Anat Ashkenazi
Senior Vice President and Chief Financial Officer at Eli Lilly and Company
Thanks, Dave. Before I review the financial results for Q3, let me highlight a change in how we expect to communicate our acquired IPR&D and development milestone charges. In mid-October, we filed an 8-K with the SEC to provide investors earlier clarity [Phonetic] on the impact from acquired IPR&D and development milestone charges for Q3. In future quarters, we generally expect to provide this information through quarterly updates on our Investor Relations website.
Now, moving to our results, Slide 6 summarizes financial performance in the third quarter of 2022 and I'll focus my overall comments on non-GAAP performance. A few notable items affected year-over-year comparisons in Q3. Foreign exchange rates had a roughly 430 basis-point impact on revenue this quarter as Q3 revenue grew by 2% or 7% on a constant currency basis. We recognized $86 million of revenue related sales collaboration agreement for the rights to sell and distribute Mounjaro in Japan. We experienced the first full quarter impact of Alimta's US patent expiry, and the increase in sales of COVID-19 antibody and the decrease in sales of Olumiant for the treatment of COVID-19 impacted our results.
When excluding revenue from Alimta, which is now offset across the EU, Japan, and the US, COVID-19 antibodies and Olumiant for the treatment of COVID-19, revenue grew 9% for the quarter or 14% in constant currency, highlighting solid momentum for our core business. Gross margin was roughly flat year-over-year. The impact of lower realized prices and increased expenses due to inflation and logistics cost were offset by favorable product mix including the impact of lower sales of Olumiant for the treatment of COVID-19 and the favorable impact of foreign exchange rates.
Total operating expenses increased 1% this quarter. Growth in marketing, selling and administrative expenses and R&D expenses were largely offset by lower acquired IPR&D and development milestone charges that reduced operating expense growth by nearly 350 basis points. Marketing, selling and administrative expenses increased 2%, primarily driven by the increased costs associated with the launch of Mounjaro, partially offset by the favorable impact of foreign exchange rates. R&D expenses increased 6%, driven by higher development expenses for late stage assets, partially offset by the favorable impact of foreign exchange rates and lower development expenses for COVID-19 antibodies.
Operating income increased 6% in Q3, primarily due to higher gross margin, partially offset by higher operating expense. Operating income as a percent of revenue was 28.9%, which includes the negative impact of approximately 90 basis points attributed to the acquired IPR&D and development milestone charges. Our Q3 effective tax rate was 10.7%, a decrease of 360 basis points compared to the same period in 2021. This decrease was primarily driven by the favorable tax impact related to the implementation of the 2017 Tac Act.
At the bottom line, earnings per share increased approximately 12% this quarter to $1.98 per share. Acquired IPR&D and development milestone charge had a negative impact of $0.06 in Q3 2022 compared to $0.17 in the same period last year.
On Slide 8, we quantify the effect of price, rate, and volume on revenue growth. This quarter, foreign exchange movement, primarily related to the weakening of the euro against the US dollar, decreased revenue by 4%.
Moving to our performance by key geography, this quarter, US revenue grew 11%, driven by volume growth of 15%. Excluding revenue from Alimta, COVID-19 antibodies and Olumiant for the treatment of COVID-19, revenue in the US increased 20% driven primarily by key growth products. US volume growth was partially offset by a net price decline of 4%, driven primarily by lower realized prices for Humalog due to segment mix and the list price reduction for Insulin Lispro injection.
Moving to Europe, revenue grew 11% in constant currency, driven primarily by volume growth for Trulicity, Jardiance, Verzenio, and Taltz. We are encouraged by the momentum of our business in Europe and expect continued growth is the impact from the patent expiry for Alimta, which lost exclusivity in June 2021, received from base period comparison.
For Japan Q3, revenue decreased by 2% in constant currency. The growth of our new medicine and revenue related to a sales collaboration agreement for the rights to sell and distribute Mounjaro in Japan was more than offset by the continued impact of declines in off-patent products, primarily Cymbalta and Alimta, which both faced generic entry in June 2021. We expect to return to growth in Japan beginning in 2023 as we continue to scale our key growth products and the impact of patent expiration subsides.
In China, revenue declined 10% in constant currency as we continue to be impacted by the zero COVID policy measures. We're also seeing the impact of increased competitive pressures for Tyvyt from local competitors with NRDL access. In addition, we experienced the first full quarter of the pricing impact of volume based procurement for Humalog. As we expect to maintain a high level of access for our innovative portfolio, we believe our volume should accelerate to drive net growth in the future.
Revenue in the rest of the world decreased 6% in constant currency in Q3, primarily driven by customer buying patterns. The year-to-date growth of 8% in constant currency in this region is more representative of underlying trends. As shown on Slide 9, our key growth products continue to drive robust worldwide volume growth. These products drove approximately 18 percentage points of volume growth this quarter and continue to underpin our current performance and future outlook.
Slide 10 further highlights the contribution of our key growth products. This quarter, these brands grew 19% or 25% in constant currency, generated $4.6 billion in sales, and made up 70% of our core business revenue. Products like Verzenio, Taltz in dermatology, and Jardiance, have outpaced competitors' growth and are leaders in new-to-brand share of market within their respective classes.
In the injectable incretin market, we continue to see significant opportunities for further class growth. In addition to Mounjaro's successful launch in the US, Trulicity has continued to experience strong growth globally. To date, our incretin manufacturing production is ahead of our internal plan and we remain focused on sustaining this performance. Strong demand for Trulicity, partially due to ongoing limited availability of competitor GLP-1 continues to challenge our ability to meet the expanding demand in most international markets. In those situations, we're working hard to supply market demand, while minimizing impact to existing patients, including communication in these markets not to initiate new patients on Trulicity.
In the US, Script volume remains robust, and while we build more capacity, wholesalers mix variance intermittent restocking delays of Trulicity orders. Moving to Slide 11, we're pleased with the rapid uptake of majority in the first four months since launch. Approximately 70% of Mounjaro's new therapy starts are patients naive to the type two diabetes injectable incretin class, and less than 10% are switches from Trulicity.
We are progressing peer negotiations and have more than doubled the level of access to approximately 45% of total commercial and Part D lives. And as we expand access, the proportion of paid script should start to increase. Our focus is to make Mounjaro available for type two diabetes patients and we intend to take actions designed to ensure access and supply for these patients. These actions may negatively impact prescription volumes but are not expected to impact net revenue.
We have seen unprecedented demand from Mounjaro's type two diabetes launch in the US, bolstered by strong efficacy and a positive customer experience. Availability of competitors is incretin also a key factor as we assess Mounjaro's demand and supply. To meet this rapidly growing demand across our incretin business, we have plans to add substantial additional manufacturing capacity. In 2023, we expect the RTP site in North Carolina to become fully operational, and that capacity coupled with additional actions and expansions in other sites will result in doubling Lilly's incretin manufacturing capacity at the end of 2023.
On Slide 12, we provide an update on capital allocation. For the first nine months of the year, we invested $6.8 billion to drive our future growth through a combination of R&D expenditures, business development outlays, and capital investments. In addition, we returned approximately $2.7 billion to shareholders in dividends and repurchased $1.5 billion in stock. Our capital allocation priorities are to fund our key marketed products and expected new launches, bolster manufacturing capacity, invest in our pipeline, pursue opportunities for external innovation to augment our future growth prospects, and return excess capital to shareholders.
Slide 13 is our updated 2022 financial guidance. Our full-year revenue outlook now includes an additional $300 million of headwinds from foreign exchange rates since our previous guidance pdate for a total impact of roughly $1 billion of foreign exchange -- headwinds of revenue for the full year compared to our original guidance. Our outlook for gross margin, SG&A, and research and development remains unchanged. Our guidance now includes acquired IPR&D and development milestone charges of approximately $670 million, reflecting total charges in the first nine months of the year. We have not recognized material acquired IPR&D or development milestone charges to date in Q4. And this guidance does not include any impact from the potential acquisition -- or potential business development or acquisition in the remainder of the year including pending acquisition of accruals.
Our non-GAAP operating margins remained unchanged at approximately 29%. On a reported basis, operating margin is now expected to be approximately 26%, driven by the intangible asset impairment for our GBA1 gene therapy due to changes in estimated launch timing. Our non-GAAP range for other income and expense remains unchanged.
On a reported basis, other income and expense is now expected to be expense in the range of $600 million to $700 million, reflecting the net impact of net losses on investments in equity securities during Q3 2022. Our tax rates and EPS in the first nine months of the year includes a favorable impact of the provision in the 2017 Tax Act that requires capitalization and amortization of research and development expenses for tax purposes. Our financial guidance for the full years continues to assume this provision will be deferred or repealed by Congress expected for the full year 2022. Assuming this deferral or repeal occurs before the end of the year, we expect our Q4 non-GAAP tax rate to be approximately 22%, which includes the cumulative tax impact of immediately expensing research and development costs for the full year 2022. If this provision is not deferred or repealed effective this year, then we would expect our reported and non-GAAP tax rate to be approximately 10% to 11%.
Based on these changes, we have lowered our reported EPS guidance by $0.46 to now be in the range of $6.50 to $6.65 per share. And lowered our 2022 non-GAAP EPS guidance by $0.20 to be in the range of $7.70 to $7.85. The $0.20 reduction in our non-GAAP EPS range is driven by the negative impact of foreign exchange rate as well as the $0.06 impact from the incremental acquired IPR&D and development milestone charges in Q3.
Now, before I turn the call over to Dan, I'd like to provide a few thoughts on the pushes and pulls across the P&L as you begin to think about next year. Starting with revenue, we're confident in the growth outlook of our core business. We expect to build on the positive momentum across our key growth products including the continued strong launch of Mounjaro and launches of new products. While we anticipate that the initial revenue from our next wave of potential launches will be modest in 2023, with only partial revenue, we do expect that donanemab, pirtobrutinib, mirikizumab, and lebrikizumab will serve as additional catalysts for continued growth.
In 2023, we will see the full-year impact of Altimta's patent expiry in the US where new generics of eroded Alimta's sales starting mid-Q2 and we anticipate a low single-digit headwind from foreign exchange rates. As for revenue from COVID 19 antibodies, we will continue to make bebtelovimab available for purchase. However, the demand for these therapies will depend not only on COVID-19 case counts, but also on evolving variants and available therapies. We continue to believe that COVID-19 antibodies will not be a major driver for long-term growth for Lilly.
We will invest in our future as we advance promising R&D opportunities, expand our manufacturing capacity, and support the potential launch of multiple new products. Assuming inflation persists, we expect to see that impact in 2023 as well. Also, we will be making a significant investment in one of our most important asset, our talented workforce through increases in compensation that are partially due to inflation pressures but also to ensure that we have the right capabilities to deliver on the promise of our future growth. While these investments will slow [Phonetic] our operating margin expansion in 2023, they are critical to maximizing pipeline and new launch opportunities to help sustain top-tier revenue growth and operating margin expansion over the mid to long term.
We look forward to sharing more details on our 2023 guidance call on December 13. Now, I will turn over -- the call over to Dan to highlight progress in R&D.