Portfolio healthcare holding Eli Lilly (LLY) reported disappointing second quarter earnings on Thursday morning.

Adjusted earnings of $1.25 per share missed the $1.69 Refinitiv consensus estimate. Revenue fell 4% year over year (down 1% on a currency neutral basis) to $6.49 billion, missing Refinitiv consensus estimate of $6.84 billion. That revenue decline comes as the result of an 11% decline in realized prices and 3% currency headwind that was partially offset by 10% increased in volumes. Excluding revenue from chemotherapy Alimta, which lost exclusivity, as well as Covid antibodies, and Cialis in China (Lilly sold the rights in the second-quarter of fiscal 2021), Eli Lilly’s revenue increased 6% for the quarter and it was volume-driven growth.

The adjusted gross margin as a percent of sales came in at 79.8%, up 0.5 percentage points year over year “driven by favorable product mix and the effect of foreign exchange rates on international inventories sold, partially offset by lower realized prices,” the company said.

The adjusted operating margin was 20.5%, representing a decrease of about 6.8 percentage points year over year, driven by $440.4 million of acquired in-process research and development (IPR&D) and development milestone charges.

Selected products

Here’s a rundown of Lilly’s key growth products, which in the second quarter collectively grew revenues 20% year over year and were responsible for 67% of quarterly sales, excluding Covid antibodies.

• Trulicity revenue of $1.91 billion exceeded estimates of $1.84 billion

• Verzenio revenue of $588.5 million exceeded estimates of $526 million

• Jardiance revenue of $461 million missed estimates of $447 million

• Taltz revenue of $606.2 million missed estimates of $671 million

• Retevmo revenue of $45 million matched expectations

• Mounjaro revenue came in at $16 million; as we mentioned a fast start and above estimates.

• Emgality revenue of $157.5 million missed estimates of $183 million

• Olumiant revenue of $186.2 million missed estimates of $272 million

• Tyvyt revenue of $73.6 million missed estimates of $100 million

• Cyramza revenue of $231.3 million exceeded estimates of $265 million

Other notable products:

• Covid antibodies’ revenue of $129.1 million for the quarter, missed estimates of $143 million.

• Humalog revenue of $447.1 million missed estimates of $569 million

• Alimta revenue of $227.7 million missed estimated of $345 million

• Humulin revenue of $274 million missed estimates of $294 million

• Basaglar revenue of $174.2 million missed estimates of $190 million

• Forteo revenue of $138.5 million missed estimates of $165 million

On the call, management stated that the initial uptake of Mounjaro (diabetes - weight loss) has been strong and they’re “excited about the potential for this new medicine to provide A1c and weight loss benefits to adults living with type-2 diabetes.”

Regarding Donanemab (Alzheimer's drug), management noted that we should expect the Phase 3 confirmatory study Trailblazer-ALZ 2 by mid-2023, which if positive, will form the basis of Lilly’s application for traditional regulatory approval

Pipeline update

On the release, management announced the FDA “accepted, with Priority Review designation, Donanemab for Alzheimer’s disease for review under the accelerated approval pathway.” Additionally, the FDA “accepted, with Priority Review designation, Pirtobrutinib for mantle cell lymphoma for patients previously treated with a BTK inhibitor for review under the accelerated approval pathway.”

Guidance

Turning to 2022 guidance, management reiterated their total revenue outlook of $28.8 billion to $29.3 billion despite an additional $400 million headwind expected from currency dynamics as they believe this will be offset by additional Covid antibody sales thanks to a $275 million U.S. government purchase and the commencement of non-U.S. government distribution. The reiteration is in line with expectations of $29.13 billion.

However, despite maintaining gross margin, marketing, selling, and administrative expenses, and research and development expenses guidance, management reduced its operating margin outlook by 100 basis points (to roughly 29% on a non-GAAP basis) “primarily due to the impacts attributable to foreign exchange rates and acquired IPR&D and development milestone charges to date.”

As a result, management reduced their full year earnings per share forecast by 25 cents to a range of $7.90 to $8.05, noting the hit to the bottom line comes entirely due to foreign exchange dynamics as the “impact of increased acquired IPR&D and development milestone charges and marketing investments in select key growth products are offset by the impact of additional sales of Bebtelovimab (the Covid antibody).” The Street was looking for full year earnings of $8.28 per share.

Bottom line

This wasn’t the cleanest quarter due to foreign exchange fluctuations (strong dollar), an unpredictable accounting milestone charge, and some loss of exclusivity headwinds. That said, the core business delivered 6% revenue growth, Lilly’s type-2 diabetes drug Mounjaro is off to a fast start and it hasn’t even been approved yet for obesity treatment. Best of all, we learned the Food and Drug Administration (FDA) accepted Lilly’s Alzheimer’s treatment drug donanemab for review under its accelerated approval pathway.

The stock was down Thursday, but it’s important to zoom out a bit and acknowledge that it has been one of the biggest winners in the market all year. Even with Thursday’s decline, it has gained about 10% year-to-date comparted to the S&P 500′s roughly 13% decline in 2022.  Protecting against a drop like Thursday was why we sold into strength when the stock was in the $320-$330 range. As a result, we are now a position to buy shares back at a lower price. We have started a small position with an average cost basis of $305/share, and looking to build a full position towards $280/share.