LLY — Q2 2026 Financial Report Analysis

Revenue up 48%, but the profit line only rose 25% — $2.8bn of deal charges is the reason

Eli Lilly's second quarter of 2026 (the three months ended June 30, 2026) was another quarter driven almost entirely by its two tirzepatide products — Mounjaro for type 2 diabetes and Zepbound for obesity. Revenue reached $22,974 million, up 48% from $15,558 million a year earlier. Net income rose a much slower 25%, to $7,095 million, because Lilly booked $2,776 million of acquired in-process research and development (IPR&D) charges in the quarter — an accounting charge taken when a company buys another business whose drugs are still in development and are not yet approved, so the purchase price is expensed immediately rather than carried on the balance sheet as an asset. A year ago that line was just $154 million.

That single item is the whole story of the gap between the top line and the bottom line this quarter. It cost $3.03 per share, against $0.14 in the same quarter of 2025.

The numbers

Operating margin — the share of revenue left after the costs of running the business, before interest, investment gains and tax — is derived here as revenue less cost of sales, R&D, marketing/selling/administrative, acquired IPR&D and special charges, since Lilly does not report an operating income subtotal in its income statement. On that basis operating income was $8,978M in Q2 2026 versus $6,867M in Q2 2025. Gross margin percentages and the non-GAAP EPS figures are the company's own, from the 10-Q and the accompanying earnings release.

Growth is volume, and the price line is going the other way

The 10-Q gives an explicit breakdown of what moved revenue. Consolidated revenue grew 48%, made up of +60% from volume, −13% from price and +1% from currency. In other words, Lilly sold far more product and accepted meaningfully less money per unit for it.

The −36% price effect outside the U.S. has a specific named cause: Lilly states the lower realized prices there were "primarily driven by the addition of Mounjaro to the National Reimbursement Drug List (NRDL) in China" — the list that determines which medicines China's public insurance covers, and at what (much lower) negotiated price. Getting onto that list trades price for access, and the volume response was large enough that non-U.S. revenue still grew 80%.

In the U.S. the price drag was milder at −3%, which Lilly attributes to Zepbound and Mounjaro, "partially offset by adjustments to estimates for rebates and discounts."

One accounting detail worth flagging

That "adjustments to estimates for rebates and discounts" phrase is doing real work. The filing quantifies it: revisions to previously-shipped-product rebate and discount estimates were 3% of U.S. revenue in Q2 2026, versus 1% in Q2 2025. On $14,413 million of U.S. revenue, three percent is roughly $430 million of benefit that relates to product shipped in earlier periods, not to this quarter's selling. It is a legitimate accounting true-up, but it flatters the quarter and is unlikely to repeat at the same size.

The clearest fingerprint of it is Trulicity, Lilly's older weekly diabetes injection, which is losing relevance to tirzepatide. Trulicity revenue rose 12% in the quarter to $1,219 million — yet for the first six months it is down 2% at $2,138 million. A declining product does not accelerate; the quarterly increase is consistent with the rebate true-up Lilly names (it cites Trulicity first among the products driving those adjustments), not with underlying demand.

Product detail: two drugs, two-thirds of the company

Three things stand out.

Mounjaro's growth is now an export story. Non-U.S. Mounjaro revenue ($5,152M) exceeded U.S. Mounjaro revenue ($4,791M) for the first time, after growing from $1,897M a year ago. U.S. Mounjaro grew 45%; international grew 172%. Zepbound, by contrast, is still almost entirely American — $4,873M of its $4,928M. Lilly notes that Zepbound is the obesity brand only in the U.S., Canada and Japan, so international obesity demand is being served under the Mounjaro label where approved. Together the two accounted for 65% of revenue in the first half, a concentration Lilly states outright in the filing.

Everything outside cardiometabolic is close to flat. Oncology revenue grew 6% ($2,570M vs $2,414M) and is carried entirely by smaller products — Verzenio, the breast cancer drug that was the franchise's growth engine, actually shrank 1%, with U.S. sales down 9% to $845M against international up 12%. Immunology grew 13% to $1,417M, with Taltz flat and the gain coming from newer products in "other immunology" (+38% to $561M). Neuroscience, at $429M, remains small relative to the group.

The orforglipron launch contributed almost nothing yet. Lilly received FDA approval for orforglipron — an oral GLP-1 pill, branded Foundayo — and launched it in the U.S. for obesity during the quarter. It is not broken out separately; the "other cardiometabolic health" line where it would sit rose only $51 million (5%) to $1,031 million. Whatever Foundayo eventually becomes, Q2 2026 revenue growth did not come from it.

Where the money went

Costs grew faster than revenue in every discretionary line:

• R&D rose 14% to $3,819M, which Lilly attributes to "continued investments in our early and late-stage portfolio." Because revenue grew 48%, R&D actually fell as a share of revenue, from 21.4% to 16.6% — operating leverage, not restraint.
• Marketing, selling and administrative rose 25% to $3,430M, "primarily driven by promotional efforts supporting ongoing and planned launches."
• Acquired IPR&D was $2,776M, from the Orna Therapeutics ($1,233M, an in-vivo CAR-T therapy for autoimmune disease) and Ajax Therapeutics ($909M, an oral JAK2 inhibitor for myelofibrosis) deals. Both assets are Phase 1 — early-stage, years from any revenue.
• Asset impairment, restructuring and other special charges were $703M, versus nil a year ago, mostly accelerated vesting of employee equity awards and integration costs from the acquisitions that closed.

Gross margin — revenue less the cost of manufacturing the product — improved 1.5 percentage points to 85.8%, which Lilly credits to "improved cost of production and favorable product mix, partially offset by lower realized prices." Manufacturing efficiency is beating the price concessions, at least so far.

The effective tax rate jumped to 23.3% from 16.5%, which is not a policy change but a consequence of the deals: acquired IPR&D charges are largely not tax-deductible, so they reduce pre-tax income without reducing tax. That mechanically inflates the rate and is a second, less visible way the acquisitions depressed reported net income.

The balance sheet is being levered for deals and factories

Lilly spent $13.3 billion on business development in the first half of 2026 (Centessa, Kelonia, Orna, Ventyx and Ajax), issued $9.0 billion of long-term debt in May, and ended June with total debt of $54.9 billion, up $12.4 billion from $42.5 billion at year-end 2025. Capital expenditure was $5,259M in the first half against $3,207M a year earlier, and the company says capex will be "meaningfully higher" in the near term as manufacturing capacity is built out. Cash was $9.0 billion.

It could afford it: first-half operating cash flow was $16,023 million, against $4,753 million a year earlier. Lilly also repurchased $4.0 billion of shares and paid $3.1 billion of dividends ($3.46 per share) in the half. After June 30 it spent roughly $2.0 billion on three infectious-disease acquisitions and agreed to buy AtaiBeckley for about $2.8 billion at closing — so the deal charges are not finished.

Takeaway: Lilly is converting a 13% decline in realized prices into 60% volume growth and still expanding gross margin — the trade it made in China and in U.S. obesity access is working on the numbers it can control. The real question the quarter raises is whether $13.3 billion spent on mostly Phase 1 assets in six months, funded with $12.4 billion of new debt, eventually produces anything that matters relative to two drugs that already supply 65% of revenue.

Guidance and outlook

Lilly raised its full-year 2026 guidance alongside these results:

The EPS range is worth reading carefully, because the headline movement conceals two opposing effects. Lilly raised the underlying figure by $2.78 at the midpoint on business strength, then subtracted $3.03 for the Q2 acquired IPR&D charges — a net reduction at the midpoint despite a better business. Note also that guidance "does not include acquired IPR&D incurred after June 30, 2026," and Lilly has already disclosed roughly $2.0 billion of July acquisitions plus a pending ~$2.8 billion deal. On the company's own convention, those will be additional charges not currently in the $35.50–$36.50 range. "Performance margin," Lilly's own measure, is defined in the release as gross margin less R&D and marketing/selling/administrative expenses, divided by revenue — it deliberately excludes the IPR&D charges.

The $85–87 billion revenue range implies roughly $42–44 billion in the second half against $42.8 billion delivered in the first — that is, broadly flat sequentially in half-over-half terms. Given that Q2 alone ran at $23.0 billion, the guidance does not assume the first half's growth rate continues, which is consistent with Lilly's own caution that the rebate true-ups and sales-based milestones helped the first half.

Our read on trajectory. The volume engine is real and the manufacturing build-out suggests Lilly expects it to stay supply-constrained rather than demand-constrained. Three things determine whether the next several quarters look like this one:

1. Price. The 13% consolidated price decline is not a one-quarter event. Lilly has agreed with the U.S. government to lower Medicaid and certain other drug prices and to price new medicines more evenly across developed countries, and the Medicare GLP-1 Bridge Program began July 1, 2026 — which means Q3 is the first quarter carrying discounted Medicare obesity volume. Lilly says explicitly that "the uptake from this expanded access is unknown." More covered patients at lower prices is the same trade as China's NRDL, and the swing factor is how many patients show up.
2. The IRA overhang. Jardiance's government-set price took effect in 2026, and Trulicity and Verzenio were selected in January 2026 for prices effective 2028. Verzenio is already shrinking in the U.S. before that arrives. Lilly states it expects "other significant products will be selected in future years" — with 65% of revenue in two drugs, that is a concentrated risk with a known mechanism and an unknown date.
3. Whether the deal spending shows up anywhere. Six acquisitions in seven months, $13.3 billion of cash out, and the disclosed assets are Phase 1. None of this can affect revenue for years, and it is already visibly reducing reported EPS and raising the tax rate. Judge it on pipeline readouts, not on this income statement.

The base case for the rest of 2026 is continued large volume growth against a widening price discount, with reported earnings staying noisier than the business underneath them for as long as Lilly keeps buying pipeline at this pace.