On October 23, 2019 Eli Lilly and Company (NYSE: LLY) reported financial results for the third quarter of 2019 (Press release, Eli Lilly, OCT 23, 2019, View Source [SID1234542434]).
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Certain financial information for 2019 and 2018 is presented on both a reported and a non-GAAP basis. Some numbers in this press release may not add due to rounding. Reported results were prepared in accordance with U.S. generally accepted accounting principles (GAAP), include all revenue and expenses recognized during the periods, and reflect Elanco Animal Health (Elanco) as discontinued operations for all periods presented. Non-GAAP measures reflect adjustments for the items described in the reconciliation tables later in the release, and assume that the disposition of Elanco occurred at the beginning of all periods presented (including the benefit from the reduction in shares of common stock outstanding). The company’s 2019 financial guidance is being provided on both a reported and a non-GAAP basis. The non-GAAP measures are presented to provide additional insights into the underlying trends in the company’s business.
"Lilly continued to deliver strong results in the third quarter, due in large part to the growth of our newer medicines and our ability to effectively manage costs while supporting global launches in highly competitive classes and funding our next generation of new therapies," said David A. Ricks, Lilly’s chairman and CEO. "Lilly’s revenue growth is being driven by volume, not price, as more and more patients are benefiting from our recently launched medicines. Our sustained investments in oncology, diabetes, immunology, and neuroscience research continue to be productive, with several new medicines expected to be submitted, launch and then reach patients over the next few years."
Key Events Over the Last Three Months
Regulatory
The U.S. Food and Drug Administration (FDA) approved REYVOW, an oral medication for the acute treatment of migraine, with or without aura, in adults. The recommended controlled substance classification for REYVOW is currently under review by the Drug Enforcement Administration (DEA) and is expected within 90 days of the FDA approval, after which REYVOW will be available to patients in retail pharmacies.
The FDA approved Taltz for the treatment of adults with active ankylosing spondylitis, also known as radiographic axial spondyloarthritis (r-axSpA).
The European Commission approved an update to the Trulicity label and indication statement to include results from the REWIND cardiovascular (CV) outcomes trial, which achieved a significant 12 percent risk reduction in major adverse cardiovascular events (MACE).
The European Medicines Agency’sCommittee for Medicinal Products for Human Use (CHMP) issued a positive opinion recommending the approval of Baqsimi for the treatment of severe hypoglycemia in adults, adolescents, and children aged four years and older with diabetes mellitus.
Clinical
The company announced positive results from a Phase 1/2 clinical trial intended to support the registration of oral selpercatinib monotherapy, also known as LOXO-292, for the treatment of RET fusion-positive non-small cell lung cancer, and for the treatment of RET-altered thyroid cancers.
The company announced that Emgality met the primary and all key secondary outcomes in a Phase 3 study evaluating its efficacy and safety in the preventive treatment of chronic and episodic migraine in patients with documented previous failures on two to four different standard-of-care migraine preventive medication categories, due to inadequate efficacy or for safety/tolerability reasons.
The company announced that Taltz met the primary and all major secondary endpoints up to week 12 in a Phase 4 study, which evaluated the efficacy and safety of Taltz versus Tremfya in people living with moderate to severe plaque psoriasis.
The company and Incyte Corporation announced that baricitinib met the primary endpoint in a Phase 3 investigational study evaluating its efficacy and safety to treat moderate to severe atopic dermatitis (AD) in adults.
The company announced top-line results from a Phase 3 trial evaluating pegilodecakin plus FOLFOX (folinic acid, 5-FU, oxaliplatin) compared to FOLFOX alone in patients with metastatic pancreatic cancer whose disease had progressed during or following a first-line gemcitabine-containing regimen. The trial did not meet its primary endpoint of overall survival.
Business Development/Other Developments
The U.S. Court of Appeals for the Federal Circuit ruled in favor of Lilly, confirming that the Alimta vitamin regimen patent would be infringed by competitors that had stated their intent to market alternative salt forms of pemetrexed prior to the patent’s expiration in May 2022.
An arbitration panel ruled in favor of Lilly in a claim filed by Adocia S.A. over the companies’ prior collaboration on a rapid-acting insulin. The panel of three arbitrators ruled that Lilly did not misappropriate or misuse Adocia’s intellectual property or confidential information, and denied Adocia’s claims for damages; the panel also denied Lilly’s smaller counterclaim.
Third-Quarter Reported Results
In the third quarter of 2019, worldwide revenue was $5.477 billion, an increase of 3 percent compared with the third quarter of 2018, and an increase of 4 percent when excluding the impact of foreign exchange rates. The increase in revenue was driven by an 8 percent increase due to volume, partially offset by a 4 percent decrease due to lower realized prices.
Revenue in the U.S. was essentially flat at $3.060 billion, as increased volume of 5 percent was offset by lower realized prices. Increased U.S. volume for key growth products including Trulicity, Taltz, Emgality, Jardiance, Verzenio, and Basaglar, was partially offset by decreased volume for Cialis due to loss of patent exclusivity, as well as the impact from the product withdrawal of Lartruvo. Lower realized prices in the U.S. were primarily due to increased coverage gap funding requirements in Medicare Part D and higher contracted rebates.
Revenue outside the U.S. increased 8 percent, to $2.416 billion, driven by increased volume of 12 percent, which was primarily from key growth products, including Trulicity, Olumiant, Jardiance, Taltz, and Verzenio, partially offset by decreased volume for Strattera due to loss of patent exclusivity and the impact of the product withdrawal of Lartruvo. The increase in revenue due to volume was partially offset by the unfavorable impact of foreign exchange rates and lower realized prices.
Gross margin increased 4 percent, to $4.302 billion, in the third quarter of 2019 compared with the third quarter of 2018. Gross margin as a percent of revenue was 78.5 percent, an increase of 0.2 percentage points compared with the third quarter of 2018. The increase in gross margin percent was primarily due to the favorable effect of foreign exchange rates on international inventories sold, lower intangibles amortization expense and greater manufacturing efficiencies, partially offset by unfavorable product mix primarily as a result of the loss of patent exclusivity for Cialis, and the impact of lower realized prices on revenue.
Operating expenses in the third quarter of 2019, defined as the sum of research and development and marketing, selling, and administrative expenses, increased 2 percent to $2.793 billion compared with the third quarter of 2018. Research and development expenses increased 8 percent to $1.381 billion, or 25.2 percent of revenue, driven by higher development expenses for late-stage assets. Marketing, selling, and administrative expenses decreased 3 percent, to $1.412 billion, as lower spending on late life-cycle products, lower litigation charges, and ongoing cost containment measures were partially offset by increased expenses for recently launched products.
In the third quarter of 2019, the company recognized acquired in-process research and development charges of $77.7 million, related to the previously announced business development transactions with Centrexion Therapeutics Corporation and AC Immune SA. In the third quarter of 2018, the company recognized acquired in-process research and development charges of $30.0 million related to a collaboration with Anima Biotech.
Operating income in the third quarter of 2019 was $1.431 billion, compared to $1.343 billion in the third quarter of 2018. The increase in operating income was primarily driven by higher gross margin and lower asset impairment, restructuring, and other special charges, partially offset by higher operating expenses and higher acquired in-process research and development charges.
Other expense was $24.9 million in the third quarter of 2019, compared with $1.9 million in the third quarter of 2018. The increase in other expense was primarily driven by higher net interest expense, partially offset by higher net gains on investment securities.
The effective tax rate was 10.8 percent in the third quarter of 2019, compared with 18.5 percent in the third quarter of 2018. The lower effective tax rate for the third quarter of 2019 was primarily driven by a net discrete tax benefit related to the settlement of certain tax matters, as compared to a net discrete tax detriment incurred in the third quarter of 2018 related to tax expenses for U.S. tax reform and the Elanco separation.
In the third quarter of 2019, net income and earnings per share were $1.254 billion and $1.37, respectively, compared with net income of $1.150 billion and earnings per share of $1.12 in the third quarter of 2018. The increase in net income in the third quarter of 2019 was primarily driven by higher operating income and, to a lesser extent, lower tax expense, partially offset by lower net income from discontinued operations related to Elanco. In addition to the increase in net income, earnings per share in the third quarter of 2019 significantly benefited from lower weighted-average shares outstanding as a result of the Elanco exchange offer and share repurchases.
Third-Quarter Non-GAAP Measures
On a non-GAAP basis, third-quarter 2019 gross margin increased 2 percent, to $4.358 billion compared with the third quarter of 2018. Gross margin as a percent of revenue was 79.6 percent, a decrease of 0.6 percentage points. The decrease in gross margin percent was primarily due to unfavorable product mix primarily as a result of the loss of patent exclusivity for Cialis, and the impact of lower realized prices on revenue, partially offset by the favorable effect of foreign exchange rates on international inventories sold and greater manufacturing efficiencies.
Operating income on a non-GAAP basis increased $44.4 million, or 3 percent, to $1.565 billion in the third quarter of 2019 compared with the third quarter of 2018, due to higher gross margin, partially offset by higher operating expenses.
The effective tax rate on a non-GAAP basis was 11.7 percent in the third quarter of 2019, compared with 14.9 percent in the third quarter of 2018. The lower effective tax rate for the third quarter of 2019 was driven primarily by a net discrete tax benefit related to the settlement of certain tax matters.
On a non-GAAP basis, in the third quarter of 2019, net income increased 5 percent, to $1.360 billion, while earnings per share increased 10 percent, to $1.48, compared with $1.293 billion and $1.34, respectively, in the third quarter of 2018. The increase in net income was driven by lower tax expense and higher operating income, partially offset by higher other expense. The increase in earnings per share was driven by the increase in net income as well as the benefit from lower weighted-average shares outstanding as a result of share repurchases. Non-GAAP weighted average shares outstanding for both periods have been reduced by the approximately 65 million shares retired in the Elanco exchange offer.
For further detail of non-GAAP measures, see the reconciliation below as well as the Reconciliation of GAAP Reported to Selected Non-GAAP Adjusted Information table later in this press release.
Year-to-Date Reported Results
For the first nine months of 2019, worldwide revenue increased 2 percent, to $16.206 billion, compared with $15.856 billion in the same period in 2018. Reported net income and earnings per share for the first nine months of 2019 were $6.823 billion and $7.24, respectively, compared with $2.107 billion and $2.03 in the same period of 2018. The increases in net income and earnings per share in the first nine months of 2019 were driven primarily by the gain recognized on the disposition of Elanco and, to a lesser extent, lower acquired in-process research and development charges.
Year-to-Date Non-GAAP Measures
For the first nine months of 2019, net income and earnings per share, on a non-GAAP basis, were $3.985 billion and $4.31, respectively, compared with $4.014 billion and $4.13 in the same period of 2018.
For further detail of non-GAAP measures, see the reconciliation below as well as the Reconciliation of GAAP Reported to Selected Non-GAAP Adjusted Information table later in this press release.
Trulicity
Third-quarter 2019 worldwide Trulicity revenue was $1.011 billion, an increase of 24 percent compared with the third quarter of 2018. U.S. revenue increased 17 percent, to $755.5 million, driven by increased demand, partially offset by lower realized prices due to higher contracted rebates, changes in segment mix, and increased coverage gap funding requirements in Medicare Part D. Revenue outside the U.S. was $256.0 million, an increase of 50 percent, driven by increased volume.
Humalog
For the third quarter of 2019, worldwide Humalog revenue decreased 2 percent compared with the third quarter of 2018, to $648.9 million. Revenue in the U.S. decreased 3 percent, to $356.2 million, driven by decreased demand and lower realized prices. Revenue outside the U.S. decreased 2 percent, to $292.6 million, driven primarily by the unfavorable impact of foreign exchange rates, partially offset by higher realized prices.
Alimta
For the third quarter of 2019, worldwide Alimta revenue decreased 2 percent compared with the third quarter of 2018, to $508.2 million. U.S. revenue decreased 2 percent, to $282.4 million, primarily driven by lower realized prices and the impact of buying patterns, partially offset by increased demand. Revenue outside the U.S. decreased 3 percent to $225.9 million, primarily driven by lower realized prices and, to a lesser extent, the unfavorable impact of foreign exchange rates, partially offset by increased volume.
Forteo
For the third quarter of 2019, worldwide Forteo revenue decreased 5 percent compared with the third quarter of 2018, to $370.7 million. U.S. revenue decreased 4 percent, to $175.1 million, primarily driven by decreased demand, partially offset by higher realized prices. Revenue outside the U.S. decreased 6 percent to $195.7 million, primarily driven by decreased volume and, to a lesser extent, the unfavorable impact of foreign exchange rates. The company expects further volume declines resulting from generic and biosimilar competition, as Forteo lost patent exclusivity in the U.S., Japan and major European markets in the third quarter of 2019.
Taltz
For the third quarter of 2019, worldwide Taltz revenue increased 29 percent compared with the third quarter of 2018, to $340.0 million. U.S. revenue increased 19 percent, to $250.6 million, driven by increased demand, partially offset by lower realized prices due to changes in estimates for rebates and discounts. Revenue outside the U.S. increased 68 percent, to $89.4 million, primarily driven by increased volume from recent launches.
Humulin
For the third quarter of 2019, worldwide Humulin revenue remained essentially flat compared with the third quarter of 2018, at $321.8 million. U.S. revenue increased 1 percent, to $218.2 million, driven by higher realized prices, partially offset by decreased volume. Revenue outside the U.S. decreased 1 percent, to $103.6 million, due to the unfavorable impact of foreign exchange rates, partially offset by higher realized prices and increased volume.
Basaglar
For the third quarter of 2019, worldwide Basaglar revenue increased 31 percent compared with the third quarter of 2018, to $263.2 million. U.S. revenue increased 29 percent, to $202.4 million, driven by increased demand and higher realized prices. Revenue outside the U.S. increased 39 percent, to $60.8 million, driven by increased volume. Basaglar is part of the company’s alliance with Boehringer Ingelheim, and Lilly reports total sales of Basaglar as revenue, with payments made to Boehringer Ingelheim for its portion of the gross margin reported as cost of sales.
Cialis
For the third quarter of 2019, worldwide Cialis revenue decreased 61 percent compared with the third quarter of 2018, to $184.3 million. U.S. revenue was $30.9 million in the third quarter, a 90 percent decrease compared with the third quarter of 2018, driven by decreased demand due to generic competition. Revenue outside the U.S. decreased 10 percent to $153.4 million, driven by decreased demand due to generic competition, and, to a lesser extent, lower realized prices and the unfavorable impact of foreign exchange rates.
Cyramza
For the third quarter of 2019, worldwide Cyramza revenue was $240.0 million, an increase of 21 percent compared with the third quarter of 2018. U.S. revenue was $82.5 million, an increase of 23 percent, primarily driven by increased demand and, to a lesser extent, higher realized prices. Revenue outside the U.S. was $157.5 million, an increase of 20 percent, driven by increased volume.
Jardiance
The company’s worldwide Jardiance revenue during the third quarter of 2019 was $240.7 million, an increase of 44 percent compared with the third quarter of 2018. U.S. revenue increased 35 percent, to $140.6 million, driven by increased demand. Revenue outside the U.S. was $100.1 million, an increase of 60 percent, driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates. Jardiance is part of the company’s alliance with Boehringer Ingelheim, and Lilly reports as revenue a portion of Jardiance’s gross margin.
Verzenio
For the third quarter of 2019, Verzenio generated worldwide revenue of $157.2 million, an increase of $23.3 million compared with the second quarter of 2019. U.S. revenue was $124.8 million, an increase of $19.6 million compared with the second quarter of 2019, primarily driven by increased higher realized prices and increased demand. Revenue outside the U.S. was $32.4 million, an increase of $3.8 million compared with the second quarter of 2019.
Olumiant
For the third quarter of 2019, Olumiant generated worldwide revenue of $114.6 million. U.S. revenue was $12.1 million. Revenue outside the U.S. was $102.5 million, an increase of 87 percent compared with the third quarter of 2018, driven by increased demand, partially offset by lower realized prices and the unfavorable impact of foreign exchange rates.
Emgality
For the third quarter of 2019, Emgality generated worldwide revenue of $47.7 million, an increase of $13.4 million compared with the second quarter of 2019. U.S. revenue was $45.8 million, an increase of $12.0 million compared with the second quarter of 2019. Emgality was launched in certain international markets in the first quarter of 2019 and generated revenue outside of the U.S. of $1.9 million in the third quarter of 2019.
2019 Financial Guidance
The company has updated certain elements of its 2019 financial guidance. On a reported basis, earnings per share for 2019 are now expected to be in the range of $8.59 to $8.69. On a non-GAAP basis, earnings per share are now expected to be in the range of $5.75 to $5.85.
Following the disposition of the company’s remaining ownership in Elanco Animal Health, Elanco’s financial results were no longer included in Lilly’s financial results beginning March 12, 2019. On a reported basis, the 2019 financial guidance outlined below includes the financial results of the Elanco business from January 1, 2019 to March 11, 2019 as discontinued operations, including the gain on the disposition of Elanco. The company’s 2019 non-GAAP financial guidance excludes the discontinued operations results for Elanco.
The company still anticipates 2019 revenue between $22.0 billion and $22.5 billion. Revenue growth is expected to be driven by volume from key growth products including Trulicity, Taltz, Basaglar, Jardiance, Verzenio, Cyramza, Olumiant, and Emgality. Revenue growth is also expected to benefit from the recent launch of Baqsimi. Revenue growth is expected to be partially offset by lower revenue for Cialis and other products that have lost patent exclusivity. Revenue growth is also expected to be partially offset by the negative impact of foreign exchange rates, a mid-single digit net price decline in the U.S. driven primarily by rebates and legislated increases to Medicare Part D cost sharing, patient affordability programs, price declines in some international markets and the impact of the product withdrawal of Lartruvo.
Gross margin as a percent of revenue rate is still expected to be approximately 79.0 percent on a reported basis and approximately 80.0 percent on a non-GAAP basis.
Marketing, selling and administrative expenses are still expected to be in the range of $5.9 billion to $6.1 billion. Research and development expenses are still expected to be in the range of $5.5 billion to $5.7 billion.
Other income (expense) is now expected to be between income of $50 million and expense of $100 million.
The 2019 effective tax rate is now expected to be in the range of 13 percent to 14 percent on a reported basis and 12 percent to 13 percent on a non-GAAP basis.
Webcast of Conference Call
As previously announced, investors and the general public can access a live webcast of the third-quarter 2019 financial results conference call through a link on Lilly’s website at www.lilly.com. The conference call will begin at 9:00 a.m. Eastern time (ET) today and will be available for replay via the website.
Lilly is a global healthcare leader that unites caring with discovery to create medicines that make life better for people around the world. We were founded more than a century ago by a man committed to creating high-quality medicines that meet real needs, and today we remain true to that mission in all our work. Across the globe, Lilly employees work to discover and bring life-changing medicines to those who need them, improve the understanding and management of disease, and give back to communities through philanthropy and volunteerism. F-LLY