Must-know: Highfields Capital starts a new position in Eli Lilly
Must-know: Assessing Highfields Capital's 2Q14 positions (Part 3 of 6)
Highfields Capital Management
Jonathon Jacobson’s Highfields Capital Management added new positions in Hertz Global Holdings (HTZ), Eli Lilly and Company (LLY), and Goldman Sachs Group (GS). It sold positions in Exxon Mobil (XOM) and Tesla Motors (TSLA).
Highfields Capital initiated a new position in Eli Lilly and Company that accounts for 2.13% of the fund’s 2Q14 (or second quarter of 2014) portfolio.
Eli Lilly and Company overview
Eli Lilly and Company is a drug manufacturing company. It discovers, develops, manufactures, and sells products in two business segments—human pharmaceutical products and animal health products.
Its human pharmaceutical products include endocrinology, neuroscience, oncology, and cardiovascular products. The animal health business—which operates through the Elanco division—develops, manufactures, and markets products for both food animals and companion animals.
Eli Lilly’s 2013 revenue growth was driven by several products, including its cardiovascular product (Cialis), endocrinology products (Humalog, Trajenta, and Forteo), oncology product (Alimta), and animal health products.
The company has recently been facing revenue decrease due to the loss of U.S. patent exclusivity for its blockbuster drugs—Cymbalta, in December 2013, and Evista, in March 2014. Cymbalta is used for treating major depressive disorders, diabetic peripheral neuropathic pain, generalized anxiety disorder, and, in the U.S., for treating chronic musculoskeletal pain and managing fibromyalgia. Evista is used for treating and preventing osteoporosis.
Revenue and earnings decline due to patent expiry of Cymbalta and Evista
Although 2Q14 results beat estimates, Eli Lilly posted a 17% decline in revenue, driven by the impact of U.S. patent expirations for Cymbalta and Evista. Net income and earnings per share decreased 39% to $733.5 million and $0.68, respectively, compared with 2Q13 net income of $1.206 billion and earnings per share of $1.11. But the company saw volume gains for several other products such as Alimta, a treatment for various cancers, and Humalog, for diabetes.
Acquisitions drove growth in animal health division
In 2Q14, increased volume primarily drove Eli Lilly’s worldwide animal health sales to $601.2 million, increasing 11%, compared with 2Q13. U.S. animal health sales increased 3% to $331.8 million, driven by increases for food animal products.
The company said in its earnings release that it’s in the process of completing the Novartis Animal Health acquisition by the end of 1Q15, which will help position Elanco to become the world’s second largest animal health company. The $5.4 billion acquisition was announced in April.
Eli Lilly also completed the Lohmann SE (Lohmann Animal Health) acquisition, a privately held company headquartered in Cuxhaven, Germany. Lohmann Animal Health is a global leader in supplying poultry vaccines and also in marketing a range of feed additives. The acquisition contributed four percentage points to the growth in worldwide animal health sales for 2Q14.
Full year EPS outlook revised
For the full year, Eli Lilly expects earnings per share (or EPS) on a reported basis to be between $2.67 and $2.75. This was revised from an earlier outlook of $2.70 to $2.78. The company anticipates 2014 revenue to be between $19.4 billion and $20.0 billion.
Growth to be driven by portfolio of current products and new launches
Although patent expiry has impacted sales, the company said it expects growth from a portfolio of other current products—including Humalog, Trajenta, Cialis, Forteo, and Alimta—as well as the animal health business and new product launches.
The company said it launched Cyramza in the U.S. as a single-agent treatment for patients with advanced or metastatic gastric cancer or gastroesophageal junction (or GEJ) adenocarcinoma.
It also announced a co-discovery and co-development collaboration in July with Immunocore Limited to research and potentially develop novel T cell-based cancer therapies.
In addition, strong revenue growth is expected in China.
For more articles on the pharmaceutical industry, click here.
In the next part of this series, we’ll discuss Highfields’ new position in Goldman Sachs Group (GS).
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