash collections timing affected the comparison |
| Cash and cash equivalents | $1.70 billion | $2.34 billion at Dec. 31, 2019 | Quarter-end balance |
| Total debt | $17.23 billion | $15.32 billion at Dec. 31, 2019 | Increase primarily related to Dermira acquisition |
| Current assets / current liabilities | $13.99 billion / $12.61 billion | — | Current ratio approximately 1.11 |
Lilly reported $2.23 billion of investments at quarter-end, in addition to cash. Capital expenditures were $258 million, making operating cash flow less capital expenditures approximately $124 million. The company paid $671 million in dividends and repurchased $500 million of shares during the quarter.
Revenue and material changes
- Revenue growth was driven by volume: worldwide volume rose 22%, while price reduced growth by 6 percentage points; foreign exchange reduced growth by 1 point.
- COVID-19-related buying and prescription patterns increased Q1 revenue by an estimated $250 million—approximately $200 million in the U.S. and $50 million outside the U.S. Management cautioned that this demand could reverse as customers destock.
- Notable product growth included Trulicity (+40% to $1.23 billion), Taltz (+76% to $444 million), Verzenio (+72% to $188 million), and Olumiant (+70% to $140 million). Cialis revenue fell 37% to $193 million, reflecting generic competition; Humalog fell 5% to $696 million.
- Gross margin improved due primarily to the prior-year Lartruvo withdrawal-related charges, favorable product mix, and manufacturing efficiencies, partly offset by lower realized prices.
- In February, Lilly acquired Dermira for approximately $849 million net of cash acquired, obtaining investigational lebrikizumab and Qbrexza. The acquisition contributed to debt growth; preliminary acquired intangible assets were $1.21 billion.
- Quarterly results also included $52 million of acquired in-process R&D charges related to Sitryx, $60 million of acquisition and integration-related special charges, and $89 million of other income. Other income included higher investment gains, particularly on two companies developing potential COVID-19 vaccines.
Outlook, risks, and contingencies
- 2020 guidance: revenue of $23.7–$24.2 billion, diluted EPS of $6.20–$6.40, gross margin approximately 79%, R&D expense of $5.6–$5.9 billion, marketing, selling and administrative expense of $6.2–$6.4 billion, and an effective tax rate of approximately 15%.
- Guidance assumes Q1 COVID-related demand gains will largely reverse during 2020; new-to-brand prescription declines peak in Q2; healthcare activity improves in the second half; clinical-trial activity resumes in the second half; and affordability programs and unemployment pressure U.S. pricing.
- COVID-19 risks include disrupted clinical trials and regulatory reviews, reduced physician visits and prescriptions, potential supply-chain disruption, and further pricing pressure. Lilly said operations and liquidity had not been materially harmed through Q1. Mirikizumab trial timing was expected to be delayed; most other late-stage trials were continuing.
- Patent exposure is significant. Generic Alimta entry could rapidly reduce product revenue; litigation outcomes remain uncertain. Lilly also cited ongoing generic and biosimilar pressure for products including Forteo, Cialis, and insulin lispro.
- Legal matters include Alimta patent challenges, insulin-pricing litigation and government inquiries, and Brazilian labor litigation. The estimated impact of the Brazilian ruling was approximately $95 million, with appeals and enforcement proceedings ongoing. Lilly stated that outcomes for various matters cannot be determined; it is self-insured for product liability.
- In April 2020, Lilly agreed to issue $1.00 billion of 2.25% notes due 2050, expected to close in May. It also made a $200 million discretionary pension contribution in April.
Investor facts to verify
- Whether COVID-related Q1 demand reverses as assumed, and the resulting effect on prescriptions, revenue, and margins.
- Progress toward full-year revenue and EPS guidance, including pricing, product mix, and the assumed recovery in healthcare activity.
- Clinical and regulatory progress for key pipeline assets, particularly lebrikizumab, mirikizumab, tirzepatide, and selpercatinib.
- Alimta patent litigation and generic-entry timing, as well as other material patent and pricing proceedings.
- Post-Dermira debt, cash generation, and liquidity; quarter-end debt rose while cash declined.
- Acquisition accounting for Dermira, including final valuation of acquired assets, liabilities, and tax exposures; the reported purchase accounting was preliminary.