Why Is Lilly (LLY) Down 5.5% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Eli Lilly (LLY). Shares have lost about 5.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Lilly due for a breakout? 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 Q1 Earnings Beat, Coronavirus May Mar Profits

Lilly reported first-quarter 2020 adjusted earnings per share of $1.75, which comprehensively beat the Zacks Consensus Estimate of $1.55. Earnings rose 32% year over year as higher R&D costs were offset by higher revenues.

Revenues in Detail

Revenues of $5.86 billion beat the Zacks Consensus Estimate of $5.51 billion. Sales grew 15% year over year (16% in constant currency), backed by strong volume trends, which offset the impact of lower realized prices.

Lower realized prices had a negative impact of 6% on sales. Volumes rose 22%, gaining from strong underlying demand trends for key growth products, augmented by higher patient and supply chain purchasing as people stocked medicines amid coronavirus-led lockdown. The coronavirus-related stockpiling mainly of Lilly’s diabetes medicine, Trulicity and psoriasis medicine, Taltz increased Lilly’s worldwide revenues by approximately $250 million. Higher volumes of key growth products, namely Trulicity, Taltz, Jardiance, Basaglar, Emgality, and Verzenio compensated for lower sales of older products like Cialis and Forteo due to loss of exclusivity.

Foreign exchange had a modest negative impact on revenue growth this quarter.

Key growth products (products launched since 2014) drove 19% of revenue growth and represented nearly 51% total revenues, up from 46% in the previous quarter.

U.S. revenues rose 15% to $3.33 billion while ex-U.S. revenues rose 15% to $2.53 billion.

Among the established products, Forteo sales declined 13% to $272.4 million. Humalog sales dropped 5% to $695.8 million. Humulin sales rose 6% to $315.7 million. Alimta sales rose 12% to $560.1 million.

Among the growth products, Trulicity generated revenues of $1.23 billion, up 40% year over year driven by higher volumes in the United States as well as ex-U.S. markets, which offset the impact of lower realized prices. COVID-19 related increased customer buying patterns and patient prescription trends benefited U.S. Trulicity sales by approximately $30 million to $40 million in the quarter.

Cyramza revenues were $239.0 million, up 21% year over year driven by higher volumes in both U.S. and international markets.

Jardiance sales rose 31% to $267.5 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 $303.7 million, up 21% year over year driven by higher volumes in both U.S. and international markets.

Taltz brought in sales of $443.5 million, up 76% year over year as U.S. sales gained from higher demand and higher realized prices due to changes in estimates for rebates and discounts. Ex-U.S. sales were driven by increased volume, which offset the impact of lower realized prices. U.S. revenues for Taltz were favorably impacted by approximately $20 million to $25 million due to COVID-19.

Olumiant generated sales of $139.7 million in the quarter compared with $127.8 million in the previous quarter, backed by increased demand in international markets. Revenues outside the United States were $128.4 million compared with $114.9 million in the previous quarter. In the United States, Olumiant recorded sales of $11.3 million compared with $13.0 million in the previous quarter.

Verzenio generated sales of $188.0 million in the quarter, up from $179.1 million in the previous quarter driven by increased volume.

Emgality generated revenues of $74.0 million in the quarter compared with $66.3 million in the previous quarter. In the United States, Emgality sales were $67.3 million compared with $63.1 million in the previous quarter. Ex U.S. sales were $6.7 million in the first quarter.

Lilly’s newly launched product, Baqsimi, which is a glucagon nasal powder to treat severe hypoglycemia in diabetes patients, generated sales of $17.8 million in the quarter.

Gross Margin & Operating Income

Adjusted gross margin was 80.3% in the quarter, up 10 basis points driven by favorable product mix and manufacturing efficiencies, which were partially offset by price and increased costs associated with COVID-19.

Operating income rose 32% year over year to $1.76 billion. Operating margin was 30.1% in the quarter, up 390 bps year over year, gaining from impact of COVID-19 buying patterns.

Total operating expenses (including research and development and marketing, selling and administrative expenses) rose 7% in the quarter. Marketing, selling and administrative expenses rose 2% to $1.55 billion due to cost control, partially offset by increased investment behind recent launches. R&D expense rose 13% to $1.39 in the quarter due to higher development expenses for late-stage assets.

Adjusted effective tax rate was 13.6%, higher than 12.9% in the year-ago quarter.

2020 Guidance

However, despite the solid first-quarter results, the company maintained its full-year revenue guidance as it expects the coronavirus-related benefits seen in the first quarter to reverse over the course of 2020.

Importantly, Lilly warned that the economic consequences of the pandemic are uncertain and could hurt its profits in the future quarters of 2020 and potentially in 2021. In fact, reduced non-COVID healthcare activities due to business disruptions and global economic challenges emanating from the pandemic may hurt its profits, going forward. Lilly expects reduction in new prescription trends (as fewer patients visit a doctor) to be most significant in the second quarter in the United States and most European countries. The company expects headwinds from destocking as supply chains normalize from the recent demand surge and potential changes in segment mix in the United States due to rising unemployment in 2020.

Lilly upped the higher end of its 2020 adjusted earnings guidance from a range of $6.70-$6.80 per share to $6.70 - $6.90 to reflect the uncertainty of the impact of COVID-19 for the rest of the year. This indicates year-over-year growth in the range of 11% to 14%. However, the 2020 revenue guidance was maintained in the range of $23.7 billion-$24.2 billion. Gross margin guidance was maintained at approximately 81%. Adjusted tax rate is expected to be approximately 15%. Adjusted operating margin is expected to be 31% in 2020 (maintained).

The other expense guidance was lowered from a range of 100 million-250 million to $0-150 million.

Marketing, selling and administrative expense guidance was maintained in the range of $6.2 to $6.4 billion. Research and development expense is still expected to be in the range of $5.6 billion to $5.9 billion.

Nonetheless, Lilly still expects revenue growth to be driven by higher demand for its growth drugs including Trulicity, Taltz, Basaglar, Jardiance, Verzenio, Cyramza, Olumiant, Emgality, Baqsimi as well as potential revenues from new product launches. However, generic competition for several drugs, rising pricing pressure in the United States due to rebates and legislated increases in Medicare Part D cost sharing, price reductions from increased utilization of patient affordability programs, and price cuts in some international markets like China, Japan and Europe are some top-line headwinds expected in 2020. In the United States, prices are still expected to decline in a low-single digit range.

Coronavirus Related Research Efforts

Earlier in April, Lilly announced that the National Institute of Allergy and Infectious Diseases (NIAID), part of the National Institutes of Health (NIH), will evaluate Olumiant (baricitinib), as a potential treatment for hospitalized patients diagnosed with COVID-19. The drug will be evaluated in one of the arms of NIAID's Adaptive COVID-19 Treatment study. The study will first begin in April in the United States and then expand to additional sites in Europe and Asia. Data from the studies are expected in two months’ time.

Alongside, Lilly has begun a phase II study on LY3127804, its monoclonal antibody that inhibits Angiopoietin 2 (Ang2), in pneumonia patients hospitalized with COVID-19 who are at a higher risk of progressing to acute respiratory distress syndrome. The phase II study is already enrolling patients in the United States and data from the study is expected in the coming months.

In March, Lilly signed a deal with private biotech, AbCellera to co-develop antibody therapies to treat and prevent COVID-19. Lilly is working with AbCellera, NIH and academic partners to characterize virus-neutralizing antibodies isolated from the blood sample of a U.S. COVID-19 patient who recovered from the disease. The most advanced antibody in this program has now entered GMP manufacturing. Lilly plans to submit an IND to the FDA by the end of May to allow start of clinical testing in patients

Last month, Lilly halted enrollment in most ongoing studies and said that it will delay new study starts in order to allow doctors and healthcare facilities to focus on efforts to combat COVID-19. Along with the earnings release, Lilly clarified that enrollment in ongoing studies and new clinical study starts will resume in the second half of the year.

 

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, Lilly has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Lilly has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.



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