On October 24, 2017 Eli Lilly and Company (NYSE: LLY) reported financial results for the third quarter of 2017 (Press release, Eli Lilly, OCT 24, 2017, View Source [SID1234521114]).
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$ in millions, except
per share data
Third Quarter
%
2017
2016
Change
Revenue
$
5,658.0
$
5,191.7
9%
Net Income – Reported
555.6
778.0
(29)%
EPS – Reported
0.53
0.73
(27)%
Net Income – Non-GAAP
1,106.7
931.0
19%
EPS – Non-GAAP
1.05
0.88
19%
Certain financial information for 2017 and 2016 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 generally accepted accounting principles (GAAP) and include all revenue and expenses recognized during the periods. Non-GAAP measures exclude the items described in the reconciliation tables later in the release. The company’s 2017 financial guidance is also 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’s focus on our key priorities led to strong performance in the third quarter, highlighted by revenue growth from our new pharmaceutical products. In addition, worldwide revenue from our diabetes products collectively grew 39 percent, and we continued to make improvements in our operating margins,” said David A. Ricks, Lilly’s chairman and CEO. “Our pipeline also continues to deliver. Including Verzenio, we’ve now launched nine medicines since 2014, and we are on a path to launch eleven more by 2023.”
Ricks continued, “Today, we are also announcing a strategic review of our Elanco Animal Health business. Elanco has developed into a premier animal health company, and has been an important growth driver and source of revenue diversification for Lilly. Through acquisitions and organic growth, we’ve grown Elanco to a size and scale that now allows us to consider a variety of options to maximize future value.”
Key Events Over the Last Three Months
Commercial
The company launched Olumiant (baricitinib) in Japan for the treatment of rheumatoid arthritis (including the prevention of structural injury of joints) in patients with inadequate response to standard-of-care therapies. Olumiant is part of a collaboration with Incyte.
Regulatory
With respect to Verzenio (abemaciclib), a cyclin-dependent kinase (CDK) 4 & 6 inhibitor, the U.S. Food and Drug Administration (FDA):
Approved and the company launched Verzenio in combination with fulvestrant for the treatment of women with hormone receptor (HR)-positive, human epidermal growth factor receptor 2 (HER2)-negative advanced or metastatic breast cancer with disease progression following endocrine therapy, and as monotherapy for the treatment of adult patients with HR-positive, HER2-negative advanced or metastatic breast cancer with disease progression following endocrine therapy and prior chemotherapy in the metastatic setting.
Granted Priority Review designation for the New Drug Application based upon the positive interim results from a study of abemaciclib in combination with an aromatase inhibitor as initial endocrine-based therapy for the treatment of women with hormone receptor (HR)-positive, human epidermal growth factor receptor 2 (HER2)-negative advanced or metastatic breast cancer.
After discussions with the FDA in late August, Lilly will resubmit the New Drug Application for baricitinib before the end of January 2018. The resubmission package will include new safety and efficacy data. Baricitinib, which is part of a collaboration between Lilly and Incyte, is a once-daily oral investigational medication for the treatment of patients with moderate-to-severe rheumatoid arthritis (RA). The companies anticipate the FDA will classify the application as a Class II resubmission, which will start a new six-month review cycle.
Jardiance (empagliflozin) was approved in China as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes. The Jardiance label includes data on the reduction of risk of cardiovascular death in patients with type 2 diabetes and established cardiovascular disease. Jardiance is part of the company’s alliance with Boehringer Ingelheim.
Clinical
The company announced that lasmiditan, an investigational, oral, first-in-class molecule for the acute treatment of migraine, met its primary endpoint in a second Phase 3 study. At two hours following the first dose, a greater percentage of patients treated with lasmiditan were migraine pain-free compared to placebo. Lilly plans to submit a New Drug Application for lasmiditan to the FDA in the second half of 2018.
The company and Incyte announced new safety and efficacy data from a Phase 2 study of baricitinib in people with moderate-to-severe atopic dermatitis (AD). The results showed that baricitinib in combination with a mid-potency topical corticosteroid (TCS) significantly improved the signs and symptoms of AD compared to TCS alone. Baricitinib is part of a collaboration with Incyte.
The company announced that its Phase 3 study evaluating Verzenio as monotherapy in KRAS-mutated, advanced non-small lung cancer did not meet its primary endpoint of overall survival. However, an analysis of the secondary study endpoints of both progression-free survival and overall response rate showed evidence of monotherapy activity in the abemaciclib arm.
Business Development/Other Developments
The company reported that it is reviewing strategic alternatives for its Elanco Animal Health business, including an initial public offering, merger, sale, or retention of the business, and will provide an update no later than the middle of 2018.
The Patent Trial and Appeal Board of the U.S. Patent and Trademark Office has ruled in the company’s favor regarding patentability of the vitamin regimen for Alimta. If the patent is ultimately upheld through all remaining challenges, Alimta would maintain U.S. exclusivity until May 2022, preventing marketing of generic products for as long as the patent remains in force.
The company announced actions to streamline operations to more efficiently focus resources on developing new medicines and to improve its cost structure. Global workforce reductions, including those from a U.S. voluntary early retirement program, are expected to impact approximately 3,500 positions. Annualized savings of approximately $500 million will be about equally split to improve the company’s cost structure and reinvest in the business, including product launches and clinical development for new indications and line extensions. Lilly confirmed these savings would improve upon its previous commitment and now expects to achieve an OPEX-to-revenue ratio of 49 percent or less in 2018.
The company and CureVac AG announced a global immuno-oncology collaboration focused on the development and commercialization of up to five potential cancer vaccine products based on CureVac’s proprietary RNActive technology. This transaction is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act and other customary closing conditions. Subject to the closing of this transaction and under the terms of the agreement, CureVac will receive an upfront payment of $50 million and an equity investment of €45 million.
Following the impact of Hurricane Maria, the company has accounted for all employees in Puerto Rico, and its manufacturing sites had minimal damage. The company’s inventory strategy for products is designed to protect against this type of event, and Lilly sees no product supply risk or other significant financial impact at this time.
The company announced plans to invest $72 million in an insulin manufacturing project at one of its Indianapolis facilities. The investment will be used to replace an existing insulin vial filling line and allow Lilly to meet growing demand for its insulins — including Humalog (insulin lispro) and Humulin (human insulin) — while upgrading to state-of-the-art technology and preparing for its insulin pipeline. This new project is part of $850 million in anticipated U.S. capital investments the company announced in March of this year.
Third-Quarter Reported Results
In the third quarter of 2017, worldwide revenue was $5.658 billion, an increase of 9 percent compared with the third quarter of 2016. The revenue increase was driven by a 7 percent increase due to volume and a 2 percent increase due to higher realized prices.
Revenue in the U.S. increased 9 percent, to $3.104 billion, due to increased volume for new pharmaceutical products, including Trulicity, Basaglar, Taltz, Jardiance and Lartruvo, as well as increased volume for companion animal products from the acquisition of Boehringer Ingelheim Vetmedica’s U.S. feline, canine and rabies vaccine portfolio, and higher realized prices for several pharmaceutical products, primarily driven by Forteo, Humalog and Cialis. The increase in revenue was partially offset by decreased volume due to loss of exclusivity for Strattera and Effient, as well as decreased demand for Cialis and food animal products. Cymbalta revenue declined by approximately $145 million, as the third quarter of 2016 included an increase in revenue due to a reduction to the return reserve.
Revenue outside the U.S. increased 8 percent, to $2.554 billion, due to increased volume for several new pharmaceutical products, primarily driven by Trulicity and Cyramza.
Gross margin increased 8 percent, to $4.092 billion, in the third quarter of 2017 compared with the third quarter of 2016. Gross margin as a percent of revenue was 72.3 percent, a decrease of 0.7 percentage points compared with the third quarter of 2016. The decrease in gross margin percent was primarily due to the effect of foreign exchange rates on international inventories sold and negative product mix, partially offset by manufacturing efficiencies.
Operating expenses in the third quarter of 2017, defined as the sum of research and development and marketing, selling and administrative expenses, increased 3 percent to $2.875 billion. Research and development expenses increased 7 percent, to $1.319 billion, or 23.3 percent of revenue. This increase is primarily due to a $50 million milestone payment related to lanabecestat as part of the company’s collaboration with AstraZeneca and, to a lesser extent, higher late-stage clinical development costs. Marketing, selling and administrative expenses decreased 1 percent, to $1.556 billion, due to decreased expenses related to late life-cycle products, partially offset by increased expenses related to new pharmaceutical products. Operating expenses were 50.8 percent of revenue in the third quarter of 2017, a reduction of 3.2 percentage points compared with the third quarter of 2016.
In the third quarter of 2017, the company recognized acquired in-process research and development charges of $205.0 million associated with a strategic collaboration with Nektar Therapeutics to co-develop NKTR-358, a novel immunological therapy that has potential to treat a number of autoimmune and other chronic inflammatory conditions, and a new collaboration with KeyBioscience focused on the development of Dual Amylin Calcitonin Receptor Agonists (DACRAs), a potential new class of treatments for metabolic disorders such as type 2 diabetes. There were no acquired in-process research and development charges in the third quarter of 2016.
In the third quarter of 2017, the company recognized asset impairment, restructuring and other special charges of $406.5 million. The charges are partially associated with asset impairments related to lower projected revenue for Posilac (rbST). The company is exploring strategic options for Posilac, including seeking a buyer for the molecule and its Augusta manufacturing site. The charges are also associated with severance costs incurred as a result of actions taken to reduce the company’s cost structure. Charges related to the U.S. voluntary early retirement program will be recognized in the fourth quarter of 2017. In the third quarter of 2016, the company recognized asset impairment, restructuring and other special charges of $45.5 million, primarily related to integration and severance costs for Novartis Animal Health.
Operating income in the third quarter of 2017 was $605.5 million, a decrease of $338.0 million compared with the third quarter of 2016, primarily driven by asset impairment, restructuring and other special charges, and acquired in-process research and development, partially offset by higher gross margin.
Other income (expense) was expense of $13.9 million in the third quarter of 2017, compared with income of $27.2 million in the third quarter of 2016. The increase in other expense was driven by higher net gains on investments in the third quarter of 2016 as compared to 2017.
The effective tax rate was 6.1 percent in the third quarter of 2017, compared with 19.9 percent in the third quarter of 2016. The lower effective tax rate for the third quarter of 2017 is primarily due to the income tax benefit of acquired in-process research and development charges and asset impairment, restructuring, and other special charges.
In the third quarter of 2017, net income decreased 29 percent, to $555.6 million, and earnings per share decreased 27 percent, to $0.53, compared with $778.0 million and $0.73, respectively, in the third quarter of 2016. The decreases in net income and earnings per share were primarily driven by lower operating income.
Third-Quarter Non-GAAP Measures
On a non-GAAP basis, third-quarter 2017 gross margin increased 7 percent, to $4.252 billion. Gross margin as a percent of revenue was 75.1 percent, a decrease of 1.3 percentage points compared with the third quarter of 2016. The decrease in gross margin percent was primarily due to the effect of foreign exchange rates on international inventories sold and negative product mix, partially offset by manufacturing efficiencies.
Operating expenses were 50.8 percent of revenue in the third quarter of 2017, a reduction of 3.1 percentage points compared with the third quarter of 2016.
Operating income increased $211.7 million, or 18 percent, to $1.378 billion in the third quarter of 2017, primarily due to higher gross margin partially offset by increased operating expenses.
The effective tax rate was 18.9 percent in the third quarter of 2017, compared with 22.0 percent in the third quarter of 2016. The lower effective tax rate for the third quarter of 2017 is primarily due to a net discrete tax benefit of approximately $30 million.
In the third quarter of 2017, net income increased 19 percent, to $1.107 billion, and earnings per share increased 19 percent, to $1.05, compared with $931.0 million and $0.88, respectively, in the third quarter of 2016. The increases in net income and earnings per share were primarily driven by higher operating income.
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.