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Lilly (LLY) Down Despite Q1 Earnings Beat on Sales View Cut

Zacks Equity Research

Eli Lilly & Company LLY delivered first-quarter 2019 adjusted earnings per share of $1.33, beating the Zacks Consensus Estimate of $1.32 by a penny. Earnings rose 2% year over year.

Including asset impairment, restructuring and other special charges, first-quarter earnings per share were $4.31 compared with $1.16 reported in first-quarter 2018.

Revenues in Detail

In the first quarter of 2019, Lilly reported revenues of $5.1 billion. Sales grew 3% year over year, backed by strong demand for its new drugs, namely Trulicity, Taltz, Jardiance and Basaglar, which compensated lower sales of older products like Cialis and Strattera.

Foreign exchange hurt sales growth by 2% in the quarter. Also, lower realized prices had a negative impact of 3% on sales. Volumes rose 7%. U.S. revenues grew 3% to $2.9 billion and ex-U.S. revenues inched up 2% to $2.2 billion.

Forteo sales were flat at $312.9 million. Humalog sales declined 8% to $730.8 million. Humulin sales fell 9% to $297.7 million.

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

Among the new products, Trulicity generated revenues of $879.7 million, up 30% year over year, driven by higher demand.

Cyramza revenues were $198.3 million, up 8% year over year, attributable to higher demand.

Jardiance sales surged 35% to $203.6 million, boosted by increased demand trends within the SGLT2 class of diabetes medicines in the United States and an expanded volume outside the United States.

Basaglar recorded revenues of $251.4 million, soaring 51% year over year. In the United States, sales jumped 56%, benefiting from higher demand, which offset the impact of lower realized price changes in estimates to rebates and discounts.

Taltz fetched in sales of $252.5 million, up 72% year over year as U.S. sales gained from solid demand, which made up for lower realized prices. Ex-U.S. sales were aided by higher volume from launches across new countries.

Lartruvo generated revenues of $83.5 million in fourth-quarter 2018 but did not contribute to the top line in the quarter under review. Notably, in February this year, Lilly announced that Lartruvo, which had won conditional approval two years back, failed to improve survival in patients with advanced soft tissue sarcoma in a late-stage confirmatory study, ANNOUNCE. Continued approval was contingent on the verification of clinical benefit in a confirmatory study. With the ANNOUNCE study failing to confirm clinical benefit, management stated that it will stop promoting Lartruvo. The company has been working with regulatory agencies to facilitate the withdrawal of Lartruvo from the market.

New rheumatoid arthritis drug, Olumiant, generated sales of $82.1 million in the quarter, backed by the launch uptake across new European markets compared with $70.1 million in the previous reported quarter. In the United States, Olumiant registered sales of $6.4 million, higher than $4.2 million in the earlier reported quarter.

New advanced breast cancer treatment medicine, Verzenio, generated sales of $109.4 million in the quarter, which was more than $83.1 million sequentially. This is because of solid demand and to some extent, higher realized prices.

The newly launched CGRP antibody, Emgality (galcanezumab), generated sales of $14.2 million in the quarter, higher than $4.9 million in the sequential quarter.

Notably, in March this year, the FDA granted a priority review to Lilly’s regulatory application looking for the label expansion of Emgality injection to address the preventive treatment of episodic cluster headache in adult patients.

Amgen’s AMGN Aimovig and Teva’s TEVA Ajovy were two other CGRP antibodies unveiled last year, which pose a strong competition to Emgality.

Meanwhile, Lilly divested its Elanco animal health unit as an independent publicly traded company — Elanco Animal Health Incorporated ELAN — via an initial public offering (IPO) of a minority stake in 2018. Lilly sold the remaining 80.2% interest in the new company through a “tax-efficient transaction” this March.

Gross Margin & Operating Income

Adjusted gross margin of 80.2% in the quarter expanded 160 basis points. Operating income decreased 8% year over year to $1.33 billion on higher operating expenses. Operating expenses increased 12% year over year to $2.7 billion due to steep marketing costs to support the introduction of Emgality.

2019 Sales Outlook Lowered

The earnings forecast was raised from a range of $5.55-$5.65 per share to the $5.60-$5.70 band. Lilly now expects revenues between $22.0 billion and $22.5 billion in 2019, down from the prior expectation of $25.1 billion-$25.6 billion.

Despite the earnings beat, Lilly’s shares declined more than 2% in pre-market trading for trimming its full-year revenue prediction. However, so far this year, shares of Lilly have gained 3.4% against the industry’s dip of 0.9%.

Our Take

In 2019, revenue growth is anticipated to be driven by elevated demand for the company’s newer medicines including Trulicity, Jardiance, Taltz, Verzenio and Emgality besides some older drugs like Cialis, which lost patent exclusivity. However, generic competition for several drugs including Cialis, the rise in pricing pressure across the United States and some international markets, currency headwinds and the impact of the failed Lartruvo study might put pressure on the top line.

Eli Lilly and Company Price, Consensus and EPS Surprise

Eli Lilly and Company Price, Consensus and EPS Surprise | Eli Lilly and Company Quote

Zacks Rank

Lilly currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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