Pharmaceutical company Eli Lilly (LLY) reported its second-quarter and first-half business operation results on July 26. The drugmaker delivered a sales and profit growth of 7% to $10.27 billion and 5% to $1.19 billion. As a result, its share price closed up 13 cents while the broader Standard & Poor's 500 index closed up 0.03.
Outlook
As of its first-half earnings announcement, Eli Lilly saw its overall business grow by an average of 4.46% between $20.6 billion to $21.1 billion and its earnings per share by 20.8% compared to its last year’s growth of 1.35%.
Valuations
According to GuruFocus data, Eli Lilly had a trailing 12-month price-earnings (P/E) multiple of 34 times (industry median 27), price-book (P/B) value of 5.98 times (industry median 3) and price-sales (P/S) ratio of 4 (industry median 2.9). The $87.5 billion pharmaceutical company also had a trailing 12-month dividend yield of 2.56% with 87% payout ratio and a 1.2% buyback ratio.
Market performance
According to Morningstar data, Eli Lilly provided a five-year total return of 18.4% while the S&P 500 index gave back 14.2%. Year to date, Eli Lilly has delivered a -4.1% return while 6.17% for the latter.
(Eli Lilly, Source)
Eli Lilly
Eli Lilly was incorporated in 1901 in Indiana to succeed the drug manufacturing business that was founded by Col. Eli Lilly in 1876. Eli Lilly discovers, develops, manufactures and markets products in two business segments –Â human pharmaceutical products and animal health products. It operates its animal health business through its Elanco division.
The company manufactures and distributes its products through facilities in the U.S., Puerto Rico and 14 other countries. Further, its products are sold in approximately 125 countries.
Animal health products
The animal health segment had the following products: Rumensin®; Posilac®; Paylean® and Optaflexx®; Tylan®; Micotil®, Pulmotil® and Pulmotil AC®; Coban®, Monteban® and Maxiban®; Surmax®; Imrestor™; Trifexis®; Comfortis®; Onsior®; Interceptor Plus®; and Osurnia®.
In fiscal year 2015, Eli Lilly acquired Novartis’ (NVS, Financial) animal health business for $5.28 billion. As a result, Eli Lilly further enhanced its Elanco segment in the animal and swine markets, equine and vaccine areas and created an entry into the aquaculture market.
In fiscal year 2015, the animal business contributed 15.9% ($3.18 billion) to overall sales while growing 35.6% year on year. This segment also delivered 18.8% profit margin for the 2015 period.
In the first half, Eli Lilly’s animal health business also grew by 1.5% to $1.6 billion (17% of sales).
(Read Novartis review: Novartis Is Surviving)
Human pharmaceutical products
The human pharmaceutical segment is further divided into: Endocrinology (35.3% of total fiscal year 2015 sales), Neuroscience (14.7%), Oncology (17.6%), Cardiovascular (15.4%) (2).
In fiscal year 2015, the neuroscience segment delivered the worst growth among the group with -18.4% while the remaining segments had an average of 1.8%. Neuroscience experienced a drop in sales with its Cymbalta and Zyprexa for this period with losses of 36.4% and 9.35% (7). By the first half, the same products continued to deliver poor growth with -22% and -11% (8).
Meanwhile, sales grew by 1.4% for Eli Lilly’s largest sales contributor (endocrinology) segment. Notably, Eli Lilly’s Evista drug, which lost U.S. sales exclusivity in March 2014, delivered weak (-43.5%) sales in fiscal year 2015 (9). Evista sales figures were not discussed in the first-half filing.
Nonetheless, Eli Lilly delivered 2.8% year-on-year loss for the segment in fiscal year 2015, including a 2,338% growth in Trulicity® (10).
Human pharmaceutical contributed 84.1% ($16.78 billion) to overall sales for fiscal year 2015 and delivered a 24% profit margin.
In the first half, Eli Lilly demonstrated overall strong results in its established and new pharmaceutical products.
Notably, Erbitux delivered a strong 56.5% year-on-year sales growth for the company’s established pharmaceutical products and great 451%, 158.4%, and 79% growth for the Eli Lilly’s Trulicity, Jardiance,and Cyramza products (11).
In review, Erbitux contributed 3.7% or $348.6 million to Eli Lilly’s sales in that period (1), while the latter three drugs contributed 7.5% or $701 million for the period.
Eli Lilly’s top contributor drugs, such as Humalog, Cialis and Alimta, together grew 0.5% and contributed 39.6% or $3.69 billion to overall sales in the first half (3).
In estimation for first-half 2016, the human pharmaceutical segment grew by 7.8% to $8.66 billion (84.3% of total sales).
Pipeline
(Eli Lilly, Recent Quarter Presentation; 4)
(Eli Lilly, recent quarter presentation)
In addition to its successful and recently launched products in 2015, Eli Lilly still has plenty of new molecular drugs in the pipeline.
Some of these are: Intranasal Glucagon (Phase III), Baricitinib for rheumatoid arthritis (Phase III in Japan, submitted for review in both the U.S. and Europe), Ixekizumab for psoriasis (submitted for review in U.S., Europe and Japan), Solanezumab for mild Alzheimer's disease (Phase III), Abemaciclib for metastatic breast cancer (Phase III) and Olaratumab for soft tissue sarcoma (Phase III) (5).
Cash, debt and book value
According to GuruFocus data, Eli Lilly had $3.9 billion in total cash as of June. The company also had $9.37 billion in debt with 0.64 debt-equity ratio and 24.88% ($9 billion) of its assets in goodwill and intangibles while having a book value of $14.6 billion.
Cash flow
(Eli Lilly cash flow, annual filing)(6)
For fiscal year 2015, Eli Lilly delivered a drop of 36.5% in its cash flow from operations, which was mainly caused by increase in receivables, inventories, and other assets as seen in the image above.
Eli Lilly allocated $1.07 billion in capital expenditures leaving it with $1.7 billion in free cash flow. The company also took in $4.45 billion in debt having a total short- and long-term borrowings net change of negative $181.6 million.
(Fiscal years 2013-2015 dividends and buybacks in millions, Eli Lilly annual filing)
Eli Lilly also allocated $2.88 billion in dividends and share buybacks in fiscal year 2015, representing 169% of its free cash flow.
Over the past three years, Eli Lilly maintained its level of cash flow allocation in dividends while reducing its budget for share buybacks. The company had a three-year free cash flow payout average of 113% with its highest payout occurrence last year.
Conclusion
Despite patent expirations in its top-selling drugs in recent years, Eli Lilly was able to launch several drugs that were complimentary, even delivering great growth figures right after product launches, as in the cases of Trulicity and Jardiance. The pharmaceutical company also expects to break out from its low sales and profit figures in recent years.
(Eli Lilly market price, Google Finance)
As a result, the market gave Eli Lilly a good premium compared to its peers.
Eli Lilly’s shares are not cheap. However, using its earnings-per-share growth outlook with its five-year historical earnings multiple average gave me a value of $55 a share (29 times earnings multiple), which is still quite a distance below the current share price.
The pharmaceutical company also had been able to provide dividends and buybacks to its shareholders consistently over the years despite losing exclusivity in some key drugs while maintaining a healthy balance sheet.
Eli Lilly is expected to deliver promising follow-up phase 3 trial results in its Alzheimer’s drug solanezumab, and analysts also think its Jardiance drug would have peak sales of over $5 billion compared to first-half 2016’s $78 million (12).
Despite its year-to-date share price performance slump, I consider its shares about fairly valued at this point.
In summary, Eli Lilly is a HOLD.
Notes
(1) In my estimation.
(2) Annual Filing: Endocrinology products include: Humalog®, Humalog Mix 75/25™, and Humalog Mix 50/50™; Humulin®; Trajenta®; Jentadueto®; Jardiance®; Trulicity®, Glyxambi®; Synjardy®; Basaglar®; Forteo®; Evista®; Humatrope®; and Axiron®.
Neuoroscience products include: Cymbalta®; Zyprexa®; Strattera®; and Amyvid®.
Oncology products include: Alimta®; Erbitux®; Cyramza®; Gemzar®; and Portrazza™.
Cardiovascular products include: Cialis®; Effient®; and ReoPro®.
(3) Annual Filing:
Humalog is an insulin analog, Cialis is used for treating erectile dysfunction and benign prostatic hyperplasia, and Alimta could be used for first-line treatment, in combination with another agent, of advanced nonsmall cell lung cancer (NSCLC) for patients with non-squamous cell histology.
Alimta can also be used as a second-line treatment of advanced non-squamous NSCLC; as monotherapy for the maintenance treatment of advanced nonsquamous NSCLC in patients whose disease has not progressed immediately following chemotherapy treatment. This drug, in combination with another agent, can also be used for malignant pleural mesothelioma treatment.
Patent Expirations (Selected)
Alimta is protected by a compound patent (July 2016) plus pediatric exclusivity (January 2017), and a vitamin regimen patent (2021) plus pediatric exclusivity (2022).
Cialis is protected by compound and use patents (November 2017).
Cyramza is protected by biologics data package protection (2026).
Trulicity is protected by a compound patent (2024 not including possible patent extension) and by biologics data package protection (2026).
(4) Annual Filing: new molecular entity (NME)
(5) Both Olaratumab and Abemaciclib were granted with the Breakthrough Therapy Designation by the Food and Drugs Administration. According to Eli Lilly, the Breakthrough Therapy Designation is designed to expedite the development and review of potential medicines that are intended to treat a serious condition where preliminary clinical evidence indicates that the treatment may demonstrate substantial improvement over available therapy on a clinically significant endpoint.
(6) Red ink by author.
(7) Annual Filing: Cymbalta lost its patent protection in 2013.
(8) Annual Filing: Cymbalta®, for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, fibromyalgia, and chronic musculoskeletal pain due to chronic low back pain or chronic pain due to osteoarthritis.
Zyprexa®, for the treatment of schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance.
(9) Annual Filing: Evista®, for the prevention and treatment of osteoporosis in postmenopausal women and for the reduction of the risk of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal women at high risk for invasive breast cancer.
(10) Annual Filing: Trulicity®, for the treatment of type 2 diabetes (approved in the U.S. and Europe in 2014 and Japan in 2015)
(11) Annual Filing: Erbitux®, indicated both as a single agent and with another chemotherapy agent for the treatment of certain types of colorectal cancers; and as a single agent, in combination with chemotherapy, or in combination with radiation therapy for the treatment of certain types of head and neck cancer.
Effective October 1, 2015, Bristol Myers Squibb transferred to Eli Lilly all commercialization rights for Erbitux in the U.S. and Canada. Outside the U.S. and Canada, Erbitux is commercialized by Merck KGaA, and the company receive royalties from Merck KGaA.
(12) According to Morningstar Research.
Disclosure: I do not have shares in Eli Lilly.
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