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Lilly (LLY) Down 2.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Eli Lilly (LLY). Shares have lost about 2.3% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Lilly due for a breakout? 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 Beats on Q1 Earnings, Lowers Sales View

Lilly reported first-quarter 2019 adjusted earnings per share of $1.33, which beat the Zacks Consensus Estimate of $1.32 by a penny. Earnings rose 2% year over year as higher operating costs were offset by a lower tax rate and reduction in shares outstanding from shares repurchase.

With the completion of spin-off of Elanco Animal Health business, the unit was reflected as discontinued operation for both the first quarter of 2018 and 2019.

Including asset impairment, amortization, acquired in-process R&D, charges for Lartruvo failure and a gain on sale associated with the disposal of Elanco, first-quarter earnings per share were $4.31 compared with $1.16 reported in the first-quarter of 2018.

Revenues in Detail

Quarterly revenues of $5.09 billion rose 3% year over year backed by strong demand for its new drugs Trulicity, Taltz, Jardiance and Basaglar, which made up for lower sales of older products like Cialis.

Foreign exchange hurt sales growth by 2% in the quarter. Also, lower realized prices had a negative impact of 3% on sales driven by increased utilization of patient affordability programs.

Volumes rose 7% 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 rose 13% excluding Cialis.

New pharma products (products launched since 2014) drove 14.8% of volume growth and generated nearly $2 billion in revenues, representing nearly 39% total revenues, up from 38% in the previous quarter. The loss of exclusivity hurt volumes by 530 basis points driven primarily by Cialis.

U.S. revenues grew 3% to $2.89 billion and ex-U.S. revenues rose 2% to $2.20 billion.

Among the established products, Forteo sales were flat at $312.9 million. Alimta sales were flat at $499.2 million. Humalog sales dropped 8% to $730.8 million. Humulin sales declined 9% to $297.7 million.

Cialis sales declined 38% to $308.2 million as U.S. sales were hurt by entry of generic products. Outside U.S. sales were hurt by currency headwinds

Among the new products, Trulicity generated revenues of $879.7 million, up 30% year over year driven by higher demand in the United States and higher volumes n ex-U.S. markets, which offset the impact of lower realized prices.

Cyramza revenues were $198.3 million, up 8% year over year driven by higher sales in both U.S. and international markets.

Jardiance sales surged 35% to $203.6 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 $251.4 million, up 51% year over year. In the United States, sales rose 56%, benefiting from higher demand and the impact of higher realized prices and changes in rebates and discounts estimates. Outside U.S. sales growth was driven by increased volume, which offset the impact of lower realized prices.

Taltz brought in sales of $252.5 million, up 72% year over year as U.S. sales gained from higher demand, which made up for lower realized prices. Ex-U.S. sales were driven by increased volume from launches in new countries, which offset the impact of currency headwinds.

Lartruvo generated sales of $43.9 in this quarter compared with 83.5 million in the previous quarter.  Due to the failure of the ANNOUNCE confirmatory study, Lilly suspended promotion of Lartruvo and sales of the drug declined sharply.

Olumiant generated sales of $82.1 million in the quarter backed by launch uptake in new European markets, compared with $70.1 million in the previous quarter. In the United States, Olumiant recorded sales of $6.4 million, higher than $4.2 million in the previous quarter.

Verzenio generated sales of $109.4 million in the quarter, which was more than $83.1 million in the previous quarter. This is because of increased demand and to some extent higher realized prices in the United States.

Verzenio was launched in several international markets in the fourth quarter of 2018 and generated ex-U.S. revenues of $15.9 million versus $6.6 million in the previous quarter.

Emgality generated revenues of $14.2 million in the quarter, which is more than $4.9 million generated in the previous quarter. In the United States, the drug generated sales of $12.2 million compared with $7.2 million realized in the fourth quarter of 2018. Emgality captured 33% share of market for new prescriptions in the United States, an increase of almost 13 points from end of 2018. Emgality was launched in some ex-U.S. markets in the first quarter of 2019 and generated revenues of $2.1 million from these markets.

Gross Margin & Operating Income

Adjusted gross margin of 80.2% in the quarter rose 160 basis points driven by favorable effect of foreign exchange rates on international inventories sold. Excluding the effect of foreign exchange rates on international inventories sold, gross margin declined about 130 basis points due to the negative impact of manufacturing shutdowns, unfavorable product mix due to lower volumes from post patent products and lower price.

Operating income decreased 8% year over year to $1.33 billion due to higher operating expenses. Total operating expenses (including research and development and marketing, selling and administrative expenses) rose 12% in the quarter as the company invested in recently launched products and late-stage assets. Marketing, selling and administrative expenses rose 13%. R&D expense rose 11% in the quarter.

Adjusted effective tax rate was 12.9%, lower than 15.5% in the year-ago quarter, driven primarily by the impact of U.S. tax reform.

2019 Sales Guidance Lowered

Lilly updated its previously issued earnings and sales guidance range for 2019 to reflect the separation of its Elanco animal health business.

The earnings forecast was increased from a range of $5.55 to $5.65 per share to $5.60 to $5.70. The previous earnings guidance, however, included 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 $22.0 billion and $22.5 billion in 2019, down from the prior expectations of $25.1 billion and $25.6 billion.

Gross margin is expected to be approximately 80% versus 76.5% previously. Adjusted tax rate is expected to be in the range of 14 versus approximately 15% expected previously.

Marketing, selling and administrative expense are expected to be in a range of $5.7 billion to $6.0 billion versus $6.4 billion to $6.7 billion previously. Research and development expense is expected to be in the range of $5.5 billion to $5.7 billion versus $5.8 billion to $6.0 billion previously.

In 2019, revenue growth is expected to be driven by higher demand for its newer medicines including Trulicity, Jardiance, Taltz, Verzenio and 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.

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.

VGM Scores

Currently, Lilly has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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