Lilly falls short in Q3 as rebates, discounts thump its diabetes mainstay Humalog

Eli Lilly

Eli Lilly ($LLY) CEO John Lechleiter did his best to balance bad news with good after the company released disappointing third-quarter earnings on Tuesday. “We’re pleased with our performance,” insisted Lechleiter, who is retiring at the end of this year, during an appearance on Bloomberg TV.

But investors are still counting on old blockbusters to prop up the company as it works to gain traction for its new entries, and one mainstay of its diabetes franchise slipped big time: Humalog. Its sales dropped 9% to $641 million, well below the $738 million analysts were expecting, according to Bloomberg.

When asked during a conference call after the earnings release to explain Humalog’s lackluster performance, Enrique Conterno, vice president of Lilly Diabetes, said sales volume was actually up 10% in the U.S., but steep rebates and discounts took a toll, particularly from Medicare Part D.

The bottom line was that there was “significantly more business flowing through less profitable books of business, less profitable channels,” he said, adding, “we have quite a bit of volatility.  We expect for this volatility, unfortunately, to continue."

Meanwhile, Lechleiter tried to strike a sunny note by touting recent successes at the FDA. “Our pipeline keeps flowing,” he said, pointing out that Lilly just had its seventh new drug nod since 2014: Lartruvo won the FDA's approval last week to treat some forms of soft tissue sarcoma. And the company has predicted it could hit 20 new drug approvals over the decade ending in 2023.

Lilly reported that its third-quarter revenue grew 5% year-over-year to $5.2 billion, while nd its net income dropped 3% to $778 million (73 cents per share). That's way short of expectations. Analysts had predicted EPS of 96 cents per share, according to Zacks.

Even so, the company reaffirmed its earnings guidance for the year, telling investors to expect EPS of $3.50 to $3.60.

The only good news was that Lilly bumped up its revenue expectations for the year slightly, to between $20.8 billion and $21.2 billion from $20.6 billion to $21.1 billion. The company ticked off more than 10 products that it expects will outperform for the remainder of the year, including cancer mainstay Erbitux and its new lung cancer med Portrazza. Lilly expects the latter to grow despite pricing pushback overseas--and despite a slow start during its first year on the market. Portrazza has brought in just $11 million year-to-date.

Lilly also has high hopes for its new diabetes drugs, Jardiance, Trulicity and Basaglar, the latter of which is a biosimilar version of Sanofi’s ($SNY) best-selling Lantus. Together they brought in $310.5 million during the third quarter.

The Q3 news on Jardiance wasn't so great by itself, however. The SGLT2 drug had been boosted by a study released last year showing that the drug slashes the risk of heart attack, stroke and cardiovascular death. But high expectations came back to bite Lilly this period: Jardiance sales came in at $48 million, far lower than the $62 million analysts had predicted.

Even Lilly’s erectile dysfunction blockbuster Cialis struggled during the quarter. Sales for that product came in at $588 million, versus the $595 million analysts were expecting. Lilly’s animal health sales fell, too, by 9%, which the company blamed on wholesaler buying patterns and weakness on the food-production side of the business, particularly in Latin America.

Lilly is looking forward to some key data readouts from its pipeline, including results from a pivotal study of solanezumab, its Alzheimers treatment, which has suffered some major disappointments in the trial process so far. The company could report the results from Phase III trial, called Expedition 3, as early as December.

In a note following the earnings release, Credit Suisse analysts said they’re still enthusiastic about Lilly’s future, an opinion that “is driven by the diverse and relatively de-risked group of recently-launched products and products in the late-stage pipeline. A light quarter does not change our broader view on LLY being well positioned to drive top-line and bottom-line growth over the next several years,” they added.

But Lilly’s incoming executive team will have their work cut out for them proving the company can live up to such sunny forecasts. Lechleiter's replacement in the CEO chair, current SVP David Ricks, will take the helm January 1.

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