Eli Lilly and Co. posted a 19% increase in its fourth-quarter 2017 adjusted net income mainly driven by the company's newer human medicines as revenue declined at the animal health unit that the pharma giant may sell.
Lilly booked $6.16 billion in revenue for the quarter, a 7% increase from $5.76 billion a year earlier. In the U.S., the company recorded revenue of $3.42 billion, a 6% year-over-year rise attributed to its new pharmaceutical offerings, including diabetes drugs Trulicity, Basaglar, and Jardiance, psoriasis medicine Taltz, as well as cancer treatments Lartruvo and Verzenio.
However, the company's Elanco Animal Health business continues to suffer from declining sales due to market access headwinds for Posilac, a dairy cow supplement, and competitive pressures for Optaflexx, a cattle feed ingredient for increased rate of weight gain.
In the fourth-quarter of 2017, animal health's worldwide revenue slipped 6% to $790.9 million from $837.6 million in the same year-ago period. "There appears to have been an oversupply of milk in the market and that has depressed milk prices," Evercore ISI Senior Analyst for Equity Research Umer Raffat commented.
Elanco was put under strategic review by Lilly in October 2017, with the drugmaker mulling a sale or spin out of the business. The company will reveal the troubled unit's fate during its second-quarter earnings call in July.
Increasing competition and pricing pressure
The company was able to deliver strong revenue growth in 2017, thanks to recently launched products particularly from its diabetes portfolio, executives said. Diabetes drug Trulicity's fourth-quarter sales alone amounted to $649 million, nearly double the $337 million recorded in the same quarter of 2016.
Lilly's diabetes segment is not without problems as market competition intensifies and pricing pressures persist.
In the quarter, sales of Humalog, the company's insulin lispro injection, fell by 5% to $782.2 million from $819.8 million a year earlier. "When we look at our Q4 result, I think there was pressure, from a rebating perspective, on the instrument portfolio, so both Humalog and Basaglar in particular," said Enrique Conterno, senior vice president of Lilly and president of both Lilly Diabetes and Lilly USA.
Novo Nordisk is expected to launch its type 2 diabetes drug Ozempic, or semaglutide, soon after receiving the U.S. Food and Drug Administration's approval. Another player about to enter the market is Merck & Co. Inc. and Pfizer Inc.'s Steglatro, known generically as ertugliflozin, which has already won the approval of the U.S. FDA and the European Medicines Agency's recommendation.
Amid the intense competition, Lilly is confident in the potential of its diabetes portfolio. "We have a number of competitors entering the diabetes space but I feel very good in terms of we are each one of our branch extensively in terms of the benefit that it provides," Conterno said in the call.
On higher EPS guidance and lower tax rates
As a result of the recent U.S. tax reform, Lilly raised its guidance for non-GAAP EPS in 2018 to $4.81 to $4.91, from the earlier $4.60 to $4.70 range. The company also lowered its 2018 effective tax rates to about 18% from 21.5%.
With lower tax rates, Lilly is left with $9 billion of global cash that is expected to go to its capital allocation priorities.
Lilly intends to utilize the additional capital to fund its existing marketed products and pipeline, invest in business development and eventually, return to its shareholders through dividend increases and share repurchases.
"While tax reform does provide ready access to additional funds, it does not alter our business development priorities. We'll continue to look for opportunities to augment our pipeline and to bolster our commercial presence in core therapeutic areas of diabetes, oncology, immunology, neurodegeneration and pain," CFO Joshua Smiley commented.
