A month has gone by since the last earnings report for Eli Lilly (LLY). Shares have added about 6.4% 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 its most recent earnings report in order to get a better handle on the important drivers.
Lilly Q3 Earnings Top Estimates, Sales Lag
Lilly reported third-quarter 2019 adjusted earnings per share of $1.48, which beat the Zacks Consensus Estimate of $1.43. Earnings rose 10% year over year as higher operating costs were partially offset by slightly higher revenues, a lower tax rate and reduction in shares outstanding due to buybacks.
Revenues in Detail
Revenues of $5.48 billion missed the Zacks Consensus Estimate of $5.56 billion. Sales however grew 3% year over year, backed by robust volume growth of new products and international operations, which compensated for lower realized prices, lower sales of older products like Cialis due to the loss of U.S. exclusivity and the impact of Lartruvo’s product withdrawal.
Foreign exchange hurt sales growth by 1% in the quarter. Also, lower realized prices had a negative impact of 4% on sales due to rebates and legislated increases in Medicare Part D cost sharing in the United States and price cuts in some international markets. Volumes rose 8%. Excluding Cialis’ loss of exclusivity and the impact of Lartruvo, volume grew nearly 16%.
New pharma products (products launched since 2014) generated $2.4 billion in revenues and drove 12% of sales growth in the third quarter and represented nearly 44% total revenues, up from 43% in the previous quarter. The loss of exclusivity hurt volumes by 700 basis points primarily attributed to Cialis.
U.S. revenues were flat at $3.06 billion while ex-U.S. revenues rose 8% to $2.42 billion.
Among the established products, Forteo sales declined 5% to $370.7 million. Alimta declined 2% to $508.2 million. Humalog sales dropped 2% to $648.9 million. Humulin sales were flat at $321.8 million.
Cialis sales declined 61% to $184.3 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.
Among the new products, Trulicity generated revenues of $1.01 billion, up 24% 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 in the United States. The prices were lower mainly in the United States due to higher contracted rebates, changes in segment mix and increased coverage gap funding requirements in Medicare Part D. On the call, the company said that the negative factors, which hurt sales of Trulicity in the third quarter, should moderate substantially going forward as impacts from the donut hole are expected to diminish in the fourth quarter.
Cyramza revenues were $240.0 million, up 21% year over year driven by higher sales in both the United States and international markets.
Jardiance sales surged 44% to $240.7 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 $263.2 million, up 31% year over year. In the United States, sales rose 29%, benefiting from higher demand and the impact of higher realized prices. Outside U.S. sales growth of 39% was driven by increased volume.
Taltz brought in sales of $340.0 million, up 29% year over year as U.S. sales gained from higher demand, which offset the impact of lower realized prices due to changes in estimates for rebates and discounts. Ex-U.S. sales were driven by increased volume from launches in new countries.
Olumiant generated sales of $114.6 million in the quarter compared with $102.4 million in the previous quarter backed by increased demand in international markets. In the United States, Olumiant recorded sales of $12.1 million, higher than $10.7 million in the previous quarter. Revenues outside the United States were $102.5 million compared with $91.7 million in the previous quarter.
Verzenio generated sales of $157.2 million in the quarter, up from $133.9 million in the previous quarter. This was because of increased demand and higher realized prices in the United States wherein Verzenio recorded sales of $124.8 million.
Emgality generated revenues of $47.7 million in the quarter compared with $34.3 million in the previous quarter. In the United States, Emgality sales were $45.8 million compared with $33.8 million in the previous quarter. Emgality was launched in some international markets in the first quarter, which brought sales of $1.9 million in the third quarter.
Emgality captured 46% share of the market for new prescriptions in the United States, an increase of 5 points from the end of second quarter.
Regarding newly launched Baqsimi, Lilly said commercial uptake in the United States was strong as Baqsimi has already captured 33% share of new to brand prescriptions.
Gross Margin & Operating Income
Adjusted gross margin of 79.6% in the quarter was down 60 basis points as favorable effect of foreign exchange rates on international inventories sold and greater manufacturing efficiencies were offset by the impact of unfavorable product mix due to lower volumes of Cialis and negative impact of price on revenues.
Operating income rose 3% year over year to $1.57 billion. Operating margin was 28.6% in the quarter.
Total operating expenses (including research and development and marketing, selling and administrative expenses) rose 2% in the quarter as the company invested in recently launched products and late-stage assets. Marketing, selling and administrative expenses declined 3% due to cost control and lower litigation charges, partially offset by increased investment behind recent launches. R&D expense rose 8% in the quarter due to higher development expenses for late-stage assets.
Adjusted effective tax rate was 11.7%, lower than 14.9% 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 $5.67 to $5.77 per share to $5.75 to $5.85 taking into account 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 12 versus 13 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. Research and development expense is still expected to be in the range of $5.5 billion to $5.7 billion.
Going forward, Lilly’s revenue growth is expected to be driven by higher demand for its newer drugs including Trulicity, Jardiance, Taltz, Verzenio, Basaglar, Emgality as well as newly launched glucagon nasal powder, Baqsimi. 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. In the United States, prices are expected to decline in a mid-single digit range.
Maintains 2020 Goals
In 2020, Lilly expects sales to grow 6%. It expects new products to help it achieve the sales growth target 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?
It turns out, estimates revision have trended upward during the past month.
Currently, Lilly has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. 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. Notably, Lilly has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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