Are Eli Lilly Earnings Headed Down?

Are Eli Lilly Earnings Headed Down?

Eli Lilly will release its quarterly report tomorrow, and recent share-price declines show that investors are somewhat nervous about the company's prospects. Although Lilly earnings are expected to have grown substantially in the past quarter, longer-term prospects for the drugmaker have raised doubt among shareholders about whether it can stay on the earnings-growth path.

The key to any drug company is its pipeline of future drug prospects, and with major drugs like Zyprexa, Cymbalta, and Humalog all presenting major patent-cliff issues, Lilly badly needs some success with its best candidates. But with some recent failures in its pipeline, can Lilly overcome increasingly negative sentiment and sustain its business? Let's take an early look at what's been happening with Eli Lilly over the past quarter and what we're likely to see in its quarterly report.

Stats on Eli Lilly

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$5.82 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Where will Lilly earnings get their growth?
In recent months, analysts have kept their near-term views on Eli Lilly earnings stable, but looking forward, they've posed bigger concerns about future results, cutting their estimates for 2014 by $0.10 per share. The stock has responded to those concerns, falling almost 10% since mid-April.

The biggest threat to Lilly's long-term prospects comes from substantial pipeline problems. Some of the setbacks were fairly minor, such as the failure of its large b-cell lymphoma drug enzastaurin in a phase 3 trial. But Lilly was hoping for big things from Alzheimer's drug candidate solanezumab, which failed to meet endpoints in two different phase 3 trials, as well as rheumatoid arthritis treatment tabalumab, which failed to meet efficacy goals. Lilly is planning one more solanezumab study for those who have mild symptoms of Alzheimer's, but it's far from certain whether it will pay off. Those problems put more pressure on Lilly's mid-stage drugs to advance and succeed through the clinical trial process.

One area that has been more promising lately has been Lilly's Elanco animal health division, which has had its revenue climb almost 50% and its pre-tax profits more than double between 2010 and 2012. Elanco faces huge competition from the recently spun-off Zoetis , as well as the Merck animal-health division, both of which managed to post stronger revenue growth in the first quarter than Elanco did. One big question that Lilly will face is whether it makes sense to follow Pfizer's lead and spin off Elanco, but given Lilly's overall challenges elsewhere, it might want to hold onto Elanco if only to maintain a brighter spot in the gloom of patent expirations.

In the meantime, Lilly is preparing for generic competition by trying to cut costs. Last week, it froze base pay for most of its workers in 2014, including its executives. As more of its big drugs start going off patent, the possibility also exists for staffing cutbacks unless Lilly can get some pipeline success.

In the Lilly earnings report, look for CEO John Lechleiter, who recently returned from a medical leave, to provide guidance on how the drugmaker will overcome all its challenges and keep moving forward. At this point, though, Lilly doesn't seem to have the answers that will avoid a crushing earnings blow next year.

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