A month has gone by since the last earnings report for Eli Lilly (LLY - Free Report) . Shares have added about 6.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Lilly due for a pullback? 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 catalysts.
Lilly Tops on Q3 Earnings, Misses Sales, Lifts 2018 Outlook
Lilly reported third-quarter 2018 adjusted earnings per share of $1.39, which beat the Zacks Consensus Estimate of $1.37 per share. Earnings rose 32% from the year-ago quarter backed by robust growth in new product sales and higher operating income. Meanwhile, lower tax rates and a reduction in shares outstanding from shares repurchase also led to higher earnings in the quarter.
Including acquisition-related in-process R&D charges, asset impairment, restructuring and other special charges, third-quarter earnings per share was $1.12 against a gain of 53 cents per share in the third-quarter of 2017.
Revenues in Detail
Quarterly revenues of $6.06 billion missed the Zacks Consensus Estimate of $6.11 billion. Sales grew 7% year over year backed by strong demand for its new drugs, led by Trulicity, Taltz, and Verzenio, which made up for lower sales of established products like Strattera, Cialis and Forteo.
Foreign exchange hurt sales growth by 1% in the quarter. Also, lower realized prices had a negative impact of 4% on sales.
Volumes rose 12% as increased demand for new products like Trulicity, Basaglar, Taltz and Verzenio, offset lower volumes of some established products like Cialis, Strattera and Effient due to loss of exclusivity. Volumes of Lilly’s diabetes products rose 30% in the quarter.
New pharma products (products launched since 2014) drove 14% of volume growth and generated over $1.9 billion in revenues, representing nearly 31% total revenues, up from 28% in the previous quarter. On the other hand, the loss of exclusivity for Strattera, Effient, Zyprexa, Axiron, Evista, and Cymbalta hurt volumes by 110 basis points. Lower demand for Cialis hurt volumes by 190 basis points.
While U.S. revenues grew 11% to $3.45 billion, ex-U.S. revenues rose 2% to $2.62 billion.
Pharmaceutical revenues rose 8% in the quarter. U.S. Pharma revenues increased 11%, while in Europe, pharma revenues rose 1%, excluding currency impact. In Japan, pharma revenues decreased 2%, excluding currency impact. Pharma revenues in the rest of the world increased 15%.
Established products that recorded growth during the quarter included Humulin (up 7% to $322.1 million) and Alimta (up 1% to $520.5 million). Sales of all other established products declined in the quarter.
Forteo sales declined 12% to $390.8 million. Cymbalta sales declined 6% to $172.0 million. Humalog sales dropped 5% to $664.6 million. Zyprexa sales were down 22% to $109.9 million. Erbitux sales declined 2% to $159.5 million.
Cialis (erectile dysfunction) sales declined 17% to $467.1 million as U.S. sales were hurt by lower demand due to the entry of generic sildenafil while outside U.S. sales were hurt by loss of exclusivity in Europe. In September, Teva Pharmaceuticals announced the launch of a generic version of Cialis, which is expected to result in rapid erosion of sales in the future quarters.
Strattera sales declined 28% to $98.7 million due to loss of exclusivity.
Among the new products, Trulicity generated revenues of $816.2 million, up 55% year over year driven by higher demand in the United States and higher volumes in ex-U.S. markets.
Cyramza revenues were $198.4 million, up 1% year over year as higher international sales were offset by lower U.S. sales. Cyramza’s ex-U.S. revenues increased 4%, as strong volumes were partially offset by lower realized prices. Cyramza U.S. revenues decreased 4% driven by lower realized prices.
Jardiance sales surged 31% to $166.9 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 $201.2 million, up 38% year over year. In the United States, sales rose 37%, benefiting from higher demand, which offset the impact of lower realized prices (due to increased volume in Medicare Part D and) and unfavorable changes to estimates for rebates and discounts.
Taltz brought in sales of $263.9 million compared with $220.1 million in the previous quarter as U.S. sales gained from higher demand, which made up for lower realized prices while 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 (olaratumab) generated revenues of $76.9 million in the quarter, up 41% year over year driven by increased demand trends in the U.S. market and increased volume from new launches in ex-U.S. markets. However, Lartruvo sales declined 3.8% sequentially in the quarter.
Olumiant generated sales of $55.6 million in the quarter backed by launch uptake in new European markets, compared with $44.7 million in the previous quarter. In the United States, Olumiant recorded sales of $0.8 million, which were less than $1.7 million in the previous quarter.
Verzenio, launched in the Unites States in late 2017, generated sales of $84.5 million in the quarter compared with $57.7 million in the previous quarter. In February, Verzenio gained FDA approval in the first-line setting while the drug was approved in Europe and Japan in the third quarter. These line extensions could prove to be significant growth drivers for the drug. However, on the conference call. The company said it saw a slowdown in the growth of the CDK4/6 market though Verzenio gained market share in the quarter.
Animal Health segment sales rose 4% to $772.7 million as higher prices and higher volume offset currency headwinds.
Gross Margin & Operating Income
Adjusted gross margin of 76.7% in the quarter rose 190 basis points driven by manufacturing efficiencies, favorable product mix and the positive effect of foreign exchange rates on international inventories sold, which offset the negative impact of lower prices.
Operating income increased 29% year over year to $1.69 billion due to 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 270 basis points in the quarter to 48.8% due to the company’s cost saving efforts.
While marketing, selling and administrative expenses rose 2%, R&D expense was flat in the quarter.
Adjusted effective tax rate was 15.1%, lower than 18.9% in the year-ago quarter, driven primarily by the impact of U.S. tax reform.
In the quarter, Lilly repurchased stock worth $1 billion.
2018 Guidance Upped
Lilly raised its previously issued outlook for adjusted earnings while increasing the lower end of the total revenue guidance.
Adjusted earnings per share are now expected in the range of $5.55 to $5.60, higher than $5.40 to $5.50 expected previously. At the mid-point of the range, the guidance represents an increase of 30% over 2017 versus 27% previously.
In the fourth quarter, the company expects earnings in the range of $1.33 - $1.38. This represents a sequential decline from third-quarter levels due to U.S. generic competition for Cialis in September, higher R&D costs in the fourth quarter, and launch costs for Emgality. Also, backing out the non-controlling interest portion of Elanco profits is expected to have a 2 to 3 cents negative impact on earnings in the fourth quarter.
The lower range of the revenue guidance for 2018 was slightly upped to $24.3 billion to $24.5 billion from $24.0 billion to $24.5 billion expected previously.
The sales guidance increase was due to strong performance of pharmaceuticals products, especially Lilly’s diabetes drugs.
Gross margin is expected to be approximately 76%, same as previous expectations.
Adjusted tax rate is expected to be approximately 16% (previously 17%).
Marketing, selling and administrative expense guidance was raised from a range of $6.2–$6.5 billion to $6.3–$6.5 billion. Research and development expense guidance was kept intact in the range of $5.2–$5.4 billion.
Going forward, new products like Trulicity, Taltz, Basaglar, Cyramza, Jardiance, Lartruvo, Verzenio and Olumiant are expected to continue to drive revenues.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.09% due to these changes.
Currently, Lilly has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Lilly has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.