Eli Lilly and Company — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2018; comparisons are with the quarter and nine-month period ended September 30, 2017. Amounts are in U.S. dollars. Lilly reports human pharmaceutical and animal health segments.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $6.062 billion | $5.658 billion | $18.117 billion | $16.711 billion |
| Gross margin | $4.500 billion | $4.072 billion | $13.281 billion | $12.205 billion |
| Gross margin as % of revenue | 74.2% | 72.0% | 73.3% | 73.0% |
| Net income | $1.150 billion | $556 million | $2.107 billion | $1.453 billion |
| Diluted EPS | $1.12 | $0.53 | $2.03 | $1.37 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $4.076 billion | $3.872 billion |
- Revenue grew 7% in Q3 and 8% year to date. Growth was primarily volume-driven; Q3 price and foreign-exchange effects partly offset volume gains. U.S. revenue rose 11% in Q3, while revenue outside the U.S. rose 2%.
- Q3 growth leaders included Trulicity (+55%), Taltz (+74%), and Basaglar (+38%). Cialis (-17%), Strattera (-28%), and Forteo (-12%) declined, largely reflecting generic competition or lower demand. Nine-month revenue increased 65% for Trulicity and 63% for Taltz.
- Gross margin improvement reflected manufacturing efficiencies and, in Q3, product mix and foreign exchange, partly offset by pricing. R&D expense was $1.343 billion in Q3 and $3.853 billion year to date; marketing, selling, and administrative expense was $1.617 billion and $4.770 billion, respectively.
- Reported earnings included acquired in-process R&D charges of $30 million in Q3 and $1.655 billion year to date, including $1.56 billion of nondeductible charges related to ARMO and AurKa. Special and restructuring charges were $83 million in Q3 and $236 million year to date.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $8.960 billion, versus $6.536 billion at year-end 2017. Short- and long-term investments totaled approximately $2.082 billion, down from $7.177 billion.
- For the first nine months, operating cash flow was $4.076 billion; investing activities provided $2.565 billion; and financing activities used $4.265 billion. Financing included $3.051 billion of share repurchases and $1.739 billion of dividends paid.
- Total debt was $12.68 billion, compared with $13.65 billion at December 31, 2017. Lilly reported $5.57 billion in committed bank credit facilities, of which $5.00 billion supported its commercial paper program; $3.80 billion of facilities were due to expire before year-end 2018. Management said operating cash generation and available cash should fund normal needs.
- Elanco’s IPO and related debt transactions provided approximately $4.2 billion of consideration intended for debt repayment, dividends, and/or repurchases. Lilly continued to consolidate Elanco and reported a $1.02 billion noncontrolling interest. Approximately $300 million of consolidated cash was retained by Elanco for working capital.
Material developments, outlook, and risks
- Outlook: Lilly raised the low end of its 2018 revenue forecast, projecting $24.3–$24.5 billion in revenue and diluted EPS of $3.04–$3.09. It expected gross margin of about 73.5%, R&D expense of $5.2–$5.4 billion, marketing and administrative expense of $6.3–$6.5 billion, other-net income of $75–$200 million, a tax rate of about 22.5%, and capital spending of approximately $1.2 billion. Management attributed the revenue outlook change to strong pharmaceutical portfolio performance, particularly in diabetes.
- Elanco separation: Elanco completed an IPO of 19.8% of its shares on September 24, 2018. Lilly intended to distribute some or all of its remaining interest but had no obligation to complete a distribution or do so by a specified date. Completion could depend on regulatory approvals, market conditions, and tax-related conditions.
- Pipeline: Emgality was approved and launched in the U.S. for migraine prevention; nasal glucagon and lasmiditan had been submitted to the FDA. Lilly reported positive Phase III results for flortaucipir and tanezumab, while lanabecestat trials were discontinued. In October 2018, Lilly reported Phase III primary-endpoint results for ultra-rapid lispro and expected regulatory submissions in 2019.
- Patent and pricing exposure: Generic tadalafil entered the U.S. market in September 2018; Lilly expected continued material declines in Cialis revenue. Forteo patent expirations in the U.S. and major European markets were approaching, with a rapid and severe U.S. decline expected. Generic challenges to Alimta patents remained ongoing; Lilly warned that loss of effective protection could sharply reduce product revenue. Pricing, rebates, payer access, and government cost-control actions were also identified as risks.
- Legal and other contingencies: Lilly disclosed ongoing Alimta patent proceedings and product-liability matters, among others. A Brazil employee-litigation appeals ruling was estimated to have a financial impact of approximately 500 million Brazilian real (about $125 million); Lilly planned to appeal. Adocia sought approximately $1.8 billion in a separate arbitration that Lilly said it would vigorously defend. Lilly stated that it could not reasonably estimate maximum exposure or possible losses beyond accruals for the matters generally; it is self-insured for product-liability losses.
- Tax and unusual items: The 2017 U.S. tax reform accounting remained incomplete, with completion expected by December 2018; updates could materially change provisional adjustments or the estimated tax rate. The nine-month effective tax rate was 26.2%, affected by nondeductible acquisition-related charges. A $28 million pension curtailment gain was recorded in 2018.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether 2018 revenue and EPS guidance were achieved, and whether growth from newer products offset price pressure and declining legacy-product sales.
- Progress and terms of any Elanco share distribution, including tax-free treatment and the use of Elanco-related proceeds.
- Generic-entry timing and outcomes in the Alimta proceedings, and the revenue impact of Cialis and forthcoming Forteo exclusivity losses.
- Pipeline trial and regulatory outcomes, especially for Emgality, lasmiditan, nasal glucagon, tanezumab, and ultra-rapid lispro.
- Final tax-reform accounting and the resolution, accruals, and potential cash effects of significant litigation and other contingencies.