Lilly's 2012 earnings forecast misses analyst estimates

January 5, 2012

Indianapolis-based Eli Lilly and Co. provided a 2012 earnings forecast that missed analyst estimates by a wide margin, sending shares down in early trading.

Full-year profit will be $3.10 to $3.20 a share, less than the average estimate of $3.67 by 19 analysts surveyed by Bloomberg. Annual revenue is expected to be between $21.8 billion and $22.8 billion, the company said in a statement.

The company's 2012 prediction would mean a drop of between 26 percent and 28 percent from its forecast for earnings of $4.30 to $4.35 per share in 2011.

Lilly shares fell more than 3 percent, to $39.34 each, early Thursday morning before rising in the afternoon. Shares closed at $40.30, down 1 percent on the day.

Lilly said 2011 earnings, excluding some items, met or exceeded its forecast of $4.30 to $4.35 a share. The drugmaker is investing in research, seeking to overcome the loss of patents on its best-selling medication Zyprexa, with revenue of $5 billion in 2010, and other medicines, without a major merger.

“The guidance came in well below expectations,” said Seamus Fernandez, an analyst for Leerink Swann & Co. “The patent loss of Zyprexa means revenue is coming down faster than people expected.”

Unlike other drug companies, Lilly is continuing to spend heavily on research and development, Fernandez said. That strategy will reveal itself over the next few years as results from drugs in development come in, he said. The only way to know if the strategy works is to wait for data, Fernandez said.

Research and development expenses this year will be $5 billion to $5.3 billion, Lilly said Thursday.

“2012 is an important year for Lilly, having entered the period when we face patent expirations on some of our largest products, most notably Zyprexa late last year and Cymbalta in the U.S. at the end of 2013,” said CEO John Lechleiter in the prepared statement. “We’ve been preparing to meet these challenges for many years, and have the plans in place to enable us to bridge this period and return to sustainable growth after 2014.”

Cymbalta, approved for the treatment of depression, anxiety disorder and fibromyalgia, generated sales of $3.5 billion in 2010, according to Bloomberg data.

The drugmaker has treatments for Alzheimer’s, diabetes and cancer in final-stage trials. As Lilly awaits these results, the company is focusing effort on growth areas such as emerging markets and animal health, Lechleiter said.

Lilly sees Zyprexa revenue plunging by over $3 billion in 2012. The drug rang up more than $5 billion in 2010 sales, the last full year before its U.S. patent expired. That happened in October, exposing Zyprexa to competition from cheaper generic versions of the drug.

Several big drugmakers are dealing with patent expirations on key products, but analysts say Lilly faces one of the biggest hits. In addition to Zyprexa, the company will lose protection for its second-best seller, the antidepressant Cymbalta, in 2013.

By 2014, the drugmaker will have lost U.S. patents protecting five drugs that generated 64 percent of Lilly's U.S. product sales in 2010. That includes the diabetes treatment Humalog and the cancer drug Gemzar, which has seen sales plummet since it lost patent protection in November 2010.

Analysts expect the company's earnings to drop through 2014 before rebounding, and some question how the company can replace that revenue and maintain its dividend at the current quarterly rate of 49 cents per share.

In October, Fitch Ratings downgraded several Lilly debt ratings on concerns about the patent expirations.

Lilly officials have said they have no plans to reduce the dividend. The company has been preparing for the revenue losses for years and is trying to offset them with cost-cutting, its pipeline of drugs under development, its animal health business, sales in emerging markets like China, and with sales growth in Japan.

Lilly said Thursday it now has a dozen potential drugs in late-stage clinical testing, the last phase before a company seeks regulatory approval to sell a drug. That beats its goal of 10 by the end of the year. 


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