Eli Lilly and Company — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Lilly discovers, develops, manufactures, and sells human pharmaceuticals and animal-health products worldwide.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $22.87 billion | $21.22 billion | +8% |
| Gross margin | $16.80 billion; 73.5% of revenue | $15.57 billion; 73.4% | +8% in dollars |
| Income before income taxes | $2.20 billion | $3.37 billion | -35% |
| Net income (loss) | ($204 million) | $2.74 billion | Turned to a loss |
| Diluted EPS | ($0.19) | $2.58 | Turned to a loss |
| Cash from operating activities | $5.62 billion | $4.85 billion | +16% |
| Capital expenditures | $1.08 billion | $1.04 billion | +4% |
Fourth-quarter revenue was $6.16 billion, up from $5.76 billion in fourth-quarter 2016. The quarter recorded a net loss of $1.66 billion, or diluted EPS of ($1.58), including $1.94 billion of income tax expense, primarily associated with the 2017 Tax Act.
Cash and cash equivalents were $6.54 billion at year-end, with total investments of $7.18 billion. Total debt was $13.65 billion, up from $10.31 billion; current liabilities were $14.54 billion and current assets were $19.20 billion. Operating cash flow less capital expenditures was approximately $4.54 billion, a simple derived measure, not a company-reported non-GAAP metric. Operating cash flow included a $3.49 billion increase in income taxes payable.
Dividends paid were $2.08 per share. The quarterly dividend was raised to $0.5625, implying an annual rate of $2.25 for 2018. Lilly repurchased $359.8 million of shares during 2017.
Changes versus the prior period
- Revenue growth was led by new products and higher realized U.S. prices: U.S. revenue rose 11%, while revenue outside the U.S. increased 4%. Volume contributed 6 percentage points to consolidated growth and price contributed 2 points.
- Trulicity revenue rose 119% to $2.03 billion; Taltz reached $559 million, and Basaglar reached $432 million. Lilly attributed growth to uptake of newer medicines, including Trulicity, Taltz, Basaglar, Jardiance, and Cyramza.
- Several established products declined: Alimta revenue fell 10% to $2.06 billion; Strattera fell 28% to $618 million; Zyprexa fell 20% to $581 million; and Effient fell 27% to $389 million. Generic competition and loss of exclusivity affected multiple products.
- Research and development expense was nearly flat at $5.28 billion. Marketing, selling, and administrative expense increased 2% to $6.59 billion.
- Acquired in-process R&D charges increased to $1.11 billion, primarily from CoLucid. Asset impairment, restructuring, and other special charges rose to $1.67 billion from $383 million, including costs related to the U.S. early-retirement program, cost reductions, and animal-health rationalizations.
Outlook, risks, and unusual items
- 2018 guidance: Revenue of $23.0–$23.5 billion; diluted EPS of $4.39–$4.49; gross margin of approximately 73%; R&D expense of $5.0–$5.2 billion; and marketing, selling, and administrative expense of $6.1–$6.4 billion. The expected tax rate is approximately 18%, reflecting the estimated Tax Act impact. Capital expenditures are expected to be approximately $1.2 billion.
- Management expected growth from newer products, including Trulicity, Taltz, Basaglar, Jardiance, Verzenio, Cyramza, Olumiant, and Lartruvo. Lilly reported approximately 40 potential new drugs in human testing or regulatory review. It discontinued Verzenio monotherapy development for KRAS-mutant non-small cell lung cancer after a Phase III trial missed its primary endpoint.
- The $1.91 billion provisional Tax Act charge reflected, among other items, the one-time tax on previously unremitted foreign earnings and deferred-tax remeasurement. Lilly said its tax accounting was incomplete and the estimate could change. Management expected to pay the toll tax over eight years.
- Patent and generic exposure is significant. U.S. Cialis exclusivity was expected to end no earlier than late September 2018; generic competition had already sharply reduced Effient and Strattera sales. Alimta’s vitamin-regimen patents are under challenge, and Lilly warned that loss of protection could materially reduce product revenue.
- Other material uncertainties include pricing and reimbursement pressure, biosimilar competition, product safety and liability claims, regulatory compliance, manufacturing and supply disruptions, foreign-exchange movements, and reliance on collaborators and suppliers. Lilly is self-insured for product liability losses on marketed products.
- Legal matters include Alimta and Effient patent proceedings, product-liability litigation, and investigations or claims concerning insulin pricing and pharmacy-benefit-manager arrangements. A Brazilian employee lawsuit included a court estimate of approximately 1.0 billion reais plus interest; Lilly disputed the ruling and said it could not estimate its reasonably possible loss.
- Lilly was reviewing strategic alternatives for Elanco, including an IPO, merger, sale, or continued ownership, with an update expected by mid-2018. Hurricane Maria caused approximately $43 million of costs related to the temporary shutdown of a Puerto Rico facility.
Important facts for investors to verify
- Whether 2018 guidance is achieved, particularly revenue growth from newer medicines and the forecast expense reductions.
- How the provisional Tax Act accounting and toll-tax estimate change as calculations and guidance are finalized, and how the tax transition affects cash deployment.
- The timing and commercial impact of generic or biosimilar entry for Cialis, Alimta, Humalog, and other exposed products, including outcomes of patent challenges.
- Whether the late-stage pipeline delivers approvals and launches, and whether confirmatory trials support products with accelerated or conditional approvals.
- The potential financial and operating impact of pending litigation, government investigations, pricing pressure, and the strategic review of Elanco.