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Eli Lilly's Prognosis: Uncertainty

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What happens when a patent cliff is within sight.

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It's easy to picture Eli Lilly (LLY) facing a tough decade once patents expire for four of its major drugs, but the pharmaceutical giant put on a brave face Thursday for investors and analysts as it doled out earnings expectations for the next few years.

The company said it expects full-year 2009 earnings per share to be in the range of $3.90 to $4.00, falling below average analyst expectations of $4.42. Yet, that wasn't what put investors' panties in a bunch, sending stock down more than 3% to linger around $35 in midday trading Thursday. Investors and analysts were looking ahead to the future.

"Lilly's 2010 and longer-term guidance points to a company with continued strong near-term results but a significantly less certain long term profile," JPMorgan analyst Chris Schott said in a research note.

Lilly predicts it will earn $4.65 to $4.85 per share in 2010, not including the impact of US health-care reform, which Leerink Swann analyst Seamus Fernandez says could negatively impact the company by $0.15 per share. The company's predictions were in-line with analysts' estimates of $4.74 per share.

In 2011, Lilly will experience the first of four major patent expirations that will continue through 2014 when its schizophrenia drug Zyprexa, along with the antidepressant Cymbalta, the cancer-treatment drug Gemzar, and the osteoporosis medication Evista all face generic competition. Combined, the four drugs brought in $7.6 billion in sales in the first nine months of 2009, nearly half its total product sales of $15.4 billion for the period.

So what happens when the Big Pharma company faces its major patent cliff in 2012 through 2014? Perhaps not surprisingly, Lilly was a little vague about that. The company failed to provide analysts with an earnings-per-share estimate for the period and only said that it would exceed annual top-line numbers of more than $20 billion, while its bottom line would exceed $3 billion. This is already below the numbers the company is expected to post this year, when analysts expect revenues of $21.5 billion on profits of $4.8 billion.

Unlike competitors such as Pfizer (PFE) and Merck (MRK), which both made mega-mergers this year to pad their pipelines before the patent jump-off, Lilly plans to tough it out by relying on its strong science core.

"We see a divergence of strategies among our peers to deal with these challenges, including the wave of consolidation this year. Many companies are seeking to lower risk by reducing their focus on innovative medicines," said Lilly Chief Executive John Lechleiter. "This is not our path. Our strategy is to create value by accelerating the flow of innovative new medicines that provide improved outcomes for individual patients. We aim to discover, develop, or acquire innovative new therapies -- medicines that make a real difference for patients and deliver clear value for payers."

With the future so uncertain, analysts and investors try to focus on the company's late-stage pipeline. In particular, they're anticipating the long-acting version of its diabetes treatment Byetta that's expected to face regulatory action in the first quarter of 2010.

This will be a major driver for the stock and could have repercussions on how diabetes is treated in the future. The drug will be the first long-acting iteration of its class to hit the market should it get approved, but questions have arisen concerning the safety of a drug that stays in a patient's system for a week. If the drug fails to gain approval or is slapped with a black-box warning (the most severe warning the FDA issues), it could mean a huge setback for several other companies developing similar treatments like Novo Nordisk (NVO) and Roche.

See also:
For Big Pharma, Diabetes Means Big Business and Roche Makes Strides in Race Against Merck.
No positions in stocks mentioned.

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