Lilly (LLY) Beats On Q4 Earnings, Raises 2018 EPS Guidance

Eli Lilly and Company (NYSE:LLY) 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 higher operating profits.

Revenues Beat

Quarterly revenues of $6.16 billion also beat the Zacks Consensus Estimate of $5.96 billion by 3.4%. Sales grew 7% year over year backed by strong performance of new drugs and favorable currency movement to a lesser extent, partially offset by lower sales of established products like Strattera, Humalog, Cialis and Effient. Lilly’s established products portfolio recorded a decline of 6.3% in worldwide revenues.

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 hada favorable impact of 1%.

Segment Revenues

Pharmaceutical revenues rose 9% in the quarter backed by 12% volume growth of the new products.

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

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. Moreover in December 2017, the FDA approved Sanofi’s (NYSE:SNY) Admelog, a biosimilar version of Humalog. This approval will certainly increase competition. 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 (up 88% to $143.2 million) were 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. Basaglar - Lilly and partner Boehringer Ingelheim’s follow-on insulin to Sanofi’s blockbuster drug, Lantus - was launched in the United States in mid-December 2016.

Taltz brought in sales of $172.5 million compared with $151.3 million in the previous quarter, reflecting strong uptake. In December 2017, the drug was approved for psoriatic arthritis and launched in the United States. The European Commission also approved the drug last week.

Lartruvo (olaratumab) generated revenues of $59 million in the fourth quarter of 2017 compared with $54.5 million in the previous quarter. Lartruvo was launched in the United States and the EU for soft tissue sarcoma in the fourth quarter of 2016.

Lilly and partner Incyte Corporation’s (NASDAQ:INCY) rheumatoid arthritis drug, Olumiant (baricitinib) has been launched in select European countries and in Japan. The drug generated sales of $23 million in the fourth quarter of 2017 compared with $16.2 million in the previous quarter backed by strong launch uptake in Germany.

However, in the United States, Lilly received a complete response letter from the FDA for baricitinib in April for want of additional data. The company has re-submitted the application in late 2017.

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

Lilly's Elanco Animal Health segment sales declined 6% to $790.9 million due to decrease in food animal revenues (down 8% to $547.4 million). However, companion animal revenues increased 1%, including revenues from the acquisition of Boehringer Ingelheim Vetmedica's U.S. feline, canine and rabies vaccine portfolio (acquired in January 2017) which was offset by competitive pressure and lower demand in the United States.

Gross Margin Down but Operating Income Rises

Adjusted gross margin of 76.5% in the quarter decreased 90 basis points as manufacturing efficiencies were offset by negative product mix and the effect of foreign exchange rates on international inventories sold.

Operating income increased 20% year over year to $1.46 billion. Total operating expenses, as a percent of revenues, declined 340 basis points in the quarter to 52.8%.

2018 EPS Guidance Upped

Lilly raised its previously issued 2018 adjusted earnings outlook. 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, reflecting positive impact of the U.S. tax reform. 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.

Our Take

Lilly’s fourth-quarter 2017 results were strong with the company beating estimates on both counts. Meanwhile expectations for a lower tax rate due to new tax laws propelled the company to raise its 2018 earnings outlook.

Shares were up 1.1% in pre-market trading. Lilly’s share price has risen 11.7% in the past year compared with an increase of 24.2% for the industry.

Going forward, new products like Trulicity, Taltz, Basaglar, Cyramza, Jardiance and Lartruvo are expected to see higher revenues. Lilly is also progressing well with its pipeline. The FDA approval for Taltz’s line extension will also boost Lilly’s product revenues. In October 2017, Lilly has announced that it is looking to sell or spin-off its Elanco Animal Health business. Potential sale of its underperforming Animal Health segment may help improve margins.

However, Alimta will continue to be impacted by competition. Other headwinds include competition from immuno-oncology agents as well as loss of exclusivity for many drugs in emerging markets.

Eli Lilly and Company Price, Consensus and EPS Surprise

Eli Lilly and Company Price, Consensus and EPS Surprise | Eli Lilly and Company Quote

Zacks Rank & Stock to Consider

Lilly carries a Zacks Rank #3 (Hold). A better-ranked stock in the pharma sector is AbbVie Inc. (NYSE:ABBV) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AbbVie’s earnings estimates increased from $6.56 to $7.30 for 2018 over the last 30 days. The company came up with a positive surprise in all the trailing four quarters with an average beat of 1.81%. The stock is up 89.7% in the past year.

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