Lilly’s Lechleiter Puts A Smile On 2015 Guidance That Came Up Short

The big pharma missed analysts’ expectations for revenue and earnings in 2015, but says its strategy to focus on three therapeutic areas is paying off despite increased competition.

Eli Lilly & Co. Chairman and CEO John Lechleiter put a positive spin on the company’s expectations for 2015 during a Jan. 7 investor call, even as the big pharma’s earnings-per-share guidance missed analyst expectations.

Lechleiter started by pointing to the progress the company has made since 2008 when it entered its “YZ years” – the years it was hardest hit by patent expirations and revenues declined – and discussing the strategy the company laid out in late 2009.

“We said at that time, that during this patent expiration period, we would drive growth in Japan, emerging markets, and [the animal health unit] Elanco along with key brands unaffected by patent expirations, that we would replenish and advance our pipeline with the goal of 10 new molecular entities or NMEs in Phase III by 2011. We would reduce head count by 5,500, and reduce our cost structure by $1 billion by the end of that same year. And we would achieve at least $20 billion in revenue, $3 billion in net income, and $4 billion in operating cash flow for each year through 2014,” the exec said.

During the last five years, the CEO noted, Lilly’s animal health business has doubled its revenues (with the help of two major acquisitions, including Novartis’ animal health business), and the firm has had growth in emerging markets and moved 12 new drugs into late-stage development by the end of 2011. “We exceeded our head count and expense reduction goals, and we achieved our revenue, net income, and operating cash flow goals through 2013,” said Lechleiter. “Since that meeting in New York in late 2009, our stock price has basically doubled from $35 per share then to almost $70 per share today.”

Upbeat, But Humble

Yet the executive admitted that in 2014, the low point of the patent expiration period, Lilly “may fall just shy in revenue and net income” (Also see "Lilly Hunkers Down Through Sales Declines, Shies Away From M&A" - Pink Sheet, 24 Jul, 2014.).

Lilly reported Jan. 7 that it expects revenues in the range of $20.3 billion to $20.8 billion for full-year 2015, with earnings per share in the range of $3.10 to $3.20, below Wall Street’s consensus estimate of $3.25 per share.

The Indianapolis pharma expects a tax rate of 21.5%, R&D expenses in the range of $4.8 billion to $5 billion, and marketing, selling and administrative expenses in the range of $6.5 billion to $6.8 billion. The R&D costs reflect the company’s increased number of Phase III trials, as well as the inclusion of the Novartis Animal Health business (Also see "Lilly Feeds The Beast, But Is Novartis Animal Health Unit Worth The Price?" - Pink Sheet, 22 Apr, 2014.). Analysts expected R&D expenses closer to $4.4 billion.

“The company believes recent moves in foreign currency will negatively impact total sales by approximately $500 million in 2015. This is roughly a 2.5% hit to the company's total sales base, so generally in line with what we and others were expecting. The positive sales impact of the Novartis Animal Health acquisition ($1.0-1.2 billion) is also in line with expectations, leading us to believe the low total sales guidance may be driven by more muted expectations for the company's core products and recent launches,” Credit Suisse analyst Vamil Divan wrote in a note to investors.

Nothing new to the Street, or investors, Lilly plans to continue to narrow its human health focus to the therapeutic areas of oncology, diabetes and neurodegeneration (Also see "Lilly Not Ducking M&A, But Will Play To Strengths In Cancer And Diabetes" - Pink Sheet, 24 Apr, 2014.). Lechleiter admits that “competition has stiffened,” but added that the company will continue to pursue immuno-oncology through internal investment and external collaboration even as competition in the red hot space gets hotter (Also see "Lilly The Latest To Latch On To Immunocore’s Bispecific Immunotherapy Approach" - Pink Sheet, 30 Jul, 2014.).

Merck & Co. Inc. and Bristol-Myers Squibb Co. have had the first product approvals in the cancer immunotherapy space, while other big pharmas are jockeying to catch up (Also see "Late-Stage Data Advantage Or Just Late To The Game: Bristol’s Opdivo Approval Sets Off PD-1 Competition" - Pink Sheet, 5 Jan, 2015.).

Meanwhile, Lilly had two diabetes drugs approved in 2014, but the space is becoming increasingly crowded as many companies try to get a piece of the large patient population and the growing diabetes epidemic in the U.S.

In each of the core therapeutic areas, “we have compelling assets and growing or already deep expertise. We'll also pursue fewer research projects so that we can apply sufficient resources to enable us to be even more competitive with those we choose to move forward. At Lilly’s size, we know we cannot participate meaningfully in every therapeutic area, but where we choose to play, we will play hard and we will play to win,” Lechleiter added.