Eli Lilly and Company (LLY">LLY) recently presented disappointing guidance for 2012 reflecting the tough times ahead for the company. Like several pharma companies including Pfizer (PFE">PFE), Eli Lilly is facing or will be facing generic competition for blockbuster drugs in its portfolio.

The biggest near-term challenge for Eli Lilly will be to replace the revenues that will be lost to generic competition now that blockbuster drug, Zyprexa, has lost exclusivity in the US and EU.

Sales of Zyprexa, a major revenue generator for Eli Lilly, are expected to erode by more than $3 billion in 2012. The product, which posted $5.03 billion in sales in 2010, generated more than $3.8 billion in sales in the first nine months of 2011.

Meanwhile, 2013 will see Cymbalta, another blockbuster drug in Eli Lilly’s portfolio, losing patent protection. Evista, another important product in Eli Lilly’s portfolio, is expected to lose exclusivity in 2014.

2012 Guidance Well Below Consensus

Eli Lilly’s 2012 guidance was well below consensus estimates. The company expects to earn $3.10 - $3.20 on revenues of $21.8 billion and $22.8 billion in 2012. This is well below the Zacks Consensus Estimate of $3.58 per share. Rapid erosion of Zyprexa sales and higher-than-expected SG&A spend account for the below consensus guidance.

Unlike its peers, Eli Lilly did not announce a cut in its R&D budget and said that it expects R&D spend to remain flat or increase from 2011 levels to $5 - $5.3 billion. The company has about 12 assets in phase III development.

Meanwhile, marketing, selling and administrative expenses are expected to be flat or decline from 2011 levels to $7.4 - $7.8 billion. Eli Lilly said that it has met its target of reducing expenses by $1 billion by the end of 2011. While the company will continue working on driving incremental productivity, it does not intend to pursue additional major restructuring activities.

The erosion in Zyprexa revenues will be partially offset by contributions from products like Cymbalta, Cialis, Humalog, Humulin and Forteo, and continued growth of newer products like Effient, Axiron and Tradjenta. Other contributors to revenue will be the Animal Health business, Japan and emerging markets.

However, the company warned that revenue growth in Japan and emerging markets will be impacted by pricing actions in Japan (approximately $200 million) and the loss of patent protection for Zyprexa in some emerging markets (approximately $250 million).

Eli Lilly remains committed to funding its dividend at current levels and expects operating cash flows to be enough to fund capital expenditures of approximately $800 million, dividends, as well as anticipated business development activity.

Mid-Term Guidance Maintained

Besides providing guidance for 2012, the company maintained its mid-term guidance through 2014. The company said that it remains on track to meet or exceed its mid-term guidance. From now through 2014, the company expects annual net income of at least $3 billion on revenues of at least $20 billion. Operating cash flow is expected to be at least $4 billion every year during this time period.

Eli Lilly will be presenting fourth quarter and full year 2011 results on January 31, 2012. The company expects to meet or exceed its 2011 guidance of $4.30 - $4.35 per share. The Zacks Consensus Estimate for 2011 stands at $4.34 per share. We currently have a Neutral recommendation on Eli Lilly, which carries a Zacks #3 Rank (short-term Hold rating).