Following the release of first quarter results on April 19, 2010, almost all the analysts covering Eli Lilly (LLY) have made downward revisions to their 2010 and 2011 annual estimates. A major part of the reduction was due to the impact of US healthcare reform, which is expected to affect the company’s earnings significantly.
Long-term performance will also be under pressure as Lilly is facing patent expirations on several products in its portfolio.
First Quarter Highlights
Eli Lilly reported first quarter earnings per share of $1.18, a couple of cents below the year-ago earnings of $1.20, but above the Zacks Consensus Estimate of $1.11. Results included a 12-cent impact due to US health care reform. Excluding this impact, earnings would have increased 4% from the year-ago period.
Revenues recorded a 9% year-over-year increase to $5.49 billion, driven by an increase in volume (4%), prices (1%) as well as a favorable impact of foreign exchange (3%).
Following the released of first quarter results, Lilly updated its 2010 guidance to reflect the impact of health care reform. The company expects health care reform to reduce earnings by about $0.35 per share in 2010. While 2010 revenues will be affected by $350 – $400 million, 2011 revenues will be impacted to the tune of $600-$700 million by health care reform.
As a result, Lilly cut its 2010 earnings guidance to $4.40 – $4.55 (previous guidance: $4.65 – $4.85). Lilly also revised its revenue growth guidance and expects volume-driven revenue growth in the mid-single digits, down from its earlier expectation of high-single digit growth.
Detailed discussion of first quarter results is available here.
Agreement of Estimate Revisions
There is a significant negative bias in earnings estimate revisions for Lilly. While all 19 analysts covering the stock have reduced their earnings estimates for fiscal 2010, 16 of the 17 analysts covering the stock have reduced their estimates for fiscal 2011.
Estimates are down for the June and Sept quarters of 2010 as well. While 12 of the 16 analysts have reduced their estimates for the June quarter over the last 30 days, only one has moved in the opposite direction. Meanwhile, 14 of the 16 analysts covering the stock have reduced their estimates for the Sept quarter with no upward revisions over the past 30 days.
About eight products, representing 74% of 2009 total revenues, are expected to lose exclusivity over the next few years. While strong sales from key products such as Cymbalta, Cialis and Alimta will be the fundamental strength to revenue growth in 2010, longer-term growth prospects remain under question especially once Zyprexa loses exclusivity in the US in 2011. Concerns remain that Lilly’s pipeline may not be sufficient to offset the impact of key patent expirations.
Magnitude of Estimate Revisions
Estimates for fiscal 2010 have gone down by 22 cents over the past 30 days. The current Zacks Consensus Estimate of $4.52 is in-line with Eli Lilly’s revised guidance ($4.40 – $4.55). 2011 estimates are down by 28 cents.
Meanwhile, estimates for the June and Sept 2010 quarters are down 5 cents and 9 cents, respectively.
Our Recommendation
Following the release of first quarter results, we downgraded Eli Lilly to Underperform (Zacks Rank #5 – Strong Sell). While strong sales from key products such as Cymbalta, Cialis and Alimta will be the fundamental strength to revenue growth in 2010, longer-term, we are unconvinced that ImClone will be the catalyst that Lilly needs to grow revenue and EPS following Zyprexa’s US patent expiration in 2011.
We expect the top-and bottom-line to remain under pressure from late 2011 as the contraction in Zyprexa sales more than offsets growth in Cymbalta, diabetes and new product sales. 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 during the year. We do not believe the short-term catalysts will translate into sustainable long-term growth until the pipeline significantly improves.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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