Eli Lilly and Company — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. Lilly operates in human pharmaceuticals and animal health.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $4.96 billion | $4.88 billion | $14.58 billion | $14.49 billion |
| Gross margin | $3.72 billion; 75.1% | $3.61 billion; 74.0% | $10.94 billion; 75.0% | $10.81 billion; 74.6% |
| Net income | $799.7 million | $500.6 million | $1.93 billion | $1.96 billion |
| Diluted EPS | $0.75 | $0.47 | $1.81 | $1.82 |
| Operating cash flow | Not provided for quarter | $1.97 billion | $3.02 billion |
- Q3 operating expenses (R&D plus marketing, selling and administrative) declined 7% to $2.72 billion; nine-month expenses declined 3% to $8.09 billion.
- At September 30, cash and cash equivalents were $3.24 billion, short-term investments $1.08 billion, and noncurrent investments $4.10 billion. Total debt was approximately $8.08 billion, versus $8.02 billion at year-end 2014. Lilly reported approximately $1.2 billion available under credit facilities.
- Nine-month cash flows included $5.29 billion of net acquisition payments, $1.59 billion of dividends, and $496.6 million of share repurchases. Cash decreased $632.8 million during the period.
Material changes and business developments
- Q3 revenue rose 2%; nine-month revenue rose 1%. U.S. sales increased 14% in Q3 and 9% year to date, while revenue outside the U.S. fell 9% and 6%, respectively, with foreign exchange a major drag.
- Novartis Animal Health, acquired January 1 for approximately $5.28 billion, contributed $255.5 million of Q3 revenue and $760.0 million for the first nine months. Animal-health revenue increased 33% in Q3 and 38% year to date, primarily reflecting the acquisition.
- Product trends included nine-month declines in Cymbalta (36%), Alimta (10%), Zyprexa (9%), and Evista (47%); Cyramza and Trulicity grew from comparatively new product launches. Lilly attributed Cymbalta and Evista declines principally to generic competition and Alimta declines to competition and foreign exchange.
- Nine-month net income and EPS were slightly lower despite modest revenue and gross-margin growth. Higher acquired R&D charges, debt-repurchase costs, and restructuring and impairment charges offset lower operating expenses and a lower effective tax rate. Q3 net income and EPS rose 60%, helped by lower operating costs and no acquired IPR&D charge in the quarter.
Outlook, commentary, and risks
- 2015 guidance: revenue of $19.7–$20.0 billion; diluted EPS of $2.40–$2.45; gross margin approximately 74.5%; R&D expense $4.6–$4.8 billion; marketing, selling and administrative expense $6.4–$6.6 billion; other-net income of $50–$75 million; tax rate approximately 16.5%; and capital expenditures approximately $1.1 billion. Guidance excludes the October 2015 Locemia intranasal-glucagon acquisition.
- Pipeline developments included Phase III progress for baricitinib, ixekizumab, abemaciclib, solanezumab and tanezumab. Lilly disclosed that it discontinued evacetrapib development in October and delayed a basal insulin peglispro filing while evaluating observed liver-fat changes.
- Patent exposure is material: generic entry has sharply reduced Cymbalta and Evista revenue; Lilly expected loss of exclusivity for Alimta in certain markets and Zyprexa in Japan. Alimta patent litigation remained unresolved, although certain U.S. and European decisions were favorable to Lilly. Effient patent challenges also continued.
- Other contingencies include approximately 6,500 U.S. Actos product-liability cases; Takeda’s proposed resolution had more than 96% claimant participation as of September, subject to review. Lilly also disclosed Byetta and Prozac claims and a Brazil employee case for which a local court estimated potential impact at about $250 million plus interest; the company appealed. Lilly said it could not reasonably estimate maximum exposure for various proceedings.
- A U.S. government inquiry concerns Lilly’s treatment of certain wholesaler distribution-service agreements in calculating Medicaid Average Manufacturer Prices; Lilly said it was responding voluntarily. Lilly also reported certain Iran shipments transported on Iran Air aircraft by a third-party logistics provider, made no direct payments to the carrier, and voluntarily disclosed the matter to U.S. authorities.
- Management cited foreign-exchange volatility, pricing and reimbursement pressure, payer consolidation, and potential patent-driven revenue declines as risks. The filing reported no material changes to the risk factors in the 2014 Form 10-K.
Most important facts for investors to verify
- Whether full-year guidance is achieved, particularly EPS, revenue, and the assumed tax-credit benefits.
- Underlying animal-health growth excluding Novartis AH and the extent to which foreign-exchange effects persist.
- Patent litigation outcomes and timing of generic competition for Alimta and Effient, plus the effect of Zyprexa’s Japanese patent expiry.
- Clinical and regulatory progress for major pipeline candidates, including baricitinib, solanezumab, tanezumab, and basal insulin peglispro.
- Integration costs, purchase-accounting adjustments, and final Novartis AH acquisition valuations; also the financial terms and accounting for the October Erbitux rights transfer.
- Resolution of the Actos settlement, Brazil litigation, and the Medicaid pricing inquiry, including any resulting cash or earnings impact.