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Why Eli Lilly Stock Fell Despite Its Solid Q3 Earnings Beat

By Keith Speights - Updated Oct 23, 2019 at 5:13PM

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The big drugmaker seemingly did what it needed to do in Q3. Except for one thing.

Shaky but better than expected. That's probably the best description for Eli Lilly's (LLY 4.39%) second-quarter results, reported in July. While the big drugmaker beat Wall Street estimates, its year-over-year revenue growth was meager, and adjusted earnings per share went in the wrong direction.

Lilly announced its third-quarter results before the market opened on Wednesday. With Lilly's shares falling nearly 5% in early trading, it's obvious that investors didn't like the results. But the results actually weren't that bad. Here's what you need to know about Lilly's Q3 update.

Scientist with two test tubes

Image source: Getty Images.

By the numbers

Lilly announced Q3 revenue of $5.5 billion. This matched the consensus analysts' estimate. It also reflected a 3% increase from the prior-year period.

The company reported net income for the third quarter of $1.25 billion, or $1.37 per share, based on generally accepted accounting principles (GAAP). This represented a solid increase from GAAP earnings of $1.1 billion, or $1.12 per share, posted in the same period in 2018.

Lilly's adjusted net income in Q3 came in at $1.36 billion, or $1.48 per share. This easily beat the average analysts' earnings estimate of $1.40 per share. It also represented an improvement from adjusted earnings of $1.29 billion, or $1.34 per share, recorded in the prior-year period. 

Behind the numbers

CEO David Ricks was quick to point out that "Lilly's revenue growth is being driven by volume, not price, as more and more patients are benefiting from our recently launched medicines." Several of the company's drugs were especially important drivers of this growth.

Lilly's biggest winner in the third quarter in terms of year-over-year revenue growth was breast cancer drug Verzenio, with sales soaring 86% to $157 million. The company's top-selling drug, though, was Trulicity. Sales of the diabetes drug in Q3 jumped 24% year over year to a little over $1 billion.

Four other drugs in Lilly's lineup delivered year-over-year revenue increases of at least 20%: Basaglar, Cyramza, Taltz, and Jardiance. In addition, new migraine drug Emgality and new rheumatoid arthritis drug Olumiant picked up solid momentum in the third quarter.

It wasn't all good news, though. Sales of Cialis plunged 61% from the prior-year period. Alimta, Humalog, and Foteo experienced single-digit percentage sales declines.

Lilly's improved adjusted earnings stemmed in large part from lower tax expense compared to the same quarter in 2018. Its adjusted earnings per share (EPS) also was boosted by stock buybacks, with Lilly's weighted-average shares outstanding dropping from nearly 1.03 billion in the prior-year period to below 919 million in the third quarter of 2019.

With an earnings beat and revenue in line with expectations, why did Lilly's share price fall on Wednesday? The most likely culprit is the performance of anti-inflammatory drug Taltz. Although sales for the drug increased by 29% year over year to $340 million, Wall Street analysts were expecting close to $400 million in sales, according to FactSet. Lilly stated that the realized prices for Taltz were lower "due to changes in estimates for rebates and discounts."

Looking ahead

Lilly boosted its full-year 2019 earnings guidance. It now projects GAAP EPS between $8.59 and $8.69, up from its previous forecast of a range of $8.58 to $8.68. Non-GAAP (adjusted) EPS is expected to be between $5.75 and $5.85, up from the previous guidance of $5.67 to $5.77. The company still expects revenue for 2019 to come in between $22 billion and $22.5 billion.

The key to success with pharmaceutical stocks, though, is their pipelines. CEO David Ricks said the company plans to submit and launch several new drugs over the next few years. Investors should especially watch for the potential FDA approval of Jardiance in treating type 1 diabetes and for late-stage results from promising pain drug tanezumab. 

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