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AstraZeneca, Eli Lilly Foreboding for Sector

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Big pharma's earnings season has gotten off to an uncomfortable start.

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Big Pharma has spent the last year making acquisitions, garnering deals, and making promises that the new and improved companies they've transformed into will be fully equipped for the tough times ahead. But earnings reports out from some of the pharmaceutical heavyweights this week paint a picture of uncertainty.

AstraZeneca (AZN), Eli Lilly (LLY), and Bristol-Myers Squibb (BMY) -- the eighth-, eleventh-, and fifteenth-largest pharmaceutical companies in the world by market cap, respectively -- all reported earnings on Thursday. AstraZeneca, a British drugmaker, had by far the most dismal report of the three, missing the Street's estimates for earnings per share by $0.09 and sales estimates by $85 million. Adding to this less-than-impressive fourth quarter was the announcement that it will cut 8,000 jobs as two of its major revenue drivers come off patent this year.

Despite the upcoming patent losses and challenging year-end, AstraZeneca's chief executive David Brennan still spouted words of optimism: "Our plans for the next five years confirm our commitment to research-based, innovative biopharmaceuticals. I believe successful execution of this strategy will benefit patients and generate the cash flow necessary to provide for the investment needs of the business and shareholder returns."

Yet, it was hard for the British drugmaker to hide the leap of faith it's taking with the upcoming drugs in its pipeline. In its earnings statement, AstraZeneca said that it expects revenues in the range of $28 billion to $34 billion annually over the next five years -- this estimate is based on the assumption that the market for biotech drugs will grow along with GDP, that the drugs currently in its pipeline will be approved, and that those drugs will be able to contribute about $4 billion to $6 billion to the company's top-line. That's a perfect storm of assumptions for the pharma company to make.

Analysts see it a different way: "EPS growth will enter negative territory in 2010 and that will turn sharply negative from 2011 to 2015, leaving the company with what is one of the steepest patent cliffs," said Sanford Bernstein analyst Tim Anderson in a research note.

Meanwhile, Eli Lilly didn't have the most impressive fourth quarter either. Lilly's earnings per share missed Wall Street's consensus estimates by a penny, but it was able to top sales expectations. Sales were led by Zyprexa and Cymbalta, $1.37 billion and $830.8 million, respectively. The company is set to lose patent protection on its blockbuster antipsychotic Zyprexa in 2012 and on the antidepressant Cymbalta in 2013. Since its acquisition of ImClone in 2008, the company has been boasting that it's prepared for the challenges of losing these major revenue drivers.

But its newer drugs seem to be a bit slow out of the gate. Almost all of the company's biggest hopes for the future are partnered on with other companies, leaving Lilly to split the revenue pie. The anti-clotting drug Effient, which is co-marketed by Japan's Diiachi Sankyo, was approved last summer and only had sales of $3.8 million for the quarter. Lilly partners with Amylin Pharmaceuticals (AMLN) on Byetta, a somewhat plagued diabetes drug that had worldwide sales of only $203.6 million, while the cancer drug Erbitux, which Lilly now shares with Bristol-Myers, came in at an underwhelming $95 million.

"We believe Lilly's cash flow will peak in the next two years with the potential to decline for the next several years due to a challenging series of patent expirations," wrote Leerink Swann analyst Seamus Fernandez in a recent report. "A timely FDA approval of [Byetta] LAR is difficult to predict and Effient's launch has been relatively unimpressive."

Bristol-Myers Squibb had the most encouraging things to say on Thursday. The pharma company beat expectations (although analysts were a little perturbed by the beat coming from a more favorable tax rate provided by the spin-off of its baby nutrition products company Mead Johnson (MJN)). Bristol-Myers has plenty to lose in the next few years -- its mega-blockbuster Plavix will be overcome by generic competition in 2011.

Like Lilly, Bristol-Myers' earnings were driven by drugs that are nearing patent expiration, while its newer compounds have yet to show encouraging results. Its diabetes treatment Onglyza had disappointing sales of only $4 million worldwide.
No positions in stocks mentioned.

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