Earnings Preview: Eli Lilly

Eli Lilly & Company (LLY) is all set to announce its fourth quarter and full year 2010 results on January 27, 2011 before the opening bell. The Zacks Consensus Estimate for the fourth quarter is $1.09, representing a year-over-year increase of 19.8%. The Zacks Consensus Estimate for 2010 is $4.71, up 6.6%. Eli Lilly has surpassed earnings estimates consistently in the last four quarters with a trailing four-quarter average of 5.54%.

Third quarter 2010 highlights

Eli Lilly’s third quarter earnings per share of $1.21 easily surpassed the Zacks Consensus Estimate of $1.15. Earnings were a penny above the year-ago earnings. Although revenues increased 2% to $5.66 billion from the year-earlier period, they were slightly below the Zacks Consensus Revenue Estimate of $5.79 billion. The company’s ongoing cost containment and productivity efforts helped leverage 3% performance growth in revenue, and 7% performance growth in operating income.

Revenues increased mainly due to a 3% price increase, which was offset by unfavorable foreign exchange fluctuations (1%). Volume growth remained flat. Healthcare reform and price cuts in Europe impacted revenues by $65 million.

During the third quarter of 2010, Eli Lilly’s lead product Zyprexa, indicated for schizophrenia and bipolar disorder, recorded a 1% decline in revenues which came in at $1.2 billion. While US revenues increased 6%, international markets revenues declined 7%, mainly due to unfavorable foreign exchange fluctuations and lower prices.

Products contributing to third quarter growth included Cymbalta (4% growth to $825.3 million), Humulin (7% growth to $278 million), Alimta (21% growth to $560.3 million) and Cialis (2% growth to $406.5 million).

Agreement of Estimate Revisions

Estimate revisions for Eli Lilly have been scarce over the past month. Over the past thirty days, only 2 analysts covering Eli Lilly have revised their earnings estimates for the final quarter of 2010. While 1 analyst has upped his earnings estimate, the other has moved in the opposite direction.

The annual estimates for 2010 have been revised upwards by 3 analysts with 1 trimming his estimate. We believe that strong sales from key products like Cymbalta, Cialis, the diabetes business and Alimta will be the fundamental basis for 2010 revenue growth with ImClone providing incremental revenue growth.

However, 2011 estimates have witnessed a significant downward bias with 9 analysts trimming estimates and only 1 moving in the opposite direction. We expect the top-and bottom-line to remain under pressure from late 2011 as the contraction in lead product Zyprexa’s sales more than offsets growth in Cymbalta, diabetes and new product sales.

Magnitude of Estimate Revisions

Estimates for the fourth quarter of 2010 have remained static at $1.09 over the last 30 days due to a lack of significant estimate revisions by the analysts following the stock. Estimates for 2010 too are static at $4.71 over a similar time period. However, estimates for 2011 have gone down by 7 cents to $4.35 due to the concerns highlighted above.

Our Take & Recommendation

Currently, Eli Lilly carries a Zacks #4 Rank (short-term ‘Sell’ rating) highlighting near-term pressure due to the generic threat to key products, the lack of a significant enough pipeline to offset key patent expirations at Eli Lilly, impact of US healthcare reform and EU pricing austerity.

Moreover, we are also concerned about the intense competition faced by Eli Lilly’s products. We expect competition for Lilly’s diabetes care products to increase with the recent entry of Novo Nordisk’s (NVO) Victoza. We are also concerned about competition for osteoporosis drug Forteo from Merck’s (MRK) Fosamax. Cialis competes primarily with Pfizer’s (PFE) Viagra and GlaxoSmithKline’s (GSK) Levitra.

On the flip side, strong performance of the diabetes business should offer some downside support. The ramp of blood thinner Effient, upside from the ImClone deal coupled with Eli Lilly’s focus on emerging markets should provide a boost to revenues. We are also pleased to see Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline. These positive catalysts cause us to maintain our ‘Neutral’ stance on the stock in the long-run.

LILLY ELI & CO (LLY): Free Stock Analysis Report

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