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Lilly (LLY) Q2 Earnings Top, Baricitinib Re-Filing Delayed

Eli Lilly and Company LLY reported second-quarter 2017 adjusted earnings per share of $1.11, which beat the Zacks Consensus Estimate of $1.04 by 6.7%. Earnings rose 29% from the year-ago quarter backed by volume driven pharma sales growth and higher profits.

Revenues Beat

Quarterly revenues of $5.82 billion beat the Zacks Consensus Estimate of $5.59 billion by 4.2%. Sales grew 8% year over year backed by higher volumes and realized prices. However, foreign exchange pulled down sales by 1%.

Volumes rose 5% as higher volumes of new products like Trulicity, Taltz, Basaglar, Jardiance and Lartruvo offset lower volumes of established products like Zyprexa, Alimta, Cialis and Strattera.

Pharmaceutical volumes rose 8% in the quarter. However, worldwide competitive pressure hurt sales in Lilly’s Animal Health segment.

Revenue in Detail

U.S. revenues grew 15% to $3.32 billion, reflecting higher volume of products like Trulicity, Taltz, Basaglar, Jardiance and Lartruvo, which offset lower volumes of established drugs.

Ex-U.S. revenues declined 1% to $2.5 billion mainly due to lower volumes, increased competition and lower realized prices. Higher volumes of newer products like Cyramza and Trulicity were offset by lower volumes of Zyprexa, Cymbalta and Alimta due to the loss of exclusivity. Cymbalta has lost exclusivity in Europe and Canada, Zyprexa in Japan and Alimta in several countries. Lower sales of food and companion animal products hurt outside U.S. sales as well.

Established products that recorded growth during the quarter include Forteo (up 22% to $446.7 million), Humulin (up 8% to $357.8 million) and Effient (up 6% to $142.9 million).

Alimta sales, however, declined 12% to $532.9 million, reflecting lower demand in the U.S. due to competitive pressure, mainly from immuno-oncology agents. Outside the U.S., sales of Alimta were hurt by loss of exclusivity in several countries, increased competition and lower realized prices.

Zyprexa sales declined 33% to $140.8 million due to loss of exclusivity.

Humalog sales decreased 3% in the quarter to $678.4 million due to lower realized prices and volumes in the U.S.

Cialis sales were flat at $627.3 million hurt by lower demand in the U.S. as well as increased competition from generic sildenafil

Erbitux sales declined 12% to $159.1 million in the quarter. Strattera sales declined 17% to $186.6 million. Cymbalta sales declined 13% to $206.6 million.

Among new products, Trulicity generated revenues of $480.2 million, up 139% year over year, with U.S. revenues benefiting from growth in the GLP-1 market and market share gains.

Cyramza revenues were $186.3 million, up 27% year over year, backed mainly by higher outside U.S. revenues. Cyramza’s ex-U.S. revenues benefited from strong volumes in Japan. However, U.S. revenues increased only 1% as higher realized prices made up for lower demand due to competitive pressure.

Jardiance sales (up 157% to $103.2 million) were driven by increased market share within the growing SGLT2 class.

Basaglar recorded revenues of $86.6 million compared with $46.0 million in the previous quarter. Basaglar - Lilly and partner Boehringer Ingelheim’s follow-on insulin to Sanofi’s SNY blockbuster drug, Lantus - was launched in the U.S. in mid-Dec 2016 where it generated revenues of $59.5 million in the quarter.

Taltz brought in sales of $138.7 million compared with $96.6 million in the previous quarter, reflecting strong launch uptake.

Lartruvo (olaratumab) generated revenues of $47.4 million in the second quarter of 2017 compared with $42.1 million in the previous quarter. Lartruvo was launched in the U.S. and the EU for soft tissue sarcoma in the fourth quarter of 2016. U.S. revenues were $39.7 million compared with $36 million in the previous quarter.

Meanwhile, Lilly and partner Incyte Corporation’s INCY rheumatoid arthritis (RA) drug Olumiant (baricitinib) was approved in EU in Feb 2017. The drug generated sales of $4.8 million in the second quarter of 2017 compared with $1.9 million in the previous quarter. The drug received marketing approval in Japan earlier this month.

However, in the U.S., the companies received a complete response letter (CRL) from the FDA in April regarding the new drug application (NDA) for baricitinib. Concurrent with the earnings release, Lilly announced that the NDA resubmission for baricitinib will not occur this year and will be delayed by a minimum of 18 months. The company said that the FDA has indicated that an additional clinical study will be needed for a resubmission.

Lilly's Animal Health segment sales declined 9% to $784.8 million despite inclusion of revenues from the acquisition of Boehringer Ingelheim Vetmedica's U.S. feline, canine and rabies (acquired in Jan 2017). Animal Health revenues were hurt due to global competitive pressure that affected sales of both food animal and companion animal revenues in the quarter.

Gross Margin & Operating Income Rise

Adjusted gross margin of 76.7% in the quarter increased 70 basis points primarily driven by higher realized prices and manufacturing efficiencies.

Operating income increased 31% to $1.51 billion on higher gross margins. Operating expenses remained flat in the quarter. However, total operating expenses, as a percent of revenues, declined 390 basis points in the quarter.

2017 Outlook Upped

Lilly raised its previously issued 2017 adjusted earnings and sales outlook. Adjusted earnings per share are now expected in the range of $4.10 to $4.20 compared with $4.05 to $4.15 previously. Revenues are expected in the range of $22.0–$22.5 billion compared with $21.8–$22.3 billion expected previously. The Zacks Consensus Estimate for earnings and revenues is $4.12 per share and $22.18 billion, respectively.

Gross margin is expected to be approximately 76%, lower than 77% previously. Adjusted tax rate is still expected to be approximately 22%.

Marketing, selling and administrative expenses are still expected in the range of $6.4–$6.6 billion, while research and development expenses are projected to be $5.0-$5.2 billion, slightly higher than $4.9–$5.1 billion expected previously.

Our Take

Lilly’s second-quarter 2017 results were strong with the company beating estimates on both counts. The pharma giant also raised its sales and earnings outlook for the year. However, the news of the delay in re-filing for baricitinib sent shares down almost 2% in pre-market trading. So far this year, Lilly’s share price has risen 15.2% compared with an increase of 11.8% for the industry.

The company also said that it will build on its oncology portfolio and work on developing next-generation immunotherapies. It will prioritize development of seven pipeline candidates.

Going forward, new products like Trulicity, Taltz, Basaglar, Cyramza, Jardiance and Lartruvo are expected to see higher revenues. Lilly also expects some established products like Trajenta, Forteo and Humalog to continue doing well. 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. Meanwhile, the recent high-profile pipeline setbacks are an investor concern and so is the weak performance of the Animal Health segment in the first half.

Lilly carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

Eli Lilly and Company Price, Consensus and EPS Surprise

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

Biogen Inc. BIIB, which also reported second-quarter results today, beat estimates for both earnings and sales. Shares were up almost 4% in pre-market trading.

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