On Thursday morning pharmaceutical giant Eli Lilly (LLY) released that firm's second quarter financial results. Investors would be disappointed.
The firm posted adjusted EPS of $1.25 (GAAP EPS: $1.05) on revenue of $6.488B. These top and bottom line results both fell short of Wall Street's expectations, with profitability significantly so. These numbers were "good" enough for earnings "growth" of -32% on sales "growth" of -4% (constant currency: -1%).
In Lilly's defense, both the adjusted and GAAP EPS numbers are inclusive of $0.46 worth of acquired IPR&D and development milestone charges. (The adjusted EPS print missed consensus by about $0.45.)
Revenue in the US increased 6% to $3.93B, primarily driven by a 14% increase in volume, partially offset by an 8% decrease in realized pricing. Revenue outside the US decreased 16% to $2.55B, driven by a 14% decrease in lower realized pricing and a 6% unfavorable exchange rate impact. These negative inputs were partially offset by a 5% increase in volume.
Reported gross margin increased 690 basis points to 78% of revenue largely driven by an excess inventory charge of $423M related to Covid antibodies that was recognized in Q2 2021 (the year ago comp). On an adjusted basis, gross margin increased 50 basis points to 79.8% of revenue. Adjusted operating income dropped 32% to $1.33B, while adjusted operating margin landed at 20.5%.
Selected Product Sales Performance
Trulicity (Type 2 Diabetes) sales increased 25% to $1.911.9B
Taltz (Autoimmune Diabetes) sales increased 7% to $606.2M.
Verzenio (Metastatic Breast Cancer) sales increased 72% to $588.5M.
Jardiance (Type 2 Diabetes, Cardiovascular Disease) sales increased 29% to $461M.
Humalog (Type 1, Type 2 Diabetes) sales decreased 26% to $447.1M.
Humulin (Type 1, Type 2, Gestational Diabetes) sales decreased 13% to $274M.
Alimta (Lung Cancer) sales decreased 63% to $227.7M.
Covid-19 antibodies sales decreased 13% to $129.1M.
Notable Announcement
Eli Lilly announced today that the FDA had accepted, with "Priority Review" designation, Donanemab for Alzheimer's Disease for review under the accelerated approval pathway. This is the big one, gang. If you are in LLY and okay with a forward looking earnings per share ratio of 37 times, this potential treatment for Alzheimer's is why.
Guidance
For the full year, Lilly reaffirmed its revenue outlook of $28.8B to $29.3B. This is unchanged from prior guidance. However, it is below the $29.1B that Wall Street was looking for. The firm sees adjusted gross margin of 78% which is unchanged from prior, and adjusted operating margin of 29%. That's down from 30%. The firm sees GAAP EPS of $6.96 to $7.11, which is down from prior guidance of $7.30 to $7.45. Lilly is also now projecting adjusted EPS of $7.90 to $8.05, which is down from prior guidance of $8.15 to $8.30.
Balance Sheet
There was no balance sheet information in the press release, which always annoys me. Why would any company make this information more difficult to find? When this happens, I go to the firm's website, where sometimes the information can be difficult to find, but is almost always available somewhere under the "investor" tab. Not today. While Eli Lilly has updated the Income Statement on their own website, to show information for the June quarter, they have not updated the site to show current balance sheet information nor current cash flow information.
So, I went back and took a look at the March quarter. Apparently, Eli Lilly has made a habit of releasing earnings one day and filing a Form 10-Q the following day with the Condensed Balance Sheet information and the Statement of Cash Flows that I seek. While I find this practice to be sloppy, that is neither here nor there. This is how Eli Lilly does it.
All I can tell you is that back in March, Eli Lilly ran with a net cash position that had been shrinking significantly from where it had been, ran with a current ratio of 1.26 which is acceptable, and a quick ratio of 0.98, which is close to "okay." Someone really has to ask these guys why they do not provide key information that investors and analysts should be looking for, on the same day that the firm releases earnings.
My Thoughts
The news on Donanemab (Alzheimer's) is encouraging. It did not make the selected product list above, but Mounjaro, which is a treatment for Type 2 Diabetes that was just approved this past May, has already accounted for sales of $16M versus expectations of $10M. This drug is also in clinical studies as an obesity treatment.
That's the positive.
The negatives are that the firm is lowering its own guidance for profitability, and acknowledges ongoing negative currency exchange rates. I also don't like that we have to wait until tomorrow (probably) to see an updated balance sheet. That really is not acceptable to me.
I had started writing this article considering perhaps a purchase on the dip, but can not pull such a trigger without seeing the financial guts of the operation. Besides, at seven times forward looking earnings, perhaps this is a trigger best not pulled. Bristol Myers-Squibb (BMY) , Pfizer (PFE) , and Merck (MRK) all trade at much cheaper valuations and pay shareholders much higher dividend yields.
Readers will see that LLY has been in an uptrend that goes back to the start of the year, and beyond. That said, the stock started selling off in late July and has not stopped. Relative Strength is very poor, the daily MACD has suffered a bearish crossover of the 26 day EMA by the two day EMA, and to top it all off... the stock has now given up its 50 day SMA.
This could very likely force portfolio managers to reduce exposure, just as the stock threatens the lower trend line of this regression model.
My plan, if I were thinking of investing in LLY would be to wait until the selling pauses. This stock is in a technical state of weakness. Add that to the eroding fundamentals, and for now... this name is hard pass for me.
