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Lilly (LLY) Up 7.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Eli Lilly (LLY). Shares have added about 7.5% 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 catalysts.

Lilly Lags Q4 Earnings, Beats Sales, Lowers 2019 View

Lilly reported fourth-quarter 2018 adjusted earnings per share of $1.33, which missed the Zacks Consensus Estimate of $1.36 and matched the lower end of the guided range of $1.33 - $1.38 per share.

Earnings rose 17% from the year-ago quarter backed by robust growth in new product sales and higher operating income. A lower tax rate and reduction in shares outstanding from shares repurchase also led to higher earnings in the quarter.

However, as expected, earnings declined sequentially from third-quarter levels due to U.S. generic competition for Cialis and launch costs for Emgality.

Including acquired in-process research and development, asset impairment, restructuring, and other special charges, fourth-quarter earnings per share were $1.10 against a loss of $1.58 cents per share in the fourth-quarter of 2017.

Revenues in Detail

Quarterly revenues of $6.44 billion beat the Zacks Consensus Estimate of $6.34 billion. Sales grew 5% year over year backed by strong demand for its new drugs led by Trulicity, Taltz, Jardiance and Basaglar, which made up for lower sales of established products like Cialis and Forteo.

Foreign exchange hurt sales growth by 1% in the quarter. Also, lower realized prices had a negative impact of 5% on sales.

Volumes rose 11% as increased demand for new products like Trulicity, Basaglar, Taltz, Jardiance and Verzenio offset lower volumes of some established products like Cialis due to loss of exclusivity. Volumes of Lilly’s diabetes products rose 31% in the quarter.

New pharma products (products launched since 2014) drove 13.7% of volume growth and generated over $2.1 billion in revenues, representing nearly 38% total revenues, up from 31% in the previous quarter. The loss of exclusivity hurt volumes by 450 basis points driven almost entirely by Cialis.

U.S. revenues grew 7% to $3.66 billion and ex-U.S. revenues rose 1% to $2.77 billion.

Despite the significant headwind from the loss of exclusivity of Cialis in the U.S., Pharmaceutical revenues rose 5% in the quarter driven by volume growth. U.S. Pharma revenues increased 6%, while in Europe, pharma revenues rose 3%, excluding currency impact. In Japan, pharma revenues rose 1%, excluding currency impact. Pharma revenues in the rest of the world increased 10%.

Established products that recorded growth during the quarter included Strattera (up 9% to $107.2 million) and Alimta (up 6% to $556.9 million). Sales of all other established products declined in the quarter.

Forteo sales declined 15% to $437.1 million. Cymbalta sales declined 4% to $184.5 million. Humalog sales dropped 2% to $770.4 million. Zyprexa sales were down 27% to $110.8 million. Erbitux sales declined 5% to $159.8 million. Humulin sales declined 7% to $337.4 million.

Cialis sales declined 41% to $350.7 million as U.S. sales were hurt by entry of generic competition. Outside U.S. sales were hurt by loss of exclusivity in Europe.

Among the new products, Trulicity generated revenues $924.7 million, up 42% over year driven by higher demand in the United States and higher volumes and realized prices in ex-U.S. markets.

Cyramza revenues were $220.6 million, up 8% year over year driven by higher sales in both U.S. and international markets.

Jardiance sales surged 35% to $193.2 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 $232.2 million, up 51% year over year. In the United States, sales rose 59%, benefiting from higher demand, which offset the impact of lower realized prices (due to increased volume in Medicare Part D).

Taltz brought in sales of $307.0 million, up 78% year over year as U.S. sales gained from higher demand and the impact of specialty pharmacy and wholesaler buying patterns, which made up for lower realized prices. Ex-U.S. sales were driven by increased volume from new launches. Taltz was launched for the second indication of psoriatic arthritis in late 2017/early 2018 in both the United States and Europe, which contributed to sales growth in the quarter.

Lartruvo generated revenues of $83.5 million in the quarter, higher than $76.9 million in the previous quarter. Though the failure of the ANNOUNCE confirmatory study on Lartruvo did not have any impact on fourth-quarter results, Lilly is suspending promotion of Lartruvo and sales of the drug should decline sharply in 2019.

Olumiant generated sales of $70.1 million in the quarter backed by launch uptake in new European markets, compared with $55.6 million in the previous quarter. In the United States, Olumiant recorded sales of $4.2 million, higher than $0.8 million in the previous quarter.

Verzenio, launched in the Unites States in late 2017, generated sales of $83.1 million in the quarter, which was less than $84.5 million in the previous quarter. This is because increased demand was more than offset by the negative impact of wholesaler buying patterns and lower realized prices in the United States. Meanwhile, the CDK4/6 inhibitors market is gradually slowing down. Verzenio was launched in several international markets in the fourth quarter of 2018 and generated ex-U.S. revenues of $6.6 million.

Emgality generated U.S. revenues of $4.9 million in the fourth quarter.

Animal Health segment sales rose 3% to $816.5 million as higher prices and higher volume offset currency headwinds.

Gross Margin & Operating Income
Adjusted gross margin of 76.6% in the quarter rose 50 basis points driven by manufacturing efficiencies, which offset the negative impact of lower prices. Excluding the effect of foreign exchange rates on international inventories sold, gross margin declined about 25 basis points.

Operating income increased 15% year over year to $1.62 billion on higher revenues and lower operating costs. Total operating expenses (including research and development and marketing, selling and administrative expenses), as a percent of revenues, declined 190 basis points in the quarter to 51.1%. This is because the company’s cost-saving efforts offset the impact of higher marketing costs to support Emgality’s launch.

While marketing, selling and administrative expenses rose 3%, R&D expense declined 2% in the quarter.

Adjusted effective tax rate was 15.8%, lower than 20.2% in the year-ago quarter, driven primarily by the impact of U.S. tax reform.

2018 Results

Full-year 2018 sales rose 7% to $24.56 billion, marginally beating the Zacks Consensus Estimate of $24.46 billion. Revenues were slightly above the guided range of $24.3 billion to $24.5 billion.

Adjusted earnings for 2018 were $5.55 per share, missing the Zacks Consensus Estimate of $5.58 but up 30% year over year. Earnings came in at the lower end of the guided range of $5.55 to $5.60 per share.

2019 Guidance Lowered

Lilly lowered its previously issued earnings and sales guidance for 2019 to account for the costs related to the pending acquisition of Loxo and the study failure for Lartruvo.

The earnings forecast was reduced from a range of $5.90 to $6.00 to $5.55 to $5.65 per share. The earnings guidance continues to include a reduction of approximately 8 cents per share to reflect the non-controlling interest portion of Elanco profits in 2019.

Lilly now expects revenues to be between $25.1 billion and $25.6 billion in 2019, down from the prior expectations of $25.3 billion and $25.8 billion.

Gross margin is expected to be approximately 76.5%. Adjusted tax rate is expected to be approximately 15%.

Marketing, selling and administrative expense are expected to be in a range of $6.4 billion to $6.7 billion. Research and development expense is expected to be in the range of $5.8 billion to $6.0 billion.

In 2019, revenue growth is expected to be driven by higher demand for its newer medicines including Trulicity, Jardiance, Taltz, Verzenio as well Emgality as some older drugs like Cialis lose patent exclusivity.

Lilly expects U.S. regulatory action for nasal glucagon for hypoglycemia and lasmiditan for acute migraine in 2019 as well as line extension approvals for several medicines, which could drive revenue growth in 2019. Loxo’s newly approved marketed drug Vitrakvi should also support the top line.

However, generic competition for several drugs including Cialis, rising pricing pressure in the United States and some international markets, currency headwinds and the impact of the failed Lartruvo study are expected to put pressure on the top line.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.

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