Eli Lilly & Company (LLY - Free Report) reported second-quarter 2018 adjusted earnings per share of $1.50, which beat the Zacks Consensus Estimate of $1.31 per share. Earnings rose 35% from the year-ago quarter backed by robust growth in new product sales, lower operating costs and lower tax rates.

Including asset impairment, acquisition-related in-process R&D charges, restructuring and other special charges, second-quarter loss per share was 25 cents against a gain of 95 cents per share in the second-quarter of 2017.

Revenues in Detail

Quarterly revenues of $6.36 billion also beat the Zacks Consensus Estimate of $6.09 billion. Sales grew 9% year over year backed by strong demand for its new drugs and favorable currency movement, which made up for lower sales of established products like Strattera, Cialis, and Forteo. Higher U.S. collaboration revenues also pulled up the top line in the quarter.

Volumes rose 7% as increased demand for new products like Trulicity, Cyramza, Taltz, Basaglar, Jardiance and Lartruvo offset decline in sales of some established products like Strattera, Effient, and Axiron due to loss of exclusivity and Cialis due to lower demand.

Foreign exchange rate also had a favorable impact of 2%.

While U.S. revenues grew 8% to $3.6 billion, ex-U.S. revenues rose 10% to $2.75 billion.

Pharmaceutical revenues rose 10% in the quarter. Lilly’s Animal Health segment sales rose 1% in the quarter.

Established products that recorded growth during the quarter included Humalog (up 13% year over year to $769.8 million) and Erbitux (up 5% to $166.4 million). Alimta sales also rose 4% to $555.9 million. Sales of all other established products declined in the quarter.

Forteo sales declined 3% to $434.5 million due to decreased demand and prices in the United States. However, in ex-U.S. markets, sales of Forteo increased.

Cymbalta sales declined 12% to $181.9 million. Humulin sales dropped 3% to $346.0 million. Zyprexa sales were down 9% to $128.0 million.

Cialis sales declined 14% to $538.7 million hurt by lower demand in the United States due to the entry of generic sildenafil and loss of exclusivity in Europe.

Strattera sales declined 39% to $114.2 million due to loss of exclusivity.

Among the new products, Trulicity generated revenues of $779.8 million, up 62% year over year, with U.S. revenues benefiting from growth in the GLP-1 market and market share gains.

Cyramza revenues were $218.8 million, up 17% year over year, backed by strong demand.

Jardiance sales surged 43% to $147.2 million, driven by increased demand trends within the SGLT2 class of diabetes medicines in the United States and increased volume outside the United States.

Basaglar recorded revenues of $201.8 million compared with $166.0 million in the previous quarter driven by increased demand in the United States.

Taltz brought in sales of $220.1 million compared with $146.5 million in the previous quarter as U.S. sales gained from higher demand and ex-U.S. sales were driven by increased volume from new launches.

Lartruvo (olaratumab) generated revenues of $79.9 million in the quarter compared with $64.4 million in the previous quarter.

Olumiant (baricitinib) has been launched in select European countries and in Japan for moderate-to-severe rheumatoid arthritis. Olumiant was approved and launched in the United States, but only for the lower dose, in June.

The drug generated sales of $44.7 million in the quarter backed by launch uptake in new European markets, compared with $32.2 million in the previous quarter. In the United States, Lilly recorded sales of $1.7 million due to initial wholesaler stocking.

Advanced breast cancer treatment, Verzenio, launched in the Unites States in late 2017, generated sales of $57.7 million in the quarter compared with $29.7 million in the previous quarter.

Elanco Animal Health segment sales rose 1% to $792.1 million as higher food animal revenues made up for lower companion animal sales.

Lilly had been exploring strategic alternatives for this business including a sale, merger or creating a separate company through an initial public offer (IPO). In the latest release, Lilly said the strategic review is over and it will spin-off this underperforming business into a new publicly traded company. Lilly said it will pursue an IPO of its minority stake of less than 20% in the separated Elanco unit. This IPO process is expected to be concluded by the second half of this year. Lilly’s remaining ownership in Elanco is expected to be divested through a “tax-efficient transaction” probably by next year.

Gross Margin & Operating Income

Adjusted gross margin of 76.1% in the quarter decreased 20 basis points as manufacturing efficiencies were offset by the unfavorable timing of manufacturing production and the effect of foreign exchange rates on international inventories sold.

Operating income increased 28% year over year to $1.85 billion due to higher revenues and lower operating costs. Total operating expenses (including research and development and marketing, selling and administrative expenses), as a percent of revenues, declined 450 basis points in the quarter to 47% due to the company’s cost-saving efforts.

2018 EPS Guidance Upped

Lilly raised its previously issued outlook for adjusted earnings as well as sales.

Adjusted earnings per share are now expected in the range of $5.40 to $5.50, higher than $5.10 to $5.20 expected previously, reflecting the expected benefit from higher revenues and gross margins.

The revenue range was also slightly upped to $24.0 billion to $24.5 billion from $23.7 billion to $24.2 billion expected previously.

The sales guidance increase was due to strong performance of pharmaceuticals products, especially Lilly’s diabetes drugs as well as higher collaboration revenues.

Gross margin is expected to be approximately 76%, higher than 75% previously expected. Adjusted tax rate is expected to be approximately 17% (maintained).

Marketing, selling and administrative expense guidance was maintained in the range of $6.2–$6.5 billion. Research and development expense guidance was also kept intact in the range of $5.2–$5.4 billion.

Our Take

Lilly’s second-quarter results were impressive as it beat estimates for earnings and sales and also raised its 2018 guidance for both metrics for the second time this year. Shares of the drug giant rose more than 3% in pre-market trading.

Year to date, Lilly’s shares have risen 5.3% against the industry’s decline of 1.3%.

Going forward, Lilly’s new products like Trulicity, Taltz, Basaglar, Cyramza, Jardiance, Lartruvo, Verzenio and Olumiant are expected to continue to drive revenues. Lilly is also having a strong year in terms of its pipeline with several positive late-stage data readouts. It has also added promising new assets through business development deals.

Meanwhile, in the wake of deeper political scrutiny over the high cost of prescription medicines, Lilly said it has not raised the list prices of its drugs since President Trump’s drug pricing blueprint was announced. David A. Ricks, Lilly's chairman and chief executive officer (CEO) said that the company aims to earn more revenues through volume growth and not price increases and its 2018 guidance range does not include any price increases for the rest of the year.

The drug pricing controversy came to the forefront this month after Trump attacked Pfizer (PFE - Free Report) for raising prices of several drugs this year.  Last week, Novartis (NVS - Free Report) said it won’t raise U.S. drug prices this year while Merck (MRK - Free Report) announced price cuts of some of its drugs.

However, competitive pressure on Lilly’s drugs is expected to rise this year. Challenges remain for the company in the form of generic competition for Strattera, Effient, and Axiron. Also, erectile dysfunction drug, Cialis will face generic competition this year.

Lilly currently carries a Zacks Rank #2 (Buy).

Eli Lilly and Company Price, Consensus and EPS Surprise

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