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It has been about a month since the last earnings report for Eli Lilly (LLY). Shares have added about 1.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Lilly due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Lilly Q2 Earnings Beat, New Drugs Drive Sales
Lilly reported second-quarter 2019 adjusted earnings per share of $1.50, which beat the Zacks Consensus Estimate of $1.46. Earnings rose 1% year over year as higher operating costs were partially offset by a lower tax rate and reduction in shares outstanding due to share repurchase.
Revenues in Detail
Revenues of $5.64 billion missed the Zacks Consensus Estimate of $5.65 billion. Sales however grew 1% year over year, backed by strong demand for its newer drugs, namely Trulicity, Taltz, Jardiance, Basaglar, Olumiant and Verzenio, which compensated for lower sales of older products like Cialis due to the loss of U.S. exclusivity and the impact of Lartruvo’s impending product withdrawal.
Foreign exchange hurt sales growth by 2% in the quarter. Also, lower realized prices had a negative impact of 3% on sales mainly due to increased coverage gap funding requirements in Medicare Part D, which hurt prices of some diabetes medicines like Trulicity and Humalog. Volumes rose 6%. Excluding Cialis’ loss of exclusivity and the impact of Lartruvo, volume grew nearly 15%.
New pharma products (products launched since 2014) drove 13% of sales growth and 15.4% of volume growth in the second quarter and represented nearly 43% total revenues, up from 39% in the previous quarter. The loss of exclusivity hurt volumes by 650 basis points primarily attributed to Cialis.
U.S. revenues were flat at $3.25 billion while ex-U.S. revenues rose 2% to $2.38 billion.
Among the established products, Forteo sales declined 17% to $360.8 million. Alimta sales rose 4% to $577.8 million. Humalog sales dropped 12% to $677.6 million. Humulin sales declined 7% to $322.6 million.
Cialis sales declined 63% to $200.2 million as U.S. sales were hurt by entry of generic products. Outside U.S. sales were also hurt by generic competition, lower realized prices and currency headwinds. Generic erosion is expected to hurt Cialis sales in the third quarter and thereafter begin to normalize in the fourth quarter.
Among the new products, Trulicity generated revenues of $1.03 billion, up 32% year over year driven by higher demand in the United States and higher volumes in ex-U.S. markets, which offset the impact of lower realized prices and changes in segment mix. The prices were lower mainly in the United States due to higher contracted rebates and increased coverage gap funding requirements in Medicare Part D.
Cyramza revenues were $241.8 million, up 11% year over year driven by higher sales in both the United States and international markets.
Jardiance sales surged 58% to $231.9 million, driven by increased demand trends within the SGLT2 class of diabetes medicines in the United States and increased volume outside the United States, which offset the negative impact of currency
Basaglar recorded revenues of $290.7 million, up 44% year over year. In the United States, sales rose 48%, benefiting from higher demand and the impact of higher realized prices. Outside U.S. sales growth of 29% was driven by increased volume, which offset the impact of currency headwinds.
Taltz brought in sales of $353.8 million, up 61% year over year as U.S. sales gained from higher demand. Ex-U.S. sales were driven by increased volume from launches in new countries, which offset the impact of currency headwinds.
Olumiant generated sales of $102.4 million in the quarter backed by increased demand in international markets, compared with $82.1 million in the previous quarter. In the United States, Olumiant recorded sales of $10.7 million, higher than $6.4 million in the previous quarter.
Verzenio generated sales of $133.9 million in the quarter, which was more than $109.4 million in the previous quarter. This was because of increased demand in the United States wherein Verzenio recorded sales of $105.2 million.
Emgality generated revenues of $34.3 million in the quarter compared with $14.2 million generated in the previous quarter. In the United States, Emgality sales were $33.8 million compared with $12.2 million in the previous quarter. Emgality captured 41% share of market for new prescriptions in the United States, an increase of almost 9 points from the end of first quarter.
Gross Margin & Operating Income
Adjusted gross margin of 81% in the quarter expanded 120 basis points driven by favorable effect of foreign exchange rates on international inventories sold and greater manufacturing efficiencies, which offset the impact of unfavorable product mix (due to lower volumes from post patent products) and negative impact of price on revenues.
Operating income decreased 7% year over year to $1.58 billion. Operating margin was 27.9% in the quarter, down 250 basis points year over year due to lower gross margins and higher operating costs.
Total operating expenses (including research and development and marketing, selling and administrative expenses) rose 8% in the quarter as the company invested in recently launched products and late-stage assets. Marketing, selling and administrative expenses rose 7%. R&D expense rose 10% in the quarter due to higher development expenses for late-stage assets.
Adjusted effective tax rate was 10%, lower than 16.7% in the year-ago quarter, driven primarily by the impact of U.S. tax reform.
2019 Earnings Guidance Raised
Lilly raised its expectations for full-year earnings while keeping its revenue guidance intact. The earnings forecast was increased from a range of $5.60 to $5.70 per share to $5.67 to $5.77 driven by a lower tax rate. The range indicates growth of 4% to 6% from the year-ago levels. The guidance excludes discontinued operations results for Elanco, following disposition of Lilly’s remaining ownership in the company.
The revenue guidance was maintained in the range of $22.0 billion - $22.5 billion, which indicates 5% growth, at mid-point, over 2018 level on a constant currency basis.
Gross margin is still expected to be approximately 80%. Adjusted tax rate is expected to be in the range of 13 versus 14 expected previously. Adjusted operating margin is expected to be 28% in 2019.
Marketing, selling and administrative expense are expected to be in the range of $5.9 billion to $6.1 billion versus $5.7 billion to $6.0 billion expected previously. Research and development expense is still expected to be in the range of $5.5 billion to $5.7 billion.
In the second half, revenue growth is expected to be driven by higher demand for its newer drugs including Trulicity, Taltz, Basaglar, Jardiance, Verzenio, Cyramza, Olumiant and Emgality. However, generic competition for several drugs including Cialis, rising pricing pressure in the United States due to rebates and legislated increases in Medicare Part D cost sharing, price cuts in some international markets, currency headwinds and the impact of the failed Lartruvo study are expected to put pressure on the top line.
Initial 2020 Goals
In 2020, Allergan expects to grow sales at 6% to be able to meet the 2015-2020 target of minimum compounded annual growth rate of 7%. It sounded confident that its new products will help it achieve growth as the headwind from Cialis LOE and Lartruvo will abate in 2020.
It expects to achieve adjusted operating margin of 31% in 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, Lilly has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Lilly has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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