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Eli Lilly & Company (LLY - Analyst Report) reported fourth quarter 2013 adjusted earnings per share of 74 cents, a penny above the Zacks Consensus Estimate but 13% below the year-ago earnings of 85 cents. Results were affected by the entry of generic competition for Cymbalta in the U.S.

Fourth quarter revenues slipped 2% to $5.81 billion. Revenues, however, surpassed the Zacks Consensus Estimate of $5.49 billion.

Reported earnings (including special items) declined 9% to 67 cents per share in the fourth quarter of 2013.

Eli Lilly’s full year earnings increased 22% to $4.15 per share, a penny above the Zacks Consensus Estimate. Revenues grew 2% to $23.1 billion, slightly above the Zacks Consensus Estimate of $22.8 billion.

Quarterly Details

Fourth quarter revenues declined 2% reflecting lower volume (5%) and unfavorable currency fluctuation (2%) that were partially offset by price increases (4%). The lower volume was mainly due to the Dec 2013 genericization of Cymbalta in the U.S.

U.S. revenues declined 6% to $3.0 billion mainly due to lower volume resulting from the loss of patent protection on Cymbalta. Ex- U.S. revenues increased 1% to $2.8 billion mainly due to higher volume that was partially offset by the unfavorable impact of the depreciation of the Japanese yen and lower prices.

During the fourth quarter, Zyprexa recorded a 10% decline in revenues, which came in at $348.2 million. U.S. revenues fell 35%. International revenues decreased 5% mainly due to the loss of market exclusivity in major markets apart from Japan. Zyprexa sales in Japan were affected by the weakening yen. Cymbalta sales fell 38% to $883.2 million. U.S. sales dropped 49% to $577.3 million due to the loss of patent exclusivity in December. Ex-U.S. sales grew 9% to $305.9 million.

Products which performed well in the fourth quarter included Alimta (up 6% to $726.2 million), Evista (up 14% to $275.9 million), Humalog (up 19% to $733.9 million), Cialis (up 15% to $588.3 million), Forteo (up 14% to $359.8 million) and Strattera (23% growth to $201.1 million) among others.

Eli Lilly’s Animal Health segment contributed $578.4 million (up 4%) to revenues. Higher prices and volume growth for food animal products was partially offset by declining volume for companion animal products. Sales in the U.S. declined 2% due to lower volume that was partially offset by higher prices.

Effient revenues increased 8% to $130.6 million. While U.S. revenues grew 10% to $96.8 million, due to higher prices and wholesaler buying patterns, ex- U.S. revenues increased 3% to $33.8 million.

Expenses

Eli Lilly’s adjusted operating expenses remained flat at $3.4 billion. Research and development (R&D) expenses increased 1% to $1.48 billion. Marketing, selling and administrative expenses declined 1% to $1.95 billion reflecting the company’s cost control efforts. The company has cut down its sales and marketing activities in the U.S. for Cymbalta and Evista.

Reiterates Guidance

Eli Lilly confirmed its guidance for 2014 and expects to earn $2.77 - $2.85 per share on revenues of $19.2 billion - $19.8 billion. The Zacks Consensus Estimate for earnings and revenues is currently $2.82 per share and $19.5 billion, respectively.

Eli Lilly bought back shares worth $500 million during the quarter.

Our Take

Eli Lilly’s fourth quarter results were slightly better-than-expected with products like Cialis, Humalog, Alimta, and Forteo performing well. However, the company is facing tough times ahead. Basically, 2014 will be an extremely challenging year for Eli Lilly with two major products – Cymbalta and Evista - facing generic competition this year. Cymbalta has already lost exclusivity in the U.S. and should see a sharp decline in sales and Evista is slated to lose exclusivity in March.

Products like Humalog, Trajenta, Cialis, Forteo and Alimta and the animal health business should help partially offset the impact of genericization. China should also see strong growth though Japan will be weaker due to currency movement.

Gross margin is expected to decline significantly in 2014 mainly due to the patent expirations. 2014 gross margin is expected to be 74%.

Eli Lilly is also working on controlling costs. Marketing, selling and administrative expenses should decline to a range of $6.2 billion - $6.5 billion (from $7.1 billion in 2013). Research and development expenses are expected to decline to $4.4 billion - $4.7 billion from $5.5 billion in 2013.

The 2014 guidance does not include the impact of a $200 million upfront fee that will be payable to Pfizer (PFE - Analyst Report) if the partial clinical hold on pipeline candidate, tanezumab, is lifted. Eli Lilly should return to growth from 2015.

Eli Lilly is a Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the pharma sector include H. Lundbeck A/S (HLUYY) and Allergan Inc. (AGN - Analyst Report). While H. Lundbeck is a Zacks Rank #1 (Strong Buy) stock, Allergan carries a Zacks Rank #2 (Buy).
 

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