Why Is Lilly (LLY) Down 2.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Eli Lilly (LLY). Shares have lost about 2.5% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Lilly Q4 Earnings Top, COVID-19 Antibody Boosts Sales

Lilly reported fourth-quarter 2020 adjusted earnings per share of $2.75, which beat the Zacks Consensus Estimate of $2.35. Earnings rose 59% year over year owing to higher revenues and operating income and higher other income.

Revenues of $7.44 billion also beat the Zacks Consensus Estimate of $7.23 billion. Sales increased 22% year over year as volume increases were offset by the impact of lower realized prices of several of its drugs. Lilly’s newly approved COVID-19 antibody drug, bamlanivimab was a key driver of sales growth in the fourth quarter. Excluding bamlanivimab, sales rose 7%.

Volume-based revenue growth of its newest drugs and initial sales of its COVID-19 antibody therapies drove sales in the quarter despite continued pricing headwinds and demand pressure from the effects of COVID-19. Also, inventory stocking of approximately $120 million contributed to growth, primarily for Trulicity, Alimta, and Taltz.

Quarter in Detail

Lower realized prices had a negative impact of 4% on sales. Volumes rose 22%. Foreign exchange had a positive impact of 1% on revenue growth.

Key growth products (products launched since 2014) drove 12% of revenue growth and represented nearly 55% total revenues, excluding bamlanivimab. U.S. revenues climbed 31% to $4.6 billion while ex-U.S. revenues increased 10% to $2.84 billion.

Among the growth products, Trulicity generated revenues worth $1.50 billion, up 24% year over year driven by higher volumes, which offset decline in prices.

The lower realized prices were a result of higher contracted rebates partially offset by favorable segment mix (due to decreased 34B segment utilization) and some list price increases.

Cyramza revenues of $284.2 million were up 16% year over year, primarily boosted by higher realized prices and solid demand in the United States and increased volumes in the ex-U.S. markets.

Jardiance sales rose 17% to $313.6 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 $282.1 million, down 8% year over year due to lower realized prices and weak demand caused by competitive pressure in the United States. However, Basaglar sales rose in international markets.

Taltz brought in sales of $495.3 million, up 18% year over year as U.S. sales gained from higher demand, which offset the impact of lower realized prices. Ex-U.S. sales were driven by increased volume.

Olumiant generated sales of $192.2 million in the quarter, up 50% year over year backed by increased volume in international markets. Revenues outside the United States were $167.4 million, up 46% year over year. U.S. revenues was $24.8 million.

Verzenio generated sales of $281.6 million in the reported quarter, up 57% year over year, driven by increased demand and to some extent, higher realized prices.

Emgality generated revenues of $109.9 million in the quarter compared with $91.5 million in the earlier quarter.

Among the newer drugs, Baqsimi generated revenues of $23.8 million in the quarter compared with $20.9 million in the earlier quarter. Retevmo, launched last year, generated sales of $18.7 million in the quarter compared with $11.6 million in the third quarter.

Among the established products, Forteo sales declined 29% to $254.4 million while Humalog sales declined 6% to $718.1 million. Humulin sales decreased 7% to $324.4 million while Alimta sales were up 23% to $652.7 million.

Importantly, in the quarter, Lilly generated revenues of $871.2 million from its COVID-19 therapy, bamlanivimab that was granted approval for emergency use by the FDA in November.

Gross Margin & Operating Income

Adjusted gross margin was 78.6% in the quarter, down 130 basis points primarily due to unfavorable product mix driven by bamlanivimab sales and the impact of lower realized prices and unfavorable effect of foreign exchange rates on international inventories sold.

Operating income rose 53% year over year to $2.5 billion due to higher sales and lower marketing costs, which offset the impact of higher R&D costs. Excluding the impact of COVID-19 therapies, operating income grew 34% in the quarter.

Operating margin was 33.0% in the quarter, up 650 bps year over year. Excluding the impact of COVID-19 therapies, operating margin expanded by 300 basis points.

Marketing, selling and administrative expenses declined 8% due to productivity savings and reduced activity due to COVID-19. R&D expense rose 16% in the quarter due to increased costs for development of COVID-19 treatments. R&D costs included expenses of $265 million to develop COVID-19 therapies.

Adjusted effective tax rate was 14.4%, higher than 12.6% in the year-ago quarter.

2020 Results

Full-year 2020 sales rose 10% to $24.5 billion, beating the Zacks Consensus Estimate of $24.4 billion. Sales were within the guided range of $24.2-$24.7 billion.

Adjusted earnings for 2020 were $7.93 per share, which surpassed the Zacks Consensus Estimate of $7.57 as well as the guided range of $7.45- $7.65.  Earnings rose 31% year over year.

2021 Guidance

Lilly maintained its financial guidance for 2021, which it had issued in December. Lilly expects adjusted earnings in the range of $7.75-$8.40 per share in 2021. Revenues in 2021 are expected in the range of $26.5 billion-$28.0 billion. Lilly expects its revenue growth to be driven by higher demand for key products including Trulicity, Taltz, Verzenio, Jardiance, Olumiant, Cyramza, Emgality and Retevmo. Importantly, Lilly expects revenues in the range of $1-$2 billion from COVID-19 therapies.

However, generic competition for several drugs, rising pricing pressure in the United States due to increased rebates to maintain broad commercial access and price declines in some international markets like China, Japan and Europe will continue to remain top-line headwinds in 2021. In the United States, prices are expected to decline in a low-to-mid-single digit range. The company expects to see quarterly variability in U.S. price impact due to increasing variability in payer mix.

The company is still experiencing suppressed demand due to the pandemic, which may have an impact on new-to-brand performance in the near term. Lilly expects a return to normalcy for health care systems in the second half of the year.

Gross margin is expected to be approximately 79%. Adjusted tax rate is expected to be approximately 15%. Adjusted operating margin is expected to be 32% in 2021.

Marketing, selling and administrative expense are expected to be in the range of $6.2 billion to $6.4 billion. Research and development expense is expected to be in the range of $6.5 billion to $6.7 billion, which includes investment of approximately $300 million to $400 million in developing COVID-19 therapies.

Q1 Outlook

The company expects inventory patterns to have a negative impact on revenue growth and operating margin in the first quarter of 2021 as significant COVID-19-related stocking benefited sales by roughly $250 million in the year-ago quarter.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.

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