Eli Lilly and Company — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Lilly operates as one global pharmaceutical segment. Figures are in U.S. dollars.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $9.50 billion | $6.94 billion | $24.77 billion | $21.24 billion |
| Net income (loss) | $(57) million | $1.45 billion | $3.05 billion | $4.31 billion |
| Diluted EPS | $(0.06) | $1.61 | $3.38 | $4.76 |
| Gross margin | 80.4% | 77.3% | 78.6% | 76.1% |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $4.55 billion | $5.92 billion |
Q3 revenue increased 37%; nine-month revenue rose 17%. Growth reflected increased volume, including Mounjaro and Verzenio, and revenue from product-rights sales. Q3 net loss and the nine-month earnings decline chiefly reflected higher acquired in-process research and development (IPR&D), R&D, and commercial expenses. Q3 acquired IPR&D expense was $2.98 billion, largely associated with the DICE, Versanis, and Emergence acquisitions; the related charges were generally nondeductible and contributed to the 113.4% quarterly effective tax rate.
Q3 gross margin improved partly because of product-rights transactions and the absence of COVID-19 antibody sales, as well as higher realized prices; higher manufacturing costs and capacity investment partly offset the improvement. R&D expense rose 34% in Q3 and 30% year to date; marketing, selling, and administrative expense rose 12% and 14%, respectively.
At September 30, cash and cash equivalents were $2.38 billion, total investments were $2.80 billion, and total debt was $20.17 billion, up from $16.24 billion at year-end 2022. Current assets were $23.01 billion and current liabilities $22.00 billion. Lilly reported $7.33 billion of unused committed bank credit facilities, including $7.00 billion available to support commercial paper.
Year-to-date operating cash flow was $4.55 billion. Investing activities used $4.23 billion, including $2.38 billion of property and equipment purchases and $3.36 billion of IPR&D purchases, partly offset by $1.60 billion of proceeds from product-rights sales. Financing activities used $49 million; dividends paid were $3.05 billion and share repurchases were $750 million.
Material changes and notable items
- Revenue mix and one-time effects: Q3 included about $1.42 billion of revenue primarily from the olanzapine portfolio rights sale. Nine-month revenue included $579 million primarily from the Baqsimi rights sale. These transactions make reported growth less representative of product-sales growth alone.
- Product trends: Q3 Mounjaro revenue was $1.41 billion versus $187 million a year earlier; Verzenio rose 68% to $1.04 billion. Trulicity fell 10% to $1.67 billion, and no COVID-19 antibody revenue was recorded, versus $387 million in Q3 2022. Nine-month Alimta revenue fell 75%, reflecting generic competition.
- Acquisitions and debt: Lilly completed the DICE, Versanis, and Emergence acquisitions in Q3 for an aggregate $2.98 billion, net of cash acquired. It issued $4.00 billion of long-term notes in February and used the proceeds for general purposes, including repayment of commercial paper.
- Cash returns: Lilly paid $3.05 billion of dividends and repurchased $750 million of shares during the first nine months. The share-repurchase program had $2.50 billion remaining at quarter-end.
Outlook, commentary, and risks
- Supply and investment: Management said demand for incretin medicines, including Mounjaro and Trulicity, continued to exceed supply, causing intermittent order delays and supply constraints in international markets. Tight supply is expected to persist while capacity is brought online over the next several years. Planned facility investments are expected to produce capital expenditures exceeding $8 billion over that period.
- Contractual exposure: Certain manufacturing and supply agreements could require payments of up to approximately $8.5 billion if specified purchase commitments are not met, over contract terms generally ranging from two to eight years.
- Pipeline and regulatory developments: Tirzepatide for obesity was under regulatory review in the U.S. and EU, with Phase III trials ongoing. Donanemab was submitted for approval in the U.S., EU, and Japan. In October 2023, Lilly reported an FDA complete response letter for lebrikizumab based on third-party manufacturer inspection findings; the filing says the FDA stated no concerns about the clinical data, safety, or label. A Phase II trial of a BTLA antibody for lupus was discontinued after failing to demonstrate efficacy.
- Pricing and reimbursement: Lilly cited ongoing payer and government pricing pressure. Jardiance was selected among the first ten medicines subject to U.S. Medicare government-set prices effective in 2026; management expects additional significant products could be selected in future years. Lilly also expects Humalog revenue pressure from lower realized prices, competition, and affordability programs.
- Legal and regulatory matters: Matters include insulin-pricing litigation and investigations, 340B program disputes, patent litigation, and a Brazil labor/environmental case. The company said it cannot estimate maximum exposure or possible losses beyond accruals for certain matters; an adverse RCT manufacturing-process litigation award could be material but is not currently reasonably estimable. Lilly is self-insured for litigation liability losses on current and previously marketed products.
- Other forward-looking risks: The filing highlights clinical and regulatory uncertainty, product safety, manufacturing quality and supply, patent expiry and competition, acquisitions, cybersecurity, foreign exchange, interest rates, taxes, and global economic and geopolitical conditions. Management provided no consolidated numerical earnings or revenue guidance in the supplied filing text.
- Subsequent event: In October 2023 Lilly announced a proposed cash acquisition of POINT Biopharma for approximately $1.4 billion, subject to customary conditions and approvals.
Important facts for investors to verify
- How much of revenue growth and gross-margin improvement is attributable to product-rights sales versus ongoing product demand and pricing.
- Whether manufacturing expansion can relieve incretin supply constraints, and how the disclosed potential $8.5 billion purchase-commitment exposure develops.
- The trajectory of Mounjaro and Verzenio growth against Trulicity, insulin, and legacy-product pricing and generic pressures.
- Progress, regulatory outcomes, and commercial potential for major pipeline assets, including tirzepatide for obesity, donanemab, and lebrikizumab.
- The eventual impact of Medicare price setting, other payer actions, and the material legal and regulatory matters described in the filing.
- Funding and closing conditions for the proposed POINT acquisition, alongside planned capital spending, debt, dividends, and remaining repurchase authorization.