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Eli Lilly and Company (LLY - Analyst Report) stated in a press release that meeting the revenue goal of $20 billion in 2014 will be challenging for the company, given unfavorable foreign exchange translation (devaluation of Yen) and slower growth in key emerging markets. Investors reacted negatively to the news, with share price falling more than 3.4%.

The company maintained its net income ($3 billion) and operating cash flow ($4 billion) guidance for 2014. Post 2014, Eli Lilly expects to return to revenue growth and expand margins.

Cost Cutting Measures

To meet the targets, the company plans to curtail operating expenses. Eli Lily plans to lower selling, general and administrative (SG&A) expenses as a percentage of revenue to the range of 28%-30% and research and development (R&D) expenses to a range of 18%-20%. In the first half of 2013, SG&A and R&D as a percentage of sales were 30.5% and 23.2%, respectively. Going forward, SG&A expenses are expected to decline as a result of restructuring efforts in Europe and the U.S. Moreover, savings from the termination of direct-to-consumer promotion of Cymbalta is also expected to bring down the SG&A expenses. R&D expenses are expected to decline as the pipeline candidates progress and complete phase III.

We note that several large-cap pharma companies including Pfizer (PFE - Analyst Report) and Merck & Co. Inc. (MRK - Analyst Report) have reduced their costs in the last couple of years in the face of declining revenues due to genericization of key products.

Genericization

The biggest near-term challenge for Eli Lilly is to replace the revenues lost due to the Zyprexa genericization. Zyprexa, which posted sales of $4.62 billion in 2011, lost exclusivity in the EU and the U.S. in late 2011. Zyprexa sales fell 63% to $1.7 billion in 2012. Generic threat will continue to pose challenges for Eli Lilly with Cymbalta (2012 revenue of $4.99 billion) slated to lose patent protection in late 2013 and Evista (2012 revenue of $1.01 billion) in 2014.

Focus on Pipeline

Apart from reducing costs Eli Lilly is working on developing its pipeline to combat the revenue decline. Subject to regulatory approval, the company may launch three drugs currently under regulatory review – empagliflozin (type II diabetes), dulaglutide (type II diabetes) and ramucirumab (advanced gastric cancer). Ramucirumab is in phase III trials for metastatic breast, liver, colorectal, and non-small cell lung cancer. The company expects 9 data readouts in 2013-2014 including the three potential launches.

In order to boost shareholder return, Eli Lilly has also announced a new buyback program of $5 billion in addition to the annual dividend of about $2 billion.

Eli Lilly currently carries a Zacks Rank #3 (Hold). Currently, companies like Novo Nordisk (NVO - Analyst Report) look more attractive with a Zacks Rank #2 (Buy).

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