We recently downgraded Eli Lilly & Co. (LLY) to Underperform based on our concerns regarding the patent expiration being faced by several products in Lilly’s portfolio. About eight products, representing 74% of 2009 total revenues, are expected to lose exclusivity over the next few years.
In addition to concerns about the patent cliff being faced by Lilly, we note the lack of a significant enough pipeline to offset key patent expirations. While we believe Lilly has a deep pipeline, we think that new product launches will not be sufficient to make up for the loss of revenues that will take place over the next few years.
Moreover, the company has had its share of development and regulatory setbacks. These include a delay in gaining approval for Effient, the disappointing results on arzoxifene, the discontinuation of dirucotide (for multiple sclerosis), the termination of the AIR insulin program (for type I and II diabetes) and a delay in Cymbalta gaining approval for chronic pain.
While strong sales from key products such as Cymbalta, Cialis, the diabetes business and Alimta will be the fundamental strength to revenue growth in 2010, we expect the top-and bottom-line to come under pressure from late 2011 with the loss of exclusivity on Zyprexa.
Barring significant cost-cutting efforts or additional revenue catalysts, 2013 will be the beginning of a very challenging period, with Cymbalta losing U.S. 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.
Lilly’s results will also be affected by the recent U.S. health care reform. The company recently announced first quarter results and revised its guidance to reflect the impact of the reform. Lilly expects health care reform to reduce earnings by about 35 cents per share in 2010. Meanwhile, higher governmental rebates are slated to affect the top-line by $350 – $400 million. 2011 revenues will be impacted to the tune of $600-$700 million by health care reform.
Lilly now expects 2010 earnings in the range of $4.40 – $4.55, down from the earlier guidance of $4.65 – $4.85. The company expects volume-driven revenue growth in the mid-single digits, down from its earlier expectation of high-single digit growth.
We have significantly reduced our 2010 earnings estimate following the release of first quarter results. We now expect Lilly to deliver earnings of $4.50 in 2010, down significantly from our earlier estimate of $4.74.
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