Eli Lilly’s profitability
Eli Lilly (LLY) reported a growth of ~4.7% during 1Q16. The net profit decreased to $764 million for 1Q16, as compared to $776 million for 1Q15. In terms of percentage, the net profit margin fell by ~1.0% to 15.7% in 1Q16 due to lower gross margin and higher operating expenses.
Gross margin decreased to 72.8% as a percentage of revenues, driven by the negative impact of foreign exchange on international sales and product mix and timings.
Operating expenses increased by 7% for 1Q16 compared to 1Q15. This was due to an increase of 17% in research and development expenses, partly offset by the 1% decline in marketing, selling, and administration expenses.
The net income decreased by 4%, resulting in a net profit margin of 9% for 1Q16 as compared to 11.4% for 1Q15. This was mainly due to the negative impact of foreign exchange. Excluding foreign exchange, the net income increased 5%.
Revised financial guidance in 2016
Eli Lily has revised part of its financial guidance for 2016. Revenues are now estimated between $20.6 billion and $21.1 billion, which is 3.2% to 5.7% higher than 2015 revenues of $20.0 billion.
Marketing, selling, and administration expenses for 2016 are estimated at $6.1 billion–$6.3 billion for 2016. Also, the research and development expenses are estimated at $4.9 billion–$5.1 billion. Other income estimates and capital expenditure estimates remain unchanged.
The earnings per share (or EPS) is now estimated in the range of $3.50 to $3.60 for 2016.
Investors can consider ETFs like the PowerShares Dynamic Pharmaceuticals ETF (PJP), which holds ~5.5% of its total assets in Eli Lilly, ~5.0% of its total assets in Pfizer (PFE), ~5.3% of its total assets in Merck (MRK), and ~5.3% of its total assets in Gilead Sciences (GILD). Investors can also consider the iShares US Pharmaceuticals ETF (IHE), which holds ~5.8% of its total assets in Eli Lilly, in order to divest company-specific risk.