Eli Lilly Q1 Earnings In-Line, Revenues Miss - Analyst Blog

Eli Lilly & Company LLY reported first quarter 2014 adjusted earnings per share of 70 cents, in line with the Zacks Consensus Estimate but 39% below the year-ago earnings of $1.14. Results were hit by the presence of generic competition for Cymbalta in the U.S.

First quarter revenues fell 16% to $4.683 billion, missing the Zacks Consensus Estimate of $4.767 billion.

Reported earnings (including special items) declined 52% to 68 cents per share in the first quarter of 2014.

Quarterly Details

First quarter revenues declined 16% reflecting lower volume (8%), lower prices (6%) and unfavorable currency fluctuation (2%). The lower volume was mainly due to the Dec 2013 genericization of Cymbalta in the U.S. Meanwhile, the price decline was due to the launch of authorized generic versions of Cymbalta and Evista.

U.S. revenues declined 34% to $2.084 billion mainly due to lower volume resulting from the loss of patent protection on Cymbalta and lower prices for Cymbalta and Evista. Wholesaler buying patterns also had an adverse impact on revenues. Ex- U.S. revenues increased 5% to $2.599 billion mainly due to higher volume that was partially offset by unfavorable currency movement, especially the Japanese yen.

During the first quarter, Zyprexa recorded a 1% decline in revenues, which came in at $283.1 million. U.S. revenues fell 15%. International revenues increased 1% mainly due to higher volume that was partially offset by unfavorable currency movement and lower prices.

Cymbalta sales fell 64% to $478.2 million. U.S. sales dropped 83% to $176 million due to the loss of patent exclusivity in December. Ex-U.S. sales grew 11% to $302.2 million.

Evista sales fell 38% to $150.1 million. U.S. sales dropped 43% to $98.0 million, due to the loss of exclusivity in Mar 2014. Ex-U.S. sales declined 25% to $52.1 million due to lower prices and unfavorable currency movement that was partially offset by higher volume

Products which recorded growth in the first quarter included Alimta (up 2% to $632 million), Humulin (up 1% to $316.2 million), Humalog (up 3% to $650 million), Cialis (up 3% to $532.4 million), Forteo (up 7% to $300.4 million) and Effient (up 3% to $119.3 million).

Eli Lilly's Animal Health segment contributed $527.4 million (up 6%) to revenues. Higher prices and increased volume was partially offset by unfavorable currency movement. Sales in the U.S. grew 4% due to higher prices of companion animal products.

Eli Lilly is looking to strengthen its Animal Health division and recently announced its intention to acquire Novartis' NVS animal health business.

Expenses

Eli Lilly's adjusted operating expenses declined 14% to $2.594 billion. Research and development (R&D) expenses decreased 18% to $1.109 billion. Marketing, selling and administrative expenses declined 10% to $1.485 billion reflecting the company's cost control efforts. The company has cut down its sales and marketing activities in the U.S. for Cymbalta and Evista.

Updates Guidance

Eli Lilly updated certain parts of its guidance for 2014. The company expects to earn $2.72 - $2.80 per share on revenues of $19.4 billion - $20.0 billion. While earnings guidance remained unchanged, the company had initially guided towards revenues of $19.2 billion - $19.8 billion.

The Zacks Consensus Estimate for earnings and revenues is currently $2.81 per share and $19.6 billion, respectively.

Our Take

Eli Lilly's first quarter results were hit by the genericization of Cymbalta and Evista. Basically, 2014 will be an extremely challenging year for Eli Lilly with both products expected to see a sharp decline in sales.

However, products like Humalog, Trajenta, Cialis, Forteo and Alimta and the animal health business should help partially offset the impact of genericization. China should also see strong growth though Japan will be weaker due to currency movement.

Gross margin is expected to decline significantly in 2014 mainly due to the patent expirations. 2014 gross margin is expected to be 73%.

Eli Lilly is also working on controlling costs. Marketing, selling and administrative expenses should decline to a range of $6.3 billion - $6.6 billion (from $7.1 billion in 2013). Research and development expenses are expected to decline to $4.4 billion - $4.7 billion from $5.5 billion in 2013. The company had initially forecasted SG&A spend of $6.2 billion - $6.5 billion.

Eli Lilly should return to growth from 2015.

Eli Lilly is a Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the pharma sector include Johnson & Johnson JNJ and Allergan Inc. AGN. Both are Zacks Rank #2 (Buy) stocks.