Eli Lilly and Company

Ladies and gentlemen, thank you for standing by and welcome to the Lilly Q1 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the question and answer session. If you wish to put yourself in the question queue, please press 1 and 0 at this time or when instructions are given. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Kevin Hearn. Please go ahead.

Good morning. Thank you for joining us for Eli Lilly and Company's Q1 2021 earnings call. I'm Kevin Hearn, Vice President of Investor Relations. Joining me on today's call are Dave Ricks, Lilly's Chairman and CEO, Anat Ashkenazi, Chief Financial Officer, Dan Skowronski, Chief Scientific Officer, Anne White, President of Lilly Oncology. Ilya Yufa, President of Lilly Biomedicines, Mike Mason, President of Lilly Diabetes, and we'd also like to welcome Jake Van Narden, CEO of Loxo Oncology at Lilly, who will be joining us today and moving forward to answer your questions about discovery and early-stage oncology efforts he's leading. Now, I'll turn the call over to Dave. Oh, sorry. We're also joined by Sarah Smith and Lauren Zierke of the Investor Relations Team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide three. Additional information concerning factors that could cause actual results to differ materially is contained in our latest forms 10-K and subsequent forms 10-Q and 8-K filed with the Security and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, a reminder that our commentary will focus on non-GAAP financial measures. Now, I'll turn the call over to Dave for a summary of our results from the first quarter of 2021.

Okay, thanks, Kevin. Lilly Enterer 2021 focused on expanding our reach to over 45 million patients by scaling our key growth brands around the world. Continuing the advancement of our pipeline, following a very successful 2020, and increasing productivity in the SG&A line while investing in research for sustainable long-term growth. We are pleased with the progress we've made on these objectives in our first quarter, while also delivering hundreds of thousands of doses of our COVID-19 antibodies to patients to help the continued fight against COVID-19. As we unpack this quarter's results, we will attempt to give you a clear picture of the underlying trends in our core business. We recognize this quarter was noisy, catching the increased consumer stock in from the Q1 2020 in our quarterly compare and increased COVID-19 therapy R&D spend in 2021. These items coupled with the FX rate movement and a number of changes to U.S. government purchase agreements for COVID-19 antibodies throughout the quarter make for a longer earnings call and press release, and we realize for those keeping score on sell-side model accuracy, perhaps some disappointment. Nonetheless, underneath all that is a strong and growing core business for Lilly and a significant number of positive, even compelling, pipeline readouts in the quarter to support long-term growth across all of our core therapy areas. And we continue to expect top-line growth and margin expansion to accelerate throughout this year. This quarter, revenue grew 16% compared to Q1 2020, or 13% in constant currency. This performance was driven entirely by volume, which grew 17 percentage points. As previously highlighted in Q1 2020, we had roughly a $250 million COVID-19 related inventory build that is impacting the year-over-year comparison. When excluding COVID-19 antibody revenue, and the Q1 2020 stocking benefit, our core business grew 7% for the quarter. Key growth products continued to drive volume and revenue growth and now represent 52% of our core business in Q1 2021. Our non-GAAP gross margin was 75.4% in Q1 and 78% excluding the impact of foreign exchange on international inventories sold. Our non-GAAP operating margin was 27.5% for the quarter and 30.1% excluding the FX impact. While foreign exchange on international inventories sold has a modest effect on our results in 2019 and 2020, in the first quarter of 2021, we experienced over a 250 basis point of negative impact on our gross margin and operating margin. Recall that is purely a non-cash accounting item. On the pipeline front, we achieved multiple milestones since our Q4 earnings call, including the Phase III initiation of pertabrutinib, formerly known as LOXO-305, and for additional obesity studies in terzipatide's Surmount program. The FDA granted emergency use authorization for the administration of bamlanivimab and edesivimab together as a treatment for COVID-19. positive Phase III results from terzipatide-surpassed 2, 3, and 5 trials in type 2 diabetes, and positive Phase III results for murikizumab in ulcerative colitis and baricitinib in alopecia areata. About a decade ago, Lilly made the decision to enter into and invest in immunology with the Phase III initiation of ixikizumab, now known as TALTS. Since then, we have added Illumient in rheumatoid arthritis, and several new indications with first or best in category data for TALTS and Illumiant in rheumatology and dermatology. This year, we see further expansion of our immunology strategy with the successful completion of Phase III studies of mirakizumab in ulcerative colitis, the first IL-23 P19 antibody medicine to demonstrate results in this setting. We're also excited about Leberkizumab's potential to differentiate from Dupixent on itch, sleep, and safety, primarily in conjunctivitis, in what is an increasingly large and growing class with meaningful unmet medical need. And we anticipate multiple Phase III readouts for Leberkizumab later this year in monotherapy and in combination with corticosteroids. We look forward to potentially reaching increasing numbers of patients in difficult-to-treat immunology conditions in the coming years. We also entered into several business development deals, including the in-licensing of a RIPK1 inhibitor from Rigel Pharmaceuticals and the divestiture of Cubregza, which, along with leberkizumab, was part of the Dermura acquisition last year. We also distributed nearly $800 million in dividends this quarter, with the dividend per share increasing 15% versus last year. Moving on to slides five and six, you'll see a list of key events since our last earnings call. We announced plans to host a webinar to provide an overview of the company's commitment in the areas of environmental, social, and governance for the investment community, for media, and the general public on May 4, 2021. Additionally, we announced two planned retirements of long-tenured executives and several additions to our leadership team. I'd like to thank Miles O'Neill, President of Lilly Manufacturing, and Melissa Barnes, our Chief Ethics and Compliance Officer, for their leadership and service to our company. We also extend a warm welcome to Edgardo Hernandez, who will be succeeding Miles, to Alonzo Weems, who will succeed Melissa, and to Diogo Rao, who will be joining Lilly next month as Chief Information and Digital Officer for succeeding Artie Shaw, whose retirement was announced last fall. Finally, we announced the appointment of Anat Eskenazi, our CFO. Anat has a deep experience having been the CFO of every part of our value chain. For the last four years, Anat has led a large portion of our finance organization with all of our divisional CFOs reporting to her, as well as our accounting and financial reporting team, our corporate strategy group, and our business transformation office. During this time, Anat worked closely with me, our executive committee, and our board of directors to develop and implement our annual business and long-term strategic plans. I have no doubt that Anat will perform extremely well as CFO of Lilly and expect no changes in our priorities, our strategy, or execution, given her significant involvement in all those areas. Anat, welcome to our leadership team, and I'll turn the call over to you for our Q1 results.