Eli Lilly and Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. All financial amounts are U.S. dollars.
Business context
Lilly reports two operating segments: human pharmaceutical products and animal health products. The quarter’s revenue growth was driven mainly by higher volume from newer medicines, including Trulicity, Taltz, and Basaglar. The filing was signed October 27, 2017.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $5.658 billion | $5.192 billion | $16.711 billion | $15.462 billion |
| Gross margin | $4.092 billion; 72.3% | $3.791 billion; 73.0% | $12.265 billion; 73.4% | $11.273 billion; 72.9% |
| Net income | $555.6 million | $778.0 million | $1.453 billion | $1.966 billion |
| Diluted EPS | $0.53 | $0.73 | $1.37 | $1.85 |
For the nine months, operating cash flow was $3.872 billion, investing cash outflow was $5.437 billion, and financing cash inflow was $684.9 million. Cash and cash equivalents fell to $3.724 billion from $4.582 billion at December 31, 2016. Cash plus short- and long-term investments totaled $13.092 billion at quarter-end.
Total debt was $13.465 billion, up from $10.305 billion at year-end 2016, primarily reflecting $2.232 billion of long-term note issuance and increased commercial paper borrowings. Current assets were $17.428 billion and current liabilities $12.667 billion. Lilly reported $5.17 billion of committed bank credit facilities, of which $5.00 billion supported its commercial paper program. Dividends paid in the first nine months were $1.644 billion.
Changes versus the prior comparable period
- Revenue increased 9% in Q3 and 8% for the first nine months. Growth reflected volume increases; nine-month U.S. revenue rose 13%, while outside-U.S. revenue rose 2%.
- Net income declined 29% in Q3 and 26% year to date; diluted EPS declined 27% and 26%, respectively. Higher acquired in-process research and development (IPR&D) and restructuring and impairment charges were major factors.
- Gross margin percentage fell 0.7 percentage points in Q3, mainly due to foreign exchange effects on international inventories and unfavorable product mix; it increased 0.5 points year to date, supported by manufacturing efficiencies and higher realized prices.
- Q3 acquired IPR&D expense was $205 million; nine-month expense was $1.063 billion, including the CoLucid acquisition and payments related to KeyBioscience and Nektar. Nine-month 2016 results included a $203.9 million Venezuela-related charge, which did not recur in 2017.
- Growth in Trulicity and other newer products was partly offset by declining established products. Effient U.S. generics launched in Q3; Strattera had lost U.S. exclusivity, and Alimta faced generic competition in some markets.
Outlook, management commentary, and risks
- Management expected 2017 revenue of $22.4 billion to $22.7 billion and diluted EPS of $1.73 to $1.83, with EPS guidance reflecting restructuring initiatives. Expected gross margin was approximately 72.5%; R&D expense $5.1 billion to $5.2 billion; marketing, selling, and administrative expense $6.4 billion to $6.6 billion; and tax rate approximately 20%.
- The September 2017 streamlining plan was expected to affect approximately 3,500 positions and generate approximately $1.2 billion in pretax charges. Lilly had recorded $406.5 million in Q3 charges and expected about $800 million of additional charges in Q4. Management was also reviewing strategic alternatives for Elanco, including an IPO, merger, sale, or continued ownership, with an update expected by mid-2018.
- Patent expirations and generic competition pose material revenue risks, notably for Cialis, Alimta, Effient, Strattera, and Zyprexa. Lilly expected generic competition following loss of Cialis exclusivity to cause a rapid and severe revenue decline. U.S. Cialis exclusivity was then expected to end no earlier than late September 2018.
- Alimta patent challenges remain ongoing across jurisdictions. Lilly reported favorable U.S. and U.K. rulings, but outcomes of remaining proceedings are uncertain; the company warned that loss of effective Alimta protection could materially affect results, liquidity, and financial position.
- Other disclosed exposures include product-liability and patent litigation, an appeal of a Brazil employee-litigation ruling that the judge estimated could have a financial impact of about 1.0 billion Brazilian real plus interest, and self-insured product-liability risk. The filing says the maximum potential exposure or range of loss generally cannot be reasonably estimated.
- Additional risks include drug-pricing and reimbursement pressures, foreign-exchange movements, and changes in tax laws. Management stated that cash generated from operations, alongside available cash and investments, was expected to fund normal operating needs.
Important facts for investors to verify
- Whether 2017 revenue and EPS guidance was achieved, particularly after the expected Q4 restructuring charges.
- Actual restructuring costs, timing, workforce effects, and the outcome of the Elanco strategic review.
- Revenue and margin trends for newer products versus erosion from generic competition and patent expirations.
- Developments in Alimta patent proceedings, Cialis exclusivity, and other material litigation, including the Brazil appeal.
- Debt, commercial paper, cash and investments, and operating cash flow after acquisitions, dividends, and capital spending.
- The eventual financial effects of new accounting standards; the filing said the impact of the revenue standard on licensing arrangements and the financial-instrument standard was not yet clear.