In the third quarter of 2019, worldwide revenue was $5.477 billion, an increase of 3 percent compared with the third quarter of 2018, and an increase of 4 percent when excluding the impact of foreign exchange rates.
The increase in revenue was driven by an 8 percent increase due to volume, partially offset by a 4 percent decrease due to lower realized prices.
Revenue in the U.S. was essentially flat at $3.060 billion, as increased volume of 5 percent was offset by lower realized prices.
Increased U.S. volume for key growth products including Trulicity, Taltz, Emgality, Jardiance, Verzenio, and Basaglar, was partially offset by decreased volume for Cialis due to loss of patent exclusivity, as well as the impact from the product withdrawal of Lartruvo.
Lower realized prices in the U.S. were primarily due to increased coverage gap funding requirements in Medicare Part D and higher contracted rebates.
Revenue outside the U.S. increased 8 percent, to $2.416 billion, driven by increased volume of 12 percent, which was primarily from key growth products, including Trulicity, Olumiant, Jardiance, Taltz, and Verzenio, partially offset by decreased volume for Strattera due to loss of patent exclusivity and the impact of the product withdrawal of Lartruvo.
The increase in revenue due to volume was partially offset by the unfavorable impact of foreign exchange rates and lower realized prices.
Gross margin increased 4 percent, to $4.302 billion, in the third quarter of 2019 compared with the third quarter of 2018.
Gross margin as a percent of revenue was 78.5 percent, an increase of 0.2 percentage points compared with the third quarter of 2018.
The increase in gross margin percent was primarily due to the favorable effect of foreign exchange rates on international inventories sold, lower intangibles amortization expense and greater manufacturing efficiencies, partially offset by unfavorable product mix primarily as a result of the loss of patent exclusivity for Cialis, and the impact of lower realized prices on revenue.
Operating expenses in the third quarter of 2019, defined as the sum of research and development and marketing, selling, and administrative expenses, increased 2 percent to $2.793 billion compared with the third quarter of 2018.
Research and development expenses increased 8 percent to $1.381 billion, or 25.2 percent of revenue, driven by higher development expenses for late-stage assets.
Marketing, selling, and administrative expenses decreased 3 percent, to $1.412 billion, as lower spending on late life-cycle products, lower litigation charges, and ongoing cost containment measures were partially offset by increased expenses for recently launched products.
In the third quarter of 2019, the company recognized acquired in-process research and development charges of $77.7 million, related to the previously announced business development transactions with Centrexion Therapeutics Corporation and AC Immune SA.
In the third quarter of 2018, the company recognized acquired in-process research and development charges of $30.0 million related to a collaboration with Anima Biotech.
Operating income in the third quarter of 2019 was $1.431 billion, compared to $1.343 billion in the third quarter of 2018.
The increase in operating income was primarily driven by higher gross margin and lower asset impairment, restructuring, and other special charges, partially offset by higher operating expenses and higher acquired in-process research and development charges.
Other expense was $24.9 million in the third quarter of 2019, compared with $1.9 million in the third quarter of 2018.
The increase in other expense was primarily driven by higher net interest expense, partially offset by higher net gains on investment securities.
The effective tax rate was 10.8 percent in the third quarter of 2019, compared with 18.5 percent in the third quarter of 2018.
The lower effective tax rate for the third quarter of 2019 was primarily driven by a net discrete tax benefit related to the settlement of certain tax matters, as compared to a net discrete tax detriment incurred in the third quarter of 2018 related to tax expenses for U.S. tax reform and the Elanco separation.
In the third quarter of 2019, net income and earnings per share were $1.254 billion and $1.37, respectively, compared with net income of $1.150 billion and earnings per share of $1.12 in the third quarter of 2018.
The increase in net income in the third quarter of 2019 was primarily driven by higher operating income and, to a lesser extent, lower tax expense, partially offset by lower net income from discontinued operations related to Elanco.
In addition to the increase in net income, earnings per share in the third quarter of 2019 significantly benefited from lower weighted-average shares outstanding as a result of the Elanco exchange offer and share repurchases. ■