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What's Behind Lilly's Solid Q2 Earnings

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Eli Lilly (NYSE: LLY  ) certainly delivered the goods with its second-quarter financial results. The big pharmaceutical company announced those results before the market opened on Wednesday. How good was the news? One clue is that shares jumped around 3% in early trading. Here are the highlights.

By the numbers
Net income for the second quarter came in at $1.21 billion. That figure is up 31% from the same period last year. Lilly reported non-GAAP net income of $1.25 billion, a 36% increase year-over-year. Non-GAAP earnings were $1.16 per share. That easily beat Wall Street estimates of $1.00 per share and reflects a 40% jump compared to the second quarter of 2012.

Lilly announced revenue for the quarter of $5.93 billion. This represents a 6% increase from the $5.60 billion revenue from the same period last year. It also beat the average analysts' expectation of $5.82 billion.

The company's gross margin moved up by 7% year-over-year to $4.76 billion, or 80.3% of total revenue. Total operating expenses dipped by 2% from last year to $3.19 billion. This reflects a 3% decrease in marketing, selling, and administrative expenses, combined with a 1% increase in research and development costs.

Behind the numbers
Lilly's year-over-year revenue growth was flat in the first quarter of 2013, but the 6% increase in the top line from the most recent quarter was quite welcome. What happened?

Zyprexa's sales continued to decline with loss of patent exclusivity, dropping by 25% year-over-year. However, that wasn't nearly as bad as the 49% year-over-year plunge reported in the first quarter.

More importantly, the lost revenue from Zyprexa was more than made up by surging sales of Cymbalta. The antidepressant generated revenue of nearly $1.5 billion -- up 22% from the second quarter of 2012. Lilly also had three other drugs hit double-digit sales growth: Cialis, Strattera, and Effient, with higher year-over-year sales of 13%, 10%, and 24%, respectively.

The company's animal health business unit struggled somewhat in the first quarter, with year-over-year growth of only 2%. Second quarter was quite better, though. Lilly reported animal health revenue of $543.5 million -- up 6% from the same period in 2012. This improved result came largely from higher sales of Trifexis in the U.S. and companion animal products outside the U.S.

Digging into the overall revenue numbers shows that only 2% of the 6% increase actually stemmed from higher volumes sold. And this 2% increase was offset by negative effects of foreign exchange rates. However, Lilly was able to increase prices during the quarter by 6%, leading to the solid top line growth.

Looking ahead
Lilly's solid results in the second quarter prompted the company to raise its full-year earnings guidance to a range of $4.28 to $4.38 on a reported basis, or $4.05 to $4.15 on a non-GAAP basis. The non-GAAP range reflects an increase of 19% to 22% over 2012 full-year earnings. Last quarter, Lilly projected non-GAAP earnings would be between $3.82 and $3.97 per share.

2013 does appear to be one that favors Lilly. However, next year will be challenging. The pharmaceutical company faces loss of patent protection later in 2013 for its No. 1 seller Cymbalta and No. 3 Humalog. Its eighth-ranked drug in terms of revenue, Evista, also goes off patent next year.

Lilly hopes that its pipeline drugs can step up to the plate, but the second quarter revealed mixed news on those prospects. Diabetes drug LY2963016 was accepted for review in Europe. Lilly also reported good results from late-stage trials of two other diabetes drugs -- dulaglutide and empagliflozin.

However, there were pipeline setbacks. Alimta didn't improve progression-free survival in patients with nonsquamous non-small-cell lung cancer. Lilly canceled two development programs -- enzastaurin in treating diffuse large B-cell lymphoma and LY2886721 in treating Alzheimer's disease. The company also wasn't happy with a draft decision by the Centers for Medicare and Medicaid Services that presented a reimbursement hurdle for Lilly's Amyvid.

Looking ahead, the good news is that shareholders should see some better performance in Lilly stock, which has lagged behind many of its peers so far this year. Investors can also enjoy Lilly's nice dividend yield, which currently stands at 3.9%. The bad news is that the situation seems likely to worsen by 2014. Delivering the goods will become increasingly more difficult. 

Dividend stocks like Lilly can make you rich over the long term. Even when they decline, those dividend payments help prevent the crash-and-burn scenarios experienced with many high-growth stocks. And the payments add up quarter by quarter. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of the only nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

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9/23/2016 4:01 PM
LLY $81.16 Down -0.13 -0.16%
Eli Lilly and Co. CAPS Rating: ***