A month has gone by since the last earnings report for Eli Lilly and Company (LLY Quick QuoteLLY - Free Report) . Shares have lost about 7.2% in the past month, underperforming the market.

Will the recent negative trend continue leading up to its next earnings release, or is LLY due for a breakout? 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 Tops Q4 Earnings and Sales, Ups 2018 Earnings Outlook

Lilly reported fourth-quarter 2017 adjusted earnings per share of $1.14, which beat the Zacks Consensus Estimate of $1.08 per share by 5.6%. Earnings rose 20% from the year-ago quarter backed by robust volume-driven growth in new product sales, lower SG&A costs and a higher other income.

Including a $1.9 billion charge related to U.S. tax reform and restructuring, amortization and other charges, fourth quarter 2017 loss per share was $1.58 per share  against earnings of 73 cents in the fourth quarter of 2016.

Revenues in Detail

Quarterly revenues of $6.16 billion also beat the Zacks Consensus Estimate of $5.96 billion by 3.3%. Sales grew 7% year over year backed by strong performance of new drugs and favorable currency movement, which made up for lower sales of established products like Strattera, Humalog, Cialis and Effient.

Volumes rose 4% as strong performance of new products like Trulicity, Taltz, Basaglar, Jardiance and Lartruvo offset decline in sales of established products. Higher realized prices for several drugs also contributed 2% to sales growth in the quarter. Foreign exchange rate also had a favorable impact of 1%.

New products drove 12% of volume growth and generated over $1.4 billion in revenues, representing nearly 23% total revenues, up from 22% in the previous quarter. On the other hand, the loss of exclusivity for Cymbalta, Strattera, Effient, Axiron, Zyprexa and Evista hurt volumes by 540 basis points.

While U.S. revenues grew 6% to $3.42 billion, ex-U.S. revenues rose 8% to $2.74 billion.

Pharmaceutical revenues rose 9% in the quarter. However, worldwide competitive pressure hurt sales in Lilly’s Animal Health segment.

Established products that recorded growth during the quarter include Forteo (up 21% to $513.2 million), Humulin (up 2% to $362.6 million), Cymbalta (up 6% to $192.8 million) and Erbitux (up 10% to $168.9 million). Sales of all other established products declined in the quarter.

Humalog sales declined 5% to $782.2 million due to lower realized prices in the United States.

Alimta sales declined 3% to $525.2 million, reflecting lower demand in ex-U.S. markets due to competitive pressure and loss of exclusivity in certain countries. However, sales of Alimta increased 1% in the United States due to increased volume, partially offset by lower realized prices.

Zyprexa sales declined 1% to $152.2 million due to loss of exclusivity in Japan.

Cialis sales declined 12% to $597.4 million hurt by worldwide lower demand.

Strattera sales declined 60% to $98.3 million. Effient sales declined 56% to $62.3 million in the quarter. Both the drugs saw lower demand due to loss of exclusivity.

Among the new products, Trulicity generated revenues of $649 million, up 93% year over year, with U.S. revenues benefiting from growth in the GLP-1 market and market share gains.

Cyramza revenues were $204.8 million, up 16% year over year, backed by strong demand. Cyramza’s ex-U.S. revenues increased 15%, benefiting from strong volumes in Japan, partially offset by lower realized prices. U.S. revenues increased 17% driven by increased volume.

Jardiance sales rose 88% to $143.2 million, driven by increased market share within the growing SGLT2 class in the United States and increased volume outside the United States.

Basaglar recorded revenues of $153.8 million compared with $145.7 million in the previous quarter. It generated revenues of $114.4 million in the United States, almost flat sequentially, as changes in estimates for rebates and discounts, which increased revenues in the third quarter, were missing in the fourth.

Taltz brought in sales of $172.5 million compared with $151.3 million in the previous quarter.

Lartruvo (olaratumab) generated revenues of $59 million in the fourth quarter compared with $54.5 million in the previous quarter.

Olumiant (baricitinib) has been launched in select European countries and in Japan. The drug generated sales of $23.0 million in the fourth quarter compared with $16.4 million in the previous quarter backed by strong launch uptake in Germany.

Verzenio, which was launched in the Unites States in the fourth quarter of 2017, generated sales of $21 million.

Elanco Animal Health segment sales declined 6% to $790.9 million as worldwide competitive pressure continued to hurt sales in the segment.

Food animal products revenues declined 8% hurt by market access pressure and competitive pressure in cattle.

Companion animal revenues rose 1% due to inclusion of $36.5 million of revenues from the acquisition of Boehringer Ingelheim Vetmedica's U.S. feline, canine and rabies (acquired in January 2017). Excluding Boehringer Ingelheim, companion animal revenues declined due to competitive pressure and lower U.S. distributor inventory levels.

Lilly is exploring strategic alternatives for this business including a sale, merger or creating a separate company through an initial public offer. A decision regarding the same is expected to be announced in July and Lilly may ultimately opt to retain the business.

Gross Margin & Operating Income

Adjusted gross margin of 76.5% in the quarter decreased 90 basis points as manufacturing efficiencies and higher realized prices were offset by negative product mix and the effect of foreign exchange rates on international inventories sold. Excluding the effects of foreign exchange on international inventory sold, gross margins increased over 130 bps.

Operating income increased 20% year over year to $1.46 billion due to lower operating costs. Total operating expenses (including research and development and marketing, selling and administrative expenses), as a percent of revenues, declined 340 basis points in the quarter to 52.8%.

While marketing, selling and administrative expenses declined 1%, R&D expenses rose 2% in the quarter.

2017 Results

Full-year 2017 sales of $22.87 billion topped the Zacks Consensus Estimate of $22.65 billion. Revenues were within the guided range of $22.4 billion and $22.7 billion. Sales rose 8% year over year.

Adjusted earnings for 2017 were $4.28 per share, topping the Zacks Consensus Estimate of $4.22 per share as well as the guided range of $4.15 to $4.25. Earnings rose 22% year over year.

2018 EPS Guidance Upped

Lilly raised its previously issued 2018 adjusted earnings outlook to reflect the expected benefit from the new tax laws. Adjusted earnings per share are now expected in the range of $4.81 to $4.91 compared with $4.60 to $4.70 expected previously. However, revenues are still expected in the range of $23.0 billion and $23.5 billion.

Gross margin is expected to be approximately 75%, same as previously expected. Adjusted tax rate is expected to be approximately 18% (previously approximately 21.5%).

Marketing, selling and administrative expenses are still expected in the range of $6.1–$6.4 billion, while research and development expenses are projected to be $5.0-$5.2 billion.

Going forward, new products like Trulicity, Taltz, Basaglar, Cyramza, Jardiance, Lartruvo, Verzenio and Olumiant are expected to drive revenues. In 2018, Animal Health revenues are expected to be flat to slightly up versus 2017. After being slightly negative in the first half, Animal Health revenues are expected to improve in the second half supported by new product launches.

Expected Impact of U.S. Tax Reform

As a result of the new tax laws, Lilly anticipates paying taxes on overseas cash and earnings of approximately $3.6 billion. With increased access to foreign cash following the U.S. tax reforms, Lilly believes now it will have more than $9 billion of extra funds across its global operations, which it does not intend to hold for a long time. Over 2018 and 2019, Lilly plans to use this cash first to support its products/pipeline, then for business development via in-licensing or acquisition and finally to return to shareholders via dividend and share buybacks. It also plans to use roughly $2 billion of repatriated cash to reduce its gross debt level.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter.

Eli Lilly and Company Price and Consensus

 

Eli Lilly and Company Price and Consensus | Eli Lilly and Company Quote

VGM Scores

At this time, LLY has a great Growth Score of A, though it is lagging a lot on the momentum front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for growth investors while also being suitable for those looking for value and to a lesser degree momentum.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of this revision looks promising. Interestingly, LLY has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.