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The Dose

Welcome to The Dose, which tackles the business and economics inside the turbulent world of health care and life sciences in Indiana. Your host is John Russell. To contact me call 317-472-5383.

5 things to look for Thursday in Lilly's earnings

January 25, 2016

Eli Lilly and Co. has a few things to prove and all eyes will be on Indianapolis-based drug maker for clues on Thursday as it releases fourth-quarter and full-year earnings.

Just two weeks ago, CEO John Lechleiter told investors at the JPMorgan Healthcare Conference in San Francisco that the company “successfully navigated” a year ago through the so-called YZ period. That’s the term Lilly has been using to describe a few rocky years in which it lost patent exclusivity and revenue on a slew of blockbuster drugs, most recently antidepressant Cymbalta (sales down 68 percent in 2014) and osteoporosis treatment Evista (likewise, down 60 percent).

Now the company is all upbeat about its prospects. “We remain very optimistic about the opportunity before us to improve patients’ lives and create value for shareholders,” Lechleiter said.

Translation: The worst is behind us, and good things await.

In three days, Lechleiter will see if investors share his optimism. That’s even though a week earlier, Lilly downgraded its profit and revenue guidance, citing the unfavorable impact of foreign exchange rates and after-tax charges associated with the acquisition of rights from Locemia Solution to a nasal spray for treating low blood sugar.

So will Lilly look strong and resilient, bouncing back from a few tough years? Or will it ask investors for more patience? Here are five things to look for on Thursday:

1) How is Cialis doing? Lilly’s signature drug for erectile dysfunction has been a proven winner, with sales in 2014 of nearly $2.3 billion, up 6 percent from a year earlier. Revenues from Cialis have been marching upward every quarter since at least 2011, according to IMS Health, a health data company. But unit sales have been rising slower, suggesting that Lilly has been raising prices fairly regularly. But how long can that last? Rising drug prices have become a national issue in recent months, so the question remains how aggressively Lilly can continue to raise prices on one of its older products. By the way, even with price increases, Cialis sales could be losing steam. The Wall Street consensus is for Cialis to ring up sales of $612 million in the fourth quarter of 2015, down about 2 percent the same quarter a year ago. Some analysts are a bit more pessimistic about Cialis; Barclays Capital is expecting product sales of $583 million for the fourth quarter, down about 6 percent.

2) How is the diabetes group doing? Diabetes is Lilly’s oldest franchise; it began mass producing insulin in the 1920s. And the company is pushing hard to remain a leader in diabetes treatments. In September, when Lilly released lots of upbeat news about its new diabetes pill Jardiance (it lowers the risk of heart attack and stroke, in addition to managing blood sugar), the stock broke through $90 for the first time in almost 15 years. In the last few weeks, the stock has settled back a bit, closing Friday at $82.48. But any sign that Jardiance and other diabetes drugs are doing exceptionally well could provide another boost. Wall Street’s consensus is for Jardiance to post sales of $37 million for the fourth quarter, up 19 percent from the third quarter and up 270 percent from a year ago. And according to IMS, Lilly is gaining market share in every diabetes product category in the US, Europe, and Japan. Lilly is putting a big bet on diabetes. Over the past 18 months, it has launched (in addition to Jardiance), diabetes treatments Trulicity, Glyxambi, Humalog U200 KwikPen, Synjardy, and Basaglar. Keep an eye on this important group.

3) How about mergers and acquisitions? In case you hadn’t noticed, Big Pharma (and health care in general) is on a tear for deals. The biggest single deal last year, in any industry, was Pfizer’s acquisition of Allergan, worth about $148.6 billion. Pharmaceutical companies, device makers and health insurers set a blistering pace all year, racking up mergers worth a record $687.5 billion, according to a recent tally by Dealogic, a financial information firm. Of course, Lilly’s Lechleiter has long resisted big mergers, saying they do not create lasting value. Nor does he plan to pursue a “tax-inversion” deal, meaning a merger with a foreign company for the purposes of lowering its tax rate. But with deal-making all the rage, listen during the conference call to any hints that Lilly is jumping a little deeper into the M&A game.

4) Where is Lilly cutting costs these days? Last week, Lechleiter said the company is focused on expanding margins. One way to do that, of course, is by chopping costs in research, administration, sales and marketing. In 2014, Lilly chopped those costs by nearly $3 billion in total, or about 13 percent. R&D felt the brunt of it, getting its budget cut by 20 percent; marketing, selling and administration got cut by 8 percent. How much more cutting will Lilly do to its research labs and sales force? What, if anything else, will get cut?

5) Show me the numbers. Yes, the bottom line is the ball game. And as we said above, Lilly recently cut its profit guidance. It now expects earnings of between $2.28 to $2.33 a share for 2015. That’s down from $2.40 to $2.45 a share. So what will the final number be?  And will that make shareholders happy? The stock is up 52 percent over the past two years. It will take a full pipeline and the promise of higher profits to keep it going. Keep your eye on the numbers. Most everything else is just noise and drama.

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