Earnings Preview: Eli Lilly Expected to Report a Solid Quarter

Eli Lilly (LLY), the pharmaceutical behind Prozac for depression and Cialis for erectile dysfunction, is expected to post solid fourth-quarter profits on Thursday after a recent restructuring. But the results will likely be lower than the year-ago quarter. Analysts expect earnings of 91 cents per share on $5.64 billion in sales. In the same quarter last year, the company lost $3.31, due to costs associated with its ImClone acquisition, on revenue of $5.21 billion. Excluding charges related to the acquisition, Lilly reported a profit of $1.07 per share in the year-ago quarter.For the full year, Lilly guided earnings in the range of $4.30 to $4.40 per share. As for 2010, Lilly raised its earnings forecast at December's annual meeting to between $4.65 to $4.85 a share, noting that the company expects its upcoming pipeline of drugs to offset expiration of several drug patents. Analyst expectations are for $4.73 a share. The company also said it expects 2010 revenue to rise in the high single digits on a percentage basis.

No Acquisition Spree

John Lechleiter, Lilly's president and CEO, said that unlike many of its competitors, Lilly hasn't embarked on an acquisition spree to tackle the fact that patents for drugs are expiring. By 2013, drugs representing more than half of the company's revenue, including the antipsychotic blockbuster Zyprexa, will lose patent protection and face generic competition. Instead of acquisitions, Lechleiter said the company will focus on its own pipeline.

"We currently have more than 60 new molecules in clinical development, including 25 in Phases II and III, targeting unmet medical needs in areas such as Alzheimer's disease, cancer and diabetes, among others," said a Lilly executive Steven Paul.

The company recently refocused its operations around five business units: Oncology, diabetes, established markets, emerging markets and animal health. In its biggest segment, established markets, Lilly relies on Zyprexa, pain killer Cymbalta, erectile dysfunction drug Cialis and acute coronary syndrome med Effient. The pipeline includes molecules for Alzheimer's, arthritis and schizophrenia, among others. It's important to note that Zyprexa may find itself under FDA review following recent studies regarding weight gain in kids.

Budding Oncology Powerhouse

With the acquisition of ImClone and the progression of its own pipeline, Lilly claims it is well along the way to building an oncology powerhouse. Lilly's three key cancer medicines -- Alimta, Gemzar and Erbitux -- account for 14% of the company's worldwide revenue. Lilly also has 23 assets in its oncology pipeline, including two melanoma hopefuls.

Lilly's diabetes segment may soon get a boost as its Byetta once-weekly drug just got that much closer to approval after a similar Novo Nordisk's (NVO) new once-daily injection was approved. Other than a promising pipeline, Lilly has established products in the segment, although Byetta has met with some resistance.

Lilly also aims to increase its presence the so-called "pharmerging markets" -- China, Russia, Brazil, Mexico, South Korea and Turkey -- over the next decade.

Expected to Deliver

As for what the earnings announcement holds, according to Derica Rice, Lilly's senior VP and CFO, "Lilly is completing another year of strong operating performance, delivering solid earnings growth resulting from volume-based sales growth, improving gross margins and tightening control of operating expenses."

So Lilly will likely deliver when it reports, but the question is whether it can sell investors on its pipeline and business plan, which includes reducing its cost structure by the end of 2011 by $1 billion. Over the past year, LLY shares significantly underperformed their peers and general market. With just a little bit of good news, they might just get jolted higher.
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