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Eli Lilly & Company (LLY - Analyst Report) reported second quarter 2012 adjusted earnings per share of 83 cents, 6 cents above the Zacks Consensus Estimate but 29.7% below the year-ago earnings of $1.18. The year-over-year decline was attributable to lower revenues in the second quarter of 2012.

Second quarter revenues declined 10% to $5.60 billion. However, revenues narrowly surpassed the Zacks Consensus Estimate of $5.56 billion. Second quarter 2012 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 73% in the second quarter of 2012. Currency fluctuation impacted revenues negatively by 2%.

Reported earnings (including special items) declined 22% to 83 cents per share.

Quarterly Details

Second quarter revenues declined mainly due to a 9% decrease in volume. A 1% price increase partially mitigated the effect of lower volume. The lower volume was mainly due to the loss of exclusivity for Zyprexa.

US revenues fell 10% to $3.0 billion mainly due to the loss of market exclusivity of Zyprexa. Ex-US revenues fell 11% to $2.6 billion, mainly due to the loss of exclusivity for Zyprexa.

During the second quarter, Zyprexa recorded a 73% decline in revenues, which came in at $379.5 million. US revenues plummeted 96% due to lower prices. International revenues decreased 50%, mainly due to the loss of market exclusivity in major markets apart from Japan.

Products which performed well in the second quarter included Cymbalta (22% growth to $1.2 billion), Alimta (8% growth to $659.5 million), and Forteo (20% growth to $276.4 million). We were pleased to hear that Cymbalta has gained pediatric exclusivity, which means the product will enjoy an additional six months of exclusivity in the US.

Both Humulin and Humalog sales in the US were negatively impacted by their removal from a large formulary in 2012.

Eli Lilly’s Animal Health segment contributed $512.2 million (up 32%) to revenues. Higher demand for companion animal products, higher prices and the impact of the acquisition of certain animal health products from the Janssen unit of Johnson and Johnson (JNJ - Analyst Report) helped boost revenues from the segment.

Effient posted revenues of $111.0 million, up 55%. While US sales increased 56% to $81.0 million, driven by higher demand and higher prices, ex-US sales increased 52% to $30.1 million driven by higher demand in Europe.

Expenses

Adjusted expenses decreased 2% during the quarter. Research and development (R&D) expenses increased 5% to $1.3 billion. Marketing, selling and administrative expenses declined 5% to $1.9 billion mainly due to lower marketing costs.

Earnings Guidance Up Again

Apart from announcing second quarter results, Eli Lilly upped its earnings guidance for 2012 the second time this year. Eli Lilly now expects earnings in the range of $3.30 - $3.40 per share on revenues of $21.8 - $22.8 billion. Earlier, Eli Lilly had guided towards earnings of $3.15 - $3.30 on revenues of $21.8 - $22.8 billion. The Zacks Consensus Estimate currently stands at $3.29 per share.

While the loss of Zyprexa exclusivity is expected to impact revenues by more than $3 billion, products like Cymbalta, Cialis, Humalog, Alimta and Forteo are expected to continue performing well. Moreover, new products like Effient, Axiron and Tradjenta should also contribute to revenues. The Animal Health business should also continue performing well. Meanwhile, revenue growth in Japan and emerging markets will be impacted by pricing actions in Japan and the loss of patent protection for Zyprexa and other products in some emerging markets.

Eli Lilly is working on controlling costs and expects operating expenses to remain flat in 2012. While marketing, selling and administrative expenses are now expected to decline to $7.3 billion - $7.7 billion (old guidance: $7.4 billion - $7.8 billion), research and development expenses are expected to remain flat or increase to $5.0 billion - $5.3 billion.

Eli Lilly expects to buy back shares worth $420 million by the end of 2012.

Meanwhile, Eli Lilly 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.

Post 2014, Eli Lilly expects to return to top and bottom-line growth.

Neutral on Eli Lilly

We currently have a Neutral recommendation on Eli Lilly, which carries a Zacks #3 Rank (short-term ‘Hold’ rating). 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 US and EU exclusivity. 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. The generic threat will continue to pose challenges for Eli Lilly with Cymbalta slated to lose patent protection in late 2013 and Evista in 2014. On the flip side, the Animal Health business and the diabetes franchise should provide some downside support.

Meanwhile, we expect investor focus to remain on Eli Lilly's high risk-return Alzheimer’s candidate, solanezumab, which is currently in late-stage development, with results expected later this year. The Alzheimer’s disease market represents huge commercial potential and a successfully developed product could generate billions of dollars in sales once launched. However, the successful development of therapies for the treatment of Alzheimer’s is challenging and we note that several companies have failed in developing treatments for Alzheimer’s. In fact, Pfizer (PFE - Analyst Report) recently presented disappointing top-line results on Alzheimer’s candidate bapineuzumab from one of four ongoing phase III studies.
 

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