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Eli Lilly & Company (LLY - Analyst Report) reported third quarter 2012 adjusted earnings per share of 79 cents, missing the Zacks Consensus Estimate by 4 cents and 30.0% below the year-ago earnings of $1.13. The year-over-year decline was attributable to lower revenues in the third quarter of 2012.
 
Third quarter revenues declined 11% to $5.44 billion, well below the Zacks Consensus Estimate of $5.62 billion. The Zyprexa patent expiry continued to impact revenues. Sales of Zyprexa, which went off patent in the EU and the US in late 2011, plummeted 68% in the third quarter of 2012. Currency fluctuation impacted revenues negatively by 3%.
 
Reported earnings (including special items) increased 6% to $1.18 per share.
 
Quarterly Details
 
Third quarter revenues declined mainly due to a 9% decrease in volume. A 1% price increase partially mitigated the effect of lower volume and unfavorable currency fluctuation. The lower volume was mainly due to the loss of exclusivity for Zyprexa, which is facing competition from generic players like Dr. Reddy’s (RDY - Snapshot Report) and Teva (TEVA - Analyst Report).
 
US revenues fell 9% to $2.99 billion mainly due to the loss of market exclusivity of Zyprexa. Ex-US revenues fell 15% to $2.46 billion, mainly due to the loss of exclusivity for Zyprexa, unfavorable currency fluctuation and lower prices.

During the third quarter, Zyprexa recorded a 68% decline in revenues, which came in at $374.5 million. US revenues plummeted 88% 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 third quarter included Cymbalta (16% growth to $1.2 billion), Alimta (2% growth to $643.6 million), and Forteo (20% growth to $288.7 million).

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 $479.4 million (up 6%) to revenues. Higher demand for companion animal products drove sales in the US. However, outside the US, sales were affected by unfavorable currency movement, lower prices and economic conditions in certain markets.

Effient posted revenues of $109.7 million, up 31%. While US sales increased 31% to $80.4 million, driven by higher demand and higher prices, ex-US sales increased 32% to $29.3 million driven by higher demand.

Expenses

Eli Lilly’s adjusted operating expenses decreased 3% during the quarter. Research and development (R&D) expenses increased 5% to $1.3 billion due to higher late-stage trial costs. Marketing, selling and administrative expenses declined 8% to $1.8 billion mainly due to lower marketing costs.

Guidance Maintained

Eli Lilly maintained its guidance for 2012. Eli Lilly expects earnings in the range of $3.30 - $3.40 per share on revenues of $21.8 - $22.8 billion.

While the loss of Zyprexa exclusivity is expected to impact Eli Lilly’s 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 and Axiron should also contribute to revenues. The Animal Health business should also continue performing well and post double-digit growth. 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 expected to decline to $7.3 billion - $7.7 billion, research and development expenses are expected to remain flat or increase to $5.0 billion - $5.3 billion.

We currently have a Neutral recommendation on Eli Lilly, which carries a Zacks #3 Rank (short-term ‘Hold’  rating). 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. We are also pleased to see Eli Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline.

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