Eli Lilly's First Quarter Results Assessment

| About: Eli Lilly (LLY)

Summary

Non-GAAP revenue of Lilly in the 1Q has increased, comparing to 1Q 2015.

The company has the highest research and development margin, what gives company good perspectives.

New pharmaceutical products' contribution to overall revenues is rising.

Eli Lilly

Company Description

Eli Lilly and Company (NYSE:LLY) discovers, develops, manufactures, and markets pharmaceutical products for human and animal diseases worldwide. Lilly has four major types of human pharmaceutical products, including endocrinology, neuroscience, oncology and cardiovascular products.

The company's share price is equal to $74.31. The market capitalization of Lilly is $84.26 billion.

1Q top-line and bottom-line details.

The company declared $4.9B revenues in the first quarter of 2016. This is 9.5% less q-o-q and 4.7% more y-o-y. Talking about bottom-line non-GAAP results, we can see that net profit amounted to $882.3 million. That is 6.5% more q-o-q and 4.5% less y-o-y. LLY's earnings per share constituted $0.83 in 1Q 2016. This is 6.4% greater q-o-q and 4.6% smaller y-o-y.

Table 1 - revenue, GAAP and non-GAAP net income and EPS (US $ millions, except per-share data)

Three months ended

Change (%)

March 31, 2016

December 31, 2015

March 31, 2015

Q/Q

Y/Y

Revenue

4 865.10

5 375.60

4 644.70

-9.5%

4.7%

Net Income - non-GAAP

882.3

828.2

923.7

6.5%

-4.5%

EPS - non-GAAP

0.83

0.78

0.87

6.4%

-4.6%

Net Income - Reported

440.10

478.40

529.50

-8.0%

-16.9%

EPS - Reported

0.41

0.45

0.50

-8.9%

-18.0%

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The company in the first quarter showed the following results in income statement.

Table 2 - income statement main characteristics, and their change (US $ millions)

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As we can see, only gross profit results were positive year-over-year, showing 2.2% increase. All the other showed a negative change year-over-year, but positive change in q-o-q terms.

Competitor analysis

It is interesting to compare LLY's results with some other companies from the same industry. The first one is Pfizer Inc. (NYSE:PFE), which reported 1Q 2016 sales of $13.00 billion. The second company is Merck & Co. Inc. (NYSE:MRK), with $9.31 billion revenue in 1Q. The third is AbbVie Inc. (NYSE:ABBV), having sales of $5.96 billion in the first quarter of 2016. The next one is Amgen Inc. (NASDAQ:AMGN) with sales equal $5.53 billion for the same period. The last company is Sanofi (NYSE:SNY), having €7.78 billion ($8.87 billion) revenue in 1Q 2016.

Table 3 - marginality comparison

1Q 2015

Eli Lilly & Co

Pfizer Inc.

Merck & Co. Inc.

AbbVie Inc.

Amgen Inc.

Sanofi

Gross margin

76.3%

78.1%

61.6%

77.0%

81.6%

70.4%

Operating margin

21.0%

29.9%

18.0%

38.2%

43.5%

14.8%

Net margin

18.1%

23.2%

12.1%

22.7%

34.4%

14.3%

R&D

25.1%

13.3%

17.8%

15.9%

15.8%

15.9%

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As can be seen from the table, Eli Lilly' result can be considered almost median in first three cases of gross margin, operating margin and net profit margin. However, we can also see that LLY's expenses on research and development constituted the biggest share of total sales, amounting to 25.1%.

Table 4 - Eli Lilly and competitors' valuations (5/20/16)

P/E

Price/Sales

52 Wk Pr Chg

Eli Lilly & Co

34.24

4.01

2.77%

Pfizer Inc.

27.36

3.95

-3.46%

Merck & Co. Inc.

33.46

3.84

-9.03%

AbbVie Inc.

17.82

4.11

-7.91%

Amgen Inc.

15.73

5.11

-7.94%

Sanofi

20.63

2.59

-23.04%

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Talking about valuation, we can see that the company's price to earnings ratio is the biggest one. Price to sales ratio is higher, than median. It is also interesting, that Eli Lilly was the only company with a positive 52-week change of 2.77%.

Key drug revenue highlights

It is interesting to see, how some particular drugs contributed to total revenue.

Table 5 - contributions by particular drugs (US $ millions)

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We can see, that the growth was shown only by drugs, which are shaded. All the shaded drugs are new pharmaceutical products of the company. We can sign this as a positive factor, which shows, that research and development expenses are carried out effectively in LLY.

DCF analysis

FCFF in 2015 equal $1.91 billion. Average retention rate equal 0.34, average return on invested capital equal 17.16%. FCFF growth rate from single stage model equal 1.72%.

This will give us the following FCFF growth rate.

Table 6 - FCFF growth rate

Year

Value

Growth rate

1

g1

5.79%

2

g2

4.77%

3

g3

3.76%

4

g4

2.74%

5 and thereafter

g5

1.72%

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Having WACC equal 3.83% we will get the following FCFF forecast.

Table 7 - Estimation of intrinsic value of Eli Lilly's share ( US $ millions)

PV (FCFF)

1

FCFF 0

1 911.07

1

FCFF 1

2 021.76

1 947.26

2

FCFF 2

2 118.29

1 965.06

3

FCFF 3

2 197.89

1 963.78

4

FCFF 4

2 258.13

1 943.26

5

FCFF 5

2 297.06

1 903.93

5

Terminal value

111 175.65

92 148.26

Intrinsic value of Lilly's capital

101 871.55

Less: Debt (fair value)

8 172.00

Intrinsic value of Lilly's common stock

93 699.55

Intrinsic value of Lilly's share

$84.89

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Conclusion

Although the company has generic risks, which are connected with the expiration of some drug patents, I believe, that Lilly has enough potential to treat this risks. And the amount of research and development expenses, along with the growing contribution of newly developed drugs can prove such beliefs. What is more, even valuation, which is based on standard assumptions, gave intrinsic value for LLY's share price of $84.9, what exceeds current share price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.