Eli Lilly in Neutral Lane

We recently reiterated a Neutral recommendation (Zacks #3 Rank – short term Hold rating) on Eli Lilly and Company (LLY). The company reported first quarter 2011 results on April 18 with both earnings and revenues topping expectations.

First quarter earnings per share came in at $1.24, 7 cents above the Zacks Consensus Estimate and 5% above the year-ago earnings of $1.18. Results were driven by higher revenues. First quarter revenues increased 6% to $5.8 billion, slightly above the Zacks Consensus Revenue Estimate of $5.7 billion. Revenues were boosted by strong performance in international markets.

Following the release of first quarter results, Eli Lilly adjusted certain components of its 2011 guidance. While the company maintained its 2011 earnings guidance of $4.15 – $4.30 per share (down 9-12% from 2010), Eli Lilly now expects revenue growth in low single digits due to favorable movement of foreign currency.

The company was previously expecting revenue growth to be flat or slightly up from 2010 levels. Eli Lilly still expects the US health care reform to impact 2011 revenues by $400 – $500 million.

We have raised both our revenue and earnings estimates for 2011 and now expect the company to post earnings of $4.26 on revenues of $23.4 billion.

However, Eli Lilly will enter a tough period in late 2011 with the loss of exclusivity on Zyprexa. Zyprexa sales should erode rapidly from October 2011 with the entry of generics. Moreover, we expect continued erosion of Gemzar sales due to genericization.

Barring significant cost-cutting efforts or additional revenue catalysts, 2013 will be the beginning of a very challenging period with Cymbalta losing US patent protection.

On the flip side, strong performance of the diabetes business, the ramp of Effient and upside from the ImClone deal should offer some downside support. We are also pleased to see Eli Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline.

Eli Lilly is also working on expanding and strengthening its animal health business and extended an irrevocable and unconditional offer in March 2011 for the animal health business of Janssen Pharmaceutica NV, a Johnson & Johnson (JNJ) company. Earlier, in May 2010, Eli Lilly had acquired European marketing rights to several animal health product lines divested by Pfizer (PFE). The company also acquired a manufacturing facility in Sligo, Ireland, which is used for the production of animal vaccines. Eli Lilly’s animal health division posted sales of $1.4 billion in 2010, up 15%.

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