Earnings Preview: Eli Lilly

Eli Lilly & Company (LLY - Analyst Report) is scheduled to announce its second quarter 2012 results on July 25, 2012 before the start of trading. The Zacks Consensus Estimate for the second quarter is 77 cents (year-over-year decrease of 34.7%) on revenues of $5,567million (year-over-year decrease of 11.0%). We believe that the loss of exclusivity of blockbuster drug, Zyprexa (schizophrenia and bipolar disorder), in the US and EU in late 2011 is responsible for the significant decline expected in the second quarter.

First Quarter Recap

Eli Lilly & Company reported first quarter 2012 adjusted earnings per share of 92 cents, 14 cents above the Zacks Consensus Estimate but 26% below the year-ago earnings of $1.24. The year-over-year decline was attributable to lower revenues and higher operating expenses in the first quarter of 2012.

First quarter revenues declined 4% to $5.6 billion. However, revenues exceeded the Zacks Consensus Estimate of $5.3 billion. Revenues were hurt by reduced sales of Zyprexa. Sales of Zyprexa, which went off patent in the EU and the US in late 2011, plummeted 56% in the first quarter of 2012. Exchange rate fluctuations did not have a material impact on revenues. (Read our detailed discussion on the first quarter earnings report at: Lilly Beats, Ups Earnings Outlook ).

Agreement of Estimate Revisions

Over the past thirty days, 8 of the 14 analysts covering Eli Lilly for the second quarter of 2012 have revised their earnings estimates. Movements have been witnessed in both directions. While 5 analysts have upped their estimates, 3 have moved in the opposite direction. Fiscal 2012 estimates too have witnessed an upward bias over the last 30 days with 5 analysts raising estimates and 2 trimming the same. We believe that the positive outlook given by the company while releasing its first quarter 2012 results, where it raised its earnings projection for 2012 to $3.15 - $3.30 from $3.10 - $3.20, has contributed to the positive sentiment.

Fiscal 2013 earnings estimates have been upped by 4 analysts over the last 30 days with 3 downward movements.

Magnitude of Estimate Revisions

Positive estimate revisions have been cancelled out by the negative ones for the second quarter and fiscal 2012 over the last 30 days. Consequently earnings estimates for the second quarter and fiscal 2012 have remained static at 77 cents and $3.29, respectively, over the last 30 days. Fiscal 2013 earnings estimates have climbed by a penny to $3.70 per share over the last 30 days.

Surprise History

Eli Lilly has surpassed earnings estimates in two of the last four quarters, missing estimates by a penny in the second quarter and reporting in line earnings in the third quarter of 2011. On average, the earnings surprise was 8.17%.

Our Take

The biggest near-term challenge for Eli Lilly will be to replace the revenues that will be lost to generic competition now that Zyprexa (schizophrenia and bipolar disorder)has lost exclusivity in the US and EU. Zyprexa sales are expected to erode significantly in 2012. The generic threat will continue to pose challenges for Eli Lilly with Cymbalta (depression)slated to lose patent protection in 2013 and Evista (osteoporosis)in 2014.

We expect the top-and bottom-line to remain under pressure as the contraction in Zyprexa sales more than offsets growth in Cymbalta, diabetes and new product sales.

On the flip side, the Animal Health business and the diabetes franchise should offer some downside support. We are also pleased to see Eli Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline. We currently have a Neutral stance on Eli Lilly, which carries a Zacks #3 Rank (short-term Hold rating).

Apart from Eli Lilly, another pharmaceutical major Bristol-Myers Squibb Company (BMY - Analyst Report) is slated to release its second quarter 2012 earnings results on July 25.