Eli Lilly and Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited consolidated results include human pharmaceuticals and animal health.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $4.865 billion | $4.645 billion | +5% |
| Gross margin | $3.542 billion; 72.8% of revenue | $3.452 billion; 74.3% | +3% in dollars; down 1.5 percentage points |
| Research and development | $1.221 billion | $1.039 billion | +17% |
| Marketing, selling, and administrative | $1.474 billion | $1.524 billion | −3% |
| Income before income taxes | $566.8 million | $617.9 million | −8% |
| Net income | $440.1 million | $529.5 million | −17% |
| Diluted EPS | $0.41 | $0.50 | −18% |
| Cash used for operating activities | $326.9 million | $84.8 million | Greater use of cash |
Revenue rose $220.4 million. U.S. revenue increased 16% to $2.556 billion, while revenue outside the U.S. fell 5% to $2.310 billion, including a 6% unfavorable foreign-exchange impact. Growth included Trulicity, Cyramza, Erbitux, and animal health; declines included Cymbalta, in part from European loss of exclusivity, and Humalog.
Operating cash flow was weighed down by a $1.430 billion net outflow from changes in operating assets and liabilities. Investing activities used $145.4 million and financing activities used $816.4 million, including $538.3 million of dividends and $300.1 million of share repurchases. Cash and cash equivalents fell to $2.308 billion from $3.666 billion at year-end.
At March 31, cash and cash equivalents plus short- and noncurrent investments totaled approximately $6.76 billion. Total debt was $8.126 billion ($648.3 million current and $7.478 billion long-term), compared with $7.979 billion at December 31, 2015. Current assets were $11.715 billion and current liabilities $7.341 billion. The company reported approximately $1.2 billion available under its corporate credit facility.
Material changes and management commentary
- Net income and EPS declined despite revenue and gross-margin dollar growth. Management attributed the decline principally to a $203.9 million pretax Venezuela charge, higher operating expenses and taxes; lower 2015 acquired in-process R&D charges partly offset the comparison. The Venezuela charge reflected a change to the exchange rate used for local assets and liabilities, from about 13.5 to 275 bolívar per U.S. dollar.
- R&D expense increased with higher late-stage development costs, including a $55 million baricitinib regulatory-submission milestone. The effective tax rate was 22.4%, versus 14.3% in Q1 2015.
- Special charges were $131.4 million, mainly associated with closure of an animal health manufacturing plant in Ireland and Novartis Animal Health integration. Q1 2015 included $256 million of acquired IPR&D charges and $63.5 million of Novartis AH inventory fair-value adjustment.
- The gross-margin percentage decline reflected a lower foreign-exchange benefit on international inventory and the North American Erbitux rights transfer, partly offset by 2015 Novartis AH inventory step-up costs.
Outlook, risks, and contingencies
Management’s revised 2016 outlook is revenue of $20.6–$21.1 billion; diluted EPS of $2.68–$2.78; gross margin of approximately 73%; R&D expense of $4.9–$5.1 billion; marketing, selling, and administrative expense of $6.1–$6.3 billion; other-net expense of $125–$200 million; tax rate of approximately 21%; and capital expenditures of approximately $1.1 billion. EPS guidance reflects the first-quarter discrete tax benefit and Venezuela charge; revenue guidance reflects recent foreign-exchange movements. Management expects growth from several established and newer products, partly offset by lower Alimta revenue amid competitive pressure.
- Patent and product risks: The filing warns that generic entry could sharply reduce Alimta, Effient, Strattera, Cialis, and Zyprexa revenue. Alimta patent challenges continued, and generic products had launched in a major European market; generic Alimta was also approved in Japan. The company expects Zyprexa generic competition in Japan in mid-2016.
- Legal and other contingencies: Outcomes of significant litigation cannot be determined. An adverse outcome in Alimta proceedings could materially affect future results, liquidity, and financial position. In Brazil employee litigation, the judge estimated potential impact at approximately 1.0 billion reais (about $280 million at March 31) plus interest; the company appealed and could not estimate the reasonably possible loss. Lilly also reported approximately 6,500 U.S. Actos product-liability cases and said it believes Takeda must indemnify it, but cannot guarantee full recovery.
- Commercial and operating risks: Management cited U.S. and international pricing and reimbursement pressure, formulary competition, foreign-exchange volatility, and possible further deterioration in Venezuela. Revenue from Venezuela was expected to be de minimis for the rest of 2016; additional charges remained possible.
- Pipeline and execution: Baricitinib and olaratumab were submitted for regulatory review in Q1. The BACE inhibitor entered Phase III in April; solanezumab’s Phase III primary endpoint changed in March. Development and regulatory outcomes remain uncertain.
Important facts for investors to verify
- Whether full-year revenue and EPS guidance is achieved, particularly after foreign-exchange changes and the Venezuela charge.
- Cash conversion and working-capital movements, given Q1 operating cash outflow and the decline in cash balances.
- Developments and potential commercial effects of Alimta patent proceedings and other expected patent expirations or generic launches.
- Regulatory and trial progress for baricitinib, olaratumab, solanezumab, and other late-stage pipeline products.
- Potential exposure and indemnification outcomes in Brazil employee litigation and Actos-related claims.