Eli Lilly and Company — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Lilly is a global pharmaceutical company operating as one reportable segment. Comparisons are with Q1 2023 unless otherwise noted. Financial amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $8.768 billion | $6.960 billion | +26% |
| Gross margin | $7.095 billion; 80.9% of revenue | $5.333 billion; 76.6% | Margin +4.3 percentage points |
| Research and development expense | $2.523 billion | $1.985 billion | +27% |
| Marketing, selling, and administrative expense | $1.952 billion | $1.749 billion | +12% |
| Income before taxes | $2.536 billion | $1.530 billion | +66% |
| Net income | $2.243 billion | $1.345 billion | +67% |
| Diluted earnings per share | $2.48 | $1.49 | +66% |
| Effective tax rate | 11.6% | 12.1% | Down 0.5 percentage points |
Revenue growth reflected higher volume and realized prices. U.S. revenue rose 28% to $5.694 billion; revenue outside the U.S. increased 22% to $3.074 billion. Product growth was led by Mounjaro ($1.807 billion, versus $569 million), newly launched Zepbound ($517 million), and Verzenio ($1.050 billion, +40%). Trulicity revenue fell 26% to $1.456 billion. Lilly attributed gross-margin expansion to higher realized prices, favorable product mix, and, to a lesser extent, lower production costs.
Operating cash flow was $1.166 billion, down from $1.731 billion. Operating cash flow included a $1.751 billion net use from changes in operating assets and liabilities, compared with a $164 million source in Q1 2023. Capital expenditures were $986 million, versus $669 million. Cash and cash equivalents were $2.460 billion at quarter-end, down from $2.819 billion at year-end 2023; total investments were $3.21 billion.
Total debt was $26.21 billion, up about $986 million from December 31, 2023. Lilly issued $6.5 billion of fixed-rate notes in February, with net proceeds of $6.45 billion, primarily for general purposes including repayment of commercial paper and debt maturities. It reported $7.42 billion of unused committed credit facilities, including $7.0 billion available to support commercial paper. The company paid $1.17 billion in dividends ($1.30 per share) and made no share repurchases during the quarter.
Material changes and developments
- Incretin medicines drove substantial growth, but demand exceeded supply. Management said growth in the near to medium term would depend largely on production and shipments; the largest production increases in 2024 were expected in the second half.
- Higher R&D expense included an approximately $75 million charge related to termination of the Verzenio prostate cancer program due to futility. Spending also rose for late-stage development and early-stage research.
- POINT Biopharma, acquired in December 2023 for approximately $1.04 billion net of cash acquired, contributed results that were not material in Q1. Purchase accounting remains preliminary.
- During Q1, Lilly completed implementation of a new global ERP system and was conducting post-implementation activities. Management concluded disclosure controls were effective; changes to processes and procedures remain subject to internal-control evaluation.
Outlook, risks, and contingencies
Outlook: The filing does not provide a clear quantitative full-year earnings or revenue guidance figure. Lilly expects tight incretin supply to persist as production increases are outpaced by demand, with additional manufacturing capacity expected over the next several years. In April 2024, it signed an agreement to purchase a Wisconsin manufacturing facility, targeting commercial production at the end of 2025; the transaction remained subject to customary closing conditions.
Lilly said executed manufacturing and supply agreements could require payments of up to approximately $10 billion if specified purchase amounts are not met over contract terms generally extending up to eight years. It believes cash, operating cash flow, and access to borrowing are sufficient for existing and planned capital requirements, while noting higher capital spending over the next several years.
- Pricing and reimbursement: Government and private-payer cost-containment measures remain a risk. Jardiance was selected for U.S. Medicare government-set pricing effective in 2026; Lilly expects other significant products may be selected in future years.
- Supply and execution: Demand exceeds supply for incretin medicines, creating shipment constraints and affecting launches and patient access. Manufacturing, quality, regulatory, labor, and third-party supply disruptions could also affect results.
- Pipeline and regulatory: Lilly reported approximately 50 candidates in clinical development or regulatory review. It anticipated U.S. regulatory action on Ebglyss by year-end 2024 and an FDA advisory committee meeting on donanemab in mid-2024; outcomes and timing are uncertain.
- Legal matters: Ongoing proceedings include incretin-product liability litigation, insulin-pricing and 340B matters, and other product, patent, and commercial cases. Lilly said it cannot reasonably estimate maximum exposure or losses beyond accrued amounts for certain matters. A Brazil labor case includes an inflation-adjusted award of approximately 1.30 billion reais (about $260 million at March 31, 2024) and a property freeze of about $27 million; appeals and mediation remain ongoing. Potential damages in the RCT manufacturing-process litigation could be material but are not currently reasonably estimable.
- Tax: U.S. IRS examinations for 2016–2018 and 2019–2021 remain ongoing, with resolution likely extending beyond the next 12 months. Lilly did not anticipate a material 2024 impact from global minimum-tax rules, based on its current assessment.
- Other risks: Foreign exchange and interest-rate movements, competition, intellectual-property protection, product safety, cybersecurity, litigation, and changing tax and regulatory requirements could affect results. Management reported no material changes to the risk factors in its 2023 Form 10-K.
Important facts for investors to verify
- Whether incretin production capacity can keep pace with demand, and how shipment constraints affect Mounjaro, Zepbound, and Trulicity sales.
- How much of revenue and margin growth persists after the disclosed Mounjaro savings-card comparison effects diminish in the second half of 2024.
- Cash conversion and working-capital movements, given lower operating cash flow and increased capital expenditure.
- Debt and funding needs alongside planned manufacturing investment, the Wisconsin facility purchase, and potential supply-agreement obligations of up to approximately $10 billion.
- Regulatory decisions and clinical-trial outcomes for key pipeline products, as well as developments in significant litigation and government investigations.