Q3 2026 ER Call - ELI LILLY & CO

Financial Performance:

• Q3 2026 revenue grew 39% year-over-year, adding nearly $7 billion, driven primarily by Monjaro, Zepbound, and strong momentum across therapeutic areas.
• Gross margin expanded 80 basis points to 84.4% of revenue, supported by favorable product mix and production efficiencies despite lower realized prices.
• Non-GAAP earnings per share (EPS) reached $7.48, up from $7.02 in Q3 2025, resulting in a non-GAAP operating margin of 54.2%, an increase of 5.9 percentage points.
• Key product revenue increased by over $6 billion; oncology, immunology, and neuroscience revenues collectively doubled compared to the prior year.
• Cardiometabolic portfolio (Monjaro and Zepbound) generated over $16 billion in revenue, contributing $6 billion in growth.
• Capital allocation included $1.5 billion in dividends and $400 million in share repurchases during the quarter.
• Revenue was positively impacted by approximately $900 million of one-time items, including milestone payments and rebate estimate adjustments.

Guidance and Future Outlook:

• Full-year 2026 revenue guidance raised to $91–$92 billion, reflecting an upward revision of approximately $10 billion from initial projections.
• Revised full-year non-GAAP operating margin guidance set between 52% and 52.5%.
• Revised full-year non-GAAP EPS guidance increased to $35.00–$36.00, representing a $4.07 increase per share at the midpoint before acquired IPR&D charges.
• 2027 guidance to be provided in Q4; preliminary outlook anticipates sustained U.S. volume growth, full-year impact from the Medicare GLP-1 Bridge Program, and global Monjaro leadership.
• Expectation of net realized price headwinds in 2027, though anticipated to be more than offset by volume growth.
• Anticipates approximately $2 billion of one-time revenue items (milestones, rebate adjustments) in 2026 that will not recur in 2027.
• Full commercial rollout of Foundatio in major global markets, including type 2 diabetes indications, is expected in 2027.

Business Segments and Product Lines:

• Cardiometabolic: Monjaro (semaglutide) and Zepbound (tirzepatide) remain the primary growth engines; total U.S. incretin market grew 32%, with obesity-specific prescriptions up 82%.
• New Launches: Global rollout of oral obesity medicine Foundatio advanced in the UK, Mexico, and Saudi Arabia; FDA approval received for weekly insulin Onsweek (insulin degludec/insulin iga) and terzepatide for cardiovascular risk reduction.
• Oncology: Jemplira (relapsed/refractory CLL) and Imlygic (breast cancer) saw strong uptake; portfolio includes eight late-stage programs including Imilustrant/abemaciclib and the recently acquired Colonial assets.
• Neuroscience: Kisumla (donanemab) revenue surged 175%; beta-amyloid blood tests (PT217) more than doubled, facilitating earlier diagnosis; acquisition of Atai Beckley adds neuroplasticity portfolio for depression.
• Immunology: Ebbal (dupilumab) revenue grew 59%; exokizumab demonstrated efficacy in combination with tirzepatide for psoriasis/obesity; Merida Biosciences acquisition adds precision therapy for Graves' disease.
• Manufacturing: Groundbreaking on two new U.S. facilities: a $6.5 billion site in Houston, Texas, and a $5 billion site in Richmond, Virginia.

Market and Competitive Landscape:

• U.S. Market: U.S. revenue grew 34%, driven by volume from Zepbound and Monjaro; price decline of 7% (10% excluding rebate adjustments) was offset by significant volume gains.
• International Growth: Europe revenue grew 29%, Japan 26%, China 62% (Monjaro exceeded $1 billion in its first full year), and Rest of World grew 87%, driven by Korea, Turkey, and Brazil.
• Market Share: Lilly holds approximately 58% of the international incretin market, gaining nearly four percentage points since Q2 2026; Monjaro share of new patient starts exceeded 50% in Japan.
• Oral GLP-1s: Foundatio captured approximately 40% of new oral obesity prescriptions in the U.S., with trialists doubling quarter-over-quarter.
• Medicare Access: The Medicare GLP-1 Bridge Program has enrolled over 500,000 seniors since July 1; 7 out of 10 new patients on the program are choosing Lilly obesity medicines.

Risks and Challenges:

• Pricing Pressures: Net realized prices are expected to face headwinds due to rebate structures and discounting, particularly in the U.S. commercial and Medicare channels.
• Manufacturing Constraints: Continued expansion of manufacturing capacity is required to meet surging demand for GLP-1 agonists; global supply chain remains a focus.
• Competitive Intensification: Increasing competition in the oral GLP-1 space and potential future entrants in triple agonist therapies.
• Regulatory Uncertainty: Ongoing regulatory reviews for Foundatio in type 2 diabetes and potential policy changes regarding the Medicare Bridge Program's long-term structure.
• Clinical Risks: Pipeline assets, particularly in neuroscience and oncology, carry inherent trial risks despite strong early data.

Management Commentary and Tone:

• Management expressed high confidence in the "industry-leading" execution and described the current environment as the "largest new category expansion in the history of the pharmaceutical industry."
• Tone was optimistic and proactive regarding the Medicare Bridge Program's potential to save Medicare over $20 billion cumulatively over 10 years.
• Leadership announced the retirement of Patrick Johnson (President, Lilly International) at the end of 2026, with Ilya Yufa expanding into a new "President of Global Markets" role.
• CEO Dave Ricks emphasized a strategic shift toward "long-term vision" with 75% of the clinical pipeline focused on diseases beyond obesity.
• Management highlighted the "Lilly Change the Course" commitment to expand access to obesity medicines in resource-limited settings by 2040.

Analyst Questions and Answers:

• Guidance Accuracy: Management clarified that previous guidance missed on the upside due to unprecedented variables (Bridge Program uptake, international middle-income demand); future guidance is expected to become more predictable as these variables stabilize.
• Incretin Runway: Confirmed that only 1 in 10 patients in the U.S. and 2 in 100 globally are currently treated, indicating a massive, multi-year growth runway rather than demand pull-forward.
• Medicare Bridge Dynamics: 75% of Bridge patients opt for injectables over oral; 80% of Bridge patients are insulin-naive, driving significant new patient acquisition.
• Pipeline Strategy: Confirmed multiple long-acting incretin programs in development; emphasized a "portfolio approach" for obesity (oral, injectable, triple agonists) to offer patient choice rather than betting on a single successor to Zepbound.
• M&A Activity: Acquisitions of Atai Beckley and Merida Biosciences reflect a strategy to acquire clinical-stage assets with high risk/reward profiles, leveraging strong cash flow to fund long-term innovation.
• Pricing in 2027: Expect stable commercial pricing with a segment mix shift toward lower-priced Medicare/Medicaid coverage; disciplined pricing maintained in international markets despite generic competition.

Other Key Points:

• Business Development: Acquired Atai Beckley and Merida Biosciences to enhance neuroscience and immunology portfolios; added eight new oncology medicines or major indications in Phase 3.
• Clinical Milestones: Retatrutide (triple agonist) demonstrated 20-21% weight loss in Type 2 diabetes trials, surpassing semaglutide; Elora-TZP showed 23.3% weight loss in Phase 2.
• Investor Day: Lilly Innovation Day scheduled for December 7 to showcase pipeline depth and breadth.
• Strategic Shift: Announcement of a new goal to treat more people in resource-limited settings with obesity-related diseases by 2040 compared to high-income countries.
• Dividend & Buybacks: Executed $400 million in share repurchases and paid $1.5 billion in dividends in Q3.