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Lilly (LLY) Lags Q4 Earnings, Lowers 2019 View, Stock Down

Zacks Equity Research

Eli Lilly & Company LLY 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 reduction in shares outstanding from shares repurchase also led to higher earnings in the quarter.

Including 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.

However, as expected, earnings declined sequentially from third-quarter levels due to U.S. generic competition for key erectile dysfunction drug Cialis and launch costs for its newly launched CGRP antibody, Emgality.

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

Pharmaceutical revenues rose 5% in the quarter driven by volume growth. 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. In September, Teva Pharmaceuticals TEVA announced the launch of a generic version of Cialis, which led to rapid erosion of sales in the quarter.

Among the new products, Trulicity generated revenues of $924.7 million, up 42% year over year driven by higher demand.

Cyramza revenues were $220.6 million, up 8% year over year driven by higher demand.

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.

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, 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. However, earlier this month, 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 verification of clinical benefit in a confirmatory study. With ANNOUNCE failing to confirm clinical benefit, Lilly said it will stop promoting Lartruvo while being in discussion with global regulators to determine the next steps for the drug. Though the negative update did not have any impact on fourth-quarter results, sales of the drug should decline sharply in 2019.

New rheumatoid arthritis drug, 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. In the United States, only the lower dose of the medicine is approved for marketing.

Advanced breast cancer treatment, 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.

The newly launched CGRP antibody, Emgality generated sales of $4.9 million in the quarter.

Animal Health segment sales rose 3% to $816.5 million.

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.

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.

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.

Lowers 2019 Outlook

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

Earlier this year, Lilly announced a definitive deal to acquire small cancer biotech, Loxo Oncology for $8 billion in cash to broaden the scope of its oncology portfolio into precision medicines.

The earnings forecast was reduced from a range of $5.90 to $6.00 to $5.55 to $5.65 per share. 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.

Our Take

Lilly’s fourth-quarter results were mixed as it beat estimates for sales but missed the same for earnings. Shares of the drug giant declined almost 3% in pre-market trading due to the guidance cut by the company. However, in the past year, Lilly’s shares have risen 56.9% compared with the industry’s increase of 6.1%.



In 2019, revenue growth is expected to be driven by higher demand for its newer medicines including Trulicity, Jardiance, Taltz, Verzenio as well as newly launched migraine drug, Emgality as some older drugs like Cialis lose patent exclusivity. Lilly has launched 10 medicines over the past five years, most of which were successful .Emgality could emerge as a significant contributor to Lilly’s long-term growth

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, competitive pressure on Lilly’s drugs is expected to rise in 2019. 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.

Also, Emgality faces strong competition from Teva and Amgen’s AMGN CGRPs, Ajovy and Aimovig, respectively, which were also launched last year.

Lilly currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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