Eli Lilly and Company announced financial results for the second quarter of 2018 on July 24, 2018.

"Lilly delivered strong results once more in the second quarter in terms of operational performance, pipeline advancements, and strategic objectives," said David A. Ricks, Lilly's chairman and CEO. "The increase in our worldwide revenue was fueled by volume growth of our new medicines, while we also maintained a keen focus on containing costs and improving productivity. Our pipeline continued to demonstrate our commitment to scientific innovation, highlighted by forward progress for key molecules, several positive late-stage data readouts and the addition of promising new assets through business development. In addition, the strategic decision to pursue an IPO for our Elanco animal health business will maximize the after-tax value for Lilly shareholders and provide Lilly with even greater focus on our human pharmaceutical business." 

Key events over the last three months

The company completed its strategic review of Elanco Animal Health, and will file a registration statement in the coming weeks with the U.S. Securities and Exchange Commission (SEC) for a potential initial public offering (IPO) of a minority ownership stake in Elanco as a separate company. The offering is expected to represent an ownership stake of less than 20%. The number of shares to be offered and the price range for the offering have not yet been determined. The company expects to complete the IPO process during the second half of 2018.

The company completed its previously-announced $5 billion share repurchase program and has authorized a new $8 billion share repurchase program. 

Second-quarter reported results

In the second quarter of 2018, worldwide revenue was $6.355 billion, an increase of 9% compared with the second quarter of 2017. The revenue increase was driven by a 7% increase due to volume and a 2% increase due to the favorable impact of foreign exchange rates. 

Revenue in the U.S. increased 8%, to $3.602 billion, driven primarily by increased volume for new pharmaceutical products, as well as an increase in U.S. collaboration revenue, partially offset by decreased volume for products that have lost exclusivity. 

Revenue outside the U.S. increased 10%, to $2.753 billion, largely due to increased volume for new pharmaceutical products, as well as the favorable impact of foreign exchange rates. The increase in revenue was partially offset lower realized prices for several pharmaceutical products.

Gross margin increased 9%, to $4.653 billion, in the second quarter of 2018 compared with the second quarter of 2017. Gross margin as a percent of revenue was 73.2%, an increase of 0.2 percentage points compared with the second quarter of 2017. The increase in gross margin percent was primarily due to manufacturing efficiencies, largely offset by the effect of foreign exchange rates on international inventories sold and the timing of manufacturing production.

Operating expenses in the second quarter of 2018, defined as the sum of research and development and marketing, selling, and administrative expenses, decreased 1% to $2.987 billion, reflecting previously-announced actions taken to reduce the company's cost structure. Research and development expenses increased 5%, to $1.333 billion, or 21.0% of revenue. This increase was primarily due to additional late-stage development expenditures. Marketing, selling, and administrative expenses decreased 4%, to $1.654 billion, due to decreased expenses related to late life-cycle products, partially offset by increased expenses related to new pharmaceutical products.

In the second quarter of 2018, the company recognized asset impairment, restructuring, and other special charges of $74.4 million. The charges were primarily associated with asset impairments and contractual commitments related to the suspension of commercial activities for Imrestor, an animal health product, as well as expenses associated with the review of strategic alternatives for the Elanco animal health business. In the second quarter of 2017, the company recognized asset impairment, restructuring, and other special charges of $50.0 million, primarily associated with integration costs and asset impairments related to the acquisition and integration of Novartis Animal Health. 

Operating income (loss) in the second quarter of 2018 was a loss of $33.2 million, compared to income of $1.200 billion in the second quarter of 2017.  The operating loss was primarily driven by the acquired in-process research and development charges described above.

Other income (expense) was income of $38.0 million in the second quarter of 2018, compared with income of $60.4 million in the second quarter of 2017.

During the second quarter of 2018, the company incurred $264.7 million of tax expense, despite earning $4.8 million of income before taxes, as a result of the non-deductible acquired in-process research and development charges totaling $1.558 billion related to the acquisitions of ARMO BioSciences and AurKa Pharma. During the second quarter of 2017, the company's effective tax rate was 20%.

In the second quarter of 2018, net income (loss) and earnings (loss) per share were a loss of $259.9 million and $0.25, respectively, compared with income of $1.008 billion and earnings per share of $0.95 in the second quarter of 2017. These decreases in net income (loss) and earnings (loss) per share were primarily driven by the acquired in-process research and development charges described above. 

Animal Health

In the second quarter of 2018, worldwide animal health revenue totaled $792.1 million, an increase of 1% compared with the second quarter of 2017. Worldwide food animal revenue increased 4%, to $491.7 million, primarily driven by the favorable impact of foreign exchange rates, increased volume, and higher realized prices. Worldwide companion animal revenue decreased 4%, to $300.5 million, primarily driven by decreased volume, partially offset by higher realized prices, and, to a lesser extent, the favorable impact of foreign exchange rates.

Source: Eli Lilly and Company