A month has gone by since the last earnings report for Eli Lilly and Company (LLY - Free Report) . Shares have added about 2.7% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is LLY due for a pullback? 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 Tops on Q1 Earnings & Sales, Raises 2018 View
Lilly reported first-quarter 2018 adjusted earnings per share of $1.34, which beat the Zacks Consensus Estimate of $1.13 per share by 18.6%. Earnings rose 37% (up 47% ex Fx) from the year-ago quarter backed by robust growth in new product sales and lower operating costs. Meanwhile, lower tax rates and a reduction in shares outstanding from shares repurchase also led to higher earnings in the quarter.
Including asset impairment, restructuring, and other special charges, first-quarter earnings per share were $1.16 against a loss of 10 cents in the first-quarter of 2017.
Revenues in Detail
Quarterly revenues of $5.70 billion also beat the Zacks Consensus Estimate of $5.53 billion. Sales grew 9% year over year (up 5% ex Fx) backed by strong demand for its new drugs and favorable currency movement, which made up for lower sales of established products like Strattera, Cialis and Forteo.
Volumes rose 2% as increased demand for new products like Trulicity, Cyramza, Taltz, Basaglar, Jardiance and Lartruvo offset decline in sales of some established products like Strattera and Effient and Axiron due to loss of exclusivity and Cialis due to lower demand. However, volume growth was softer than 4% in the previous quarter.
New products (products launched since 2014) drove 11% of volume growth and generated over $1.5 billion in revenues, representing nearly 25% total revenues, up from 23% in the previous quarter. On the other hand, the loss of exclusivity for Effient, Strattera, Zyprexa, Cymbalta, Evista and Axiron hurt volumes by 510 basis points. Lower demand for Cialis and food animal products hurt volumes by 230 and 120 basis points, respectively.
Higher realized prices for several drugs contributed 3% to sales growth in the quarter. Foreign exchange rate also had a favorable impact of 4%.
While U.S. revenues grew 8% to $3.16 billion, ex-U.S. revenues rose 11% to $2.55 billion.
Pharmaceutical revenues rose 11% in the quarter. However, decreased demand for food animal products continued to hurt sales in Lilly’s Animal Health segment with sales declining 1% in the quarter.
Established products that recorded growth during the quarter include Humalog (up 12% year over year to $791.7 million), Humulin (up 4% to $325.9 million) and Trajenta (up 25% to $141.1 million).
Forteo sales declined 10% to $313.2 million due to decreased volume from unfavorable wholesale and retail buying patterns in the United States. However, in ex-U.S. markets, sales of Forteo increased.
Cymbalta sales declined 3% to $169.6 million while Erbitux sales declined 3% to $149.6 million. Zyprexa sales declined 17% to $122.6 million.
Alimta sales rose 2% to $499.6 million as higher sales in United States offset sales decline in international markets. In ex-U.S. markets, sales declined 3% to $254.3 million due to competitive pressure and loss of exclusivity in certain countries. However, sales of Alimta increased 8% to $245.3 million in the United States due to increased volume and higher realized prices.
Cialis sales declined 7% to $495.4 million hurt by lower demand in United States due to the entry of generic sildenafil and loss of exclusivity in Europe.
Strattera sales declined 33% to $130.7 million due to loss of exclusivity.
Among the new products, Trulicity generated revenues of $678.3 million, up 82% year over year, with U.S. revenues benefiting from growth in the GLP-1 market and market share gains.
Cyramza revenues were $183.6 million, up 7% year over year, backed by strong demand. Cyramza’s ex-U.S. revenues increased 10%, benefiting from strong volumes and currency benefit, partially offset by lower realized prices. Cyramza U.S. revenues increased 3% driven by increased volume and higher realized prices.
Jardiance sales surged 104% to $151 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 $166.0 million compared with $153.8 million in the previous quarter. It generated revenues of $126.7 million in the United States, which improved sequentially driven by increased demand as the drug gained Medicare Part D formulary access. Sales growth was flat in ex-U.S. markets.
Taltz brought in sales of $146.5 million compared with $172.5 million in the previous quarter as higher ex-U.S. revenues were offset by lower U.S. sales. While ex-U.S. sales benefitted from continued uptake from new launches, sales in the United States were hurt by unfavorable specialty pharmacy buying patterns.
Lartruvo (olaratumab) generated revenues of $64.4 million in the quarter compared with $59.0 million in the previous quarter.
Olumiant (baricitinib) has been launched in select European countries and in Japan for moderate-to-severe rheumatoid arthritis. The drug generated sales of $32.2 million in the quarter backed by strong launch uptake in Germany, compared with $23.0 million in the previous quarter.
Verzenio, which was launched in the Unites States in the fourth quarter of 2017, generated sales of $29.7 million in the quarter compared with $21 million in the previous quarter. In the quarter, Verzenio gained FDA approval and was launched in the first-line setting for metastatic breast cancer based on MONARCH 3 data.
Elanco Animal Health segment sales declined 1% (down 4% ex-Fx) to $761.3 million due to decreased demand for food animal products.
Food animal products revenues declined 7% hurt by market access pressure.
Companion animal revenues rose 10% due to higher realized prices and currency benefits.
Gross Margin & Operating Income
Adjusted gross margin of 75.1% in the quarter decreased 270 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 nearly 70 bps.
Operating income increased 29% year over year to $1.60 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 710 basis points in the quarter to 46.9% due to the company’s cost saving efforts.
While marketing, selling and administrative expenses declined 4%, R&D declined 6% in the quarter.
Adjusted effective tax rate was 15.9%, lower than 21.2% in the year-ago quarter driven primarily by the impact of US tax reform.
2018 Guidance Upped
Lilly raised its previously issued outlook for adjusted earnings as well as sales.
Adjusted earnings per share are now expected in the range of $5.10 to $5.20, higher than $4.81 to $4.91 expected previously, to reflect the expected benefit from higher operating profits and lower tax rates.
The revenue range was also slightly upped to $23.7 billion to $24.2 billion from $23.0 billion to $23.5 billion expected previously.
The sales guidance increase was due to lower anticipated rebates/discounts resulting from lower expected Medicaid utilization and payer mix and positive impact of currency.
Gross margin is expected to be approximately 75%, same as previously expected. Adjusted tax rate is expected to be approximately 17% (previously approximately 18%).
Marketing, selling and administrative expense guidance was tightened to a range of $6.2–$6.3 billion compared with $6.1–$6.4 billion previously. Research and development expense guidance was slightly increased to a range of $5.2–$5.4 billion compared with $5.0–$5.2 billion previously due to increased funding requirement for pipeline development.
Going forward, new products like Trulicity, Taltz, Basaglar, Cyramza, Jardiance, Lartruvo, Verzenio and Olumiant are expected to drive revenues.
After being slightly negative in the first half, Animal Health revenues are expected to improve in the second half of 2018 supported by new product launches.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter.
Eli Lilly and Company Price and Consensus
At this time, LLY has an average Growth Score of C, however its Momentum is doing a bit better with a B. Charting a somewhat similar path, 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 B. 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 more suitable for momentum investors than those looking for value and growth.
Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Notably, LLY has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.