Eli Lilly and Company — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars. Lilly operates human pharmaceutical and animal health businesses.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $6.36 billion | $5.82 billion | $12.06 billion | $11.05 billion |
| Gross margin | $4.65 billion; 73.2% | $4.25 billion; 73.0% | $8.78 billion; 72.8% | $8.13 billion; 73.6% |
| Operating expenses (R&D and marketing, selling and administrative) | $2.99 billion | $3.00 billion | $5.66 billion | $5.83 billion |
| Acquired in-process R&D | $1.62 billion | — | $1.62 billion | $857.6 million |
| Net income (loss) | $(259.9) million | $1.01 billion | $957.5 million | $897.2 million |
| Diluted EPS | $(0.25) | $0.95 | $0.92 | $0.85 |
| Operating cash flow | Not presented separately for the quarter | $1.95 billion | $1.99 billion |
Quarterly revenue rose 9%, driven principally by volume growth and favorable foreign exchange; first-half revenue also rose 9%, with higher realized prices contributing. Newer products supported growth, notably Trulicity (Q2 +62%), Taltz (+59%), and Basaglar (revenue of $201.8 million versus $86.6 million). Effient revenue fell 81% and Strattera fell 39%, reflecting generic competition. Cialis revenue declined 14% in Q2 amid competition and loss of exclusivity outside the U.S.
The Q2 net loss chiefly reflects $1.62 billion of acquired IPR&D charges for ARMO, AurKa, and the Sigilon collaboration. ARMO and AurKa charges totaling approximately $1.56 billion were non-deductible, contributing to $264.7 million of Q2 tax expense despite only $4.8 million of pretax income. First-half effective tax rate was 33.8%.
Financial position and cash flows
- At June 30, cash and cash equivalents were $6.82 billion; investments totaled $2.15 billion, down from $7.18 billion at year-end 2017.
- Total debt was $12.22 billion, versus $13.65 billion at December 31, 2017. The company repaid $1.00 billion of long-term debt and reduced commercial paper borrowings. It reported $5.57 billion of committed bank facilities, $5.00 billion of which supported its commercial-paper program.
- First-half investing cash flow was positive $2.96 billion, largely reflecting investment sales and maturities; financing cash flow was negative $4.70 billion, including $2.05 billion of share repurchases and $1.17 billion of dividends.
- Current assets were $18.33 billion and current liabilities $13.06 billion. Sales rebates and discounts accrued were $4.75 billion.
- First-half capital expenditures were $546.5 million. The company stated that operating cash generation and available cash should cover normal operating needs, dividends, repurchases, and capital expenditures.
Material changes, outlook, and management commentary
- Full-year 2018 revenue guidance increased to $24.0–$24.5 billion, attributed to strength across the pharmaceutical portfolio, especially diabetes, and higher collaboration revenue, partly offset by foreign exchange.
- 2018 diluted EPS guidance was $3.19–$3.29, reduced due to higher acquired IPR&D charges associated with ARMO, partly offset by higher revenue. Expected gross margin is approximately 73.5%; R&D expense $5.2–$5.4 billion; marketing, selling and administrative expense $6.2–$6.5 billion; other-net income $75–$200 million; tax rate approximately 22.5%; and capital expenditures approximately $1.2 billion.
- Lilly completed its prior $5.00 billion repurchase program, repurchasing $2.05 billion in the first half, and authorized a new $8.00 billion program in June. No shares had been repurchased under the new authorization by June 30.
- Lilly anticipated filing for a potential IPO of less than 20% of Elanco in the coming weeks, with completion expected in the second half of 2018. Elanco remained a continuing operation at quarter-end. Lilly expected IPO and related Elanco debt-financing proceeds to support debt repayment, dividends, and repurchases.
- Late-stage pipeline developments included U.S. approval and launch of the 2 mg Olumiant dose; Phase III trials initiated for mirikizumab; a positive Phase III episodic cluster-headache result for galcanezumab, but a failed chronic cluster-headache trial; and discontinuation of lanabecestat Phase III trials. Lilly expected to submit lasmiditan to the FDA in the second half of 2018. In July, after quarter-end, it reported positive Phase III primary endpoints for tanezumab and expected a potential 2019 submission.
Risks, contingencies, and unusual items
- Patent and generic exposure: Lilly warned of rapid revenue declines following loss of exclusivity for products including Cialis, Effient, and Strattera. U.S. Cialis exclusivity was expected to end in late September 2018. Alimta faces generic challenges and potential erosion; a German court held its vitamin-regimen patent invalid in July 2018, and Lilly planned to appeal. Generic competitors could launch at risk in European markets.
- Pricing and reimbursement: Government policy proposals, Medicare Part D changes effective in 2019, payer consolidation, formulary restrictions, and pricing pressure could adversely affect sales and cash flows.
- Legal matters: A Brazil employee litigation ruling was expected to have an estimated impact of about $130 million, according to an appeals-court press release; Lilly disputed the decision and planned to appeal. Alimta patent proceedings could materially affect results, liquidity, and financial position. Lilly also described Cymbalta, Byetta, Cialis, insulin-pricing, and antitrust litigation; it is self-insured for product-liability losses on marketed products.
- Tax uncertainty: Accounting for the 2017 U.S. tax law remained incomplete, with potential adjustments still under evaluation. The IRS examination of tax years 2013–2015 was ongoing, and the possible effect could not be reasonably estimated.
- Foreign exchange and other factors: Currency movements affect revenue, costs, and expenses. The filing also identifies regulatory, safety, manufacturing, intellectual-property, cybersecurity, acquisition, and macroeconomic risks.
- Q2 other comprehensive loss was $671.2 million, primarily reflecting foreign-currency translation losses; this reduced comprehensive income beyond the reported net loss.
Important facts for investors to verify
- Whether revenue and demand growth in newer products can offset generic erosion in established products, particularly Cialis, Effient, Strattera, and Alimta.
- Whether ARMO/AurKa-related charges, tax assumptions, and the full-year EPS and revenue outlook develop as management expects.
- Progress and economics of the potential Elanco IPO and debt financing, including Lilly’s use of proceeds.
- Outcomes and timing of Alimta patent challenges, the Brazil litigation appeal, and other material legal proceedings.
- Cash generation, debt reduction, investment balances, and capital returns alongside the new $8 billion repurchase authorization.
- Pipeline trial results, regulatory decisions, and commercial uptake; development outcomes are uncertain and may differ from management expectations.