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Eli Lilly & Company (LLY - Analyst Report) reported first quarter 2013 adjusted earnings per share of $1.14, well above the Zacks Consensus Estimate of $1.05 and 24% above the year-ago earnings of 92 cents. The year-over-year growth was attributable to the strong performance of several key products and regions that were partially offset by the genericization of Zyprexa, a weaker Japanese yen and a slowdown in some parts of the animal health business. Earnings also benefited from a lower tax rate.

First quarter revenues remained flat at $5.60 billion. However, revenues were slightly below the Zacks Consensus Estimate of $5.67 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 49% in the first quarter of 2013.

Reported earnings (including special items) increased 56% to $1.42 per share in the first quarter of 2013.

Quarterly Details

First quarter revenues remained flat with a 4% price increase being offset by lower volume (3%) and unfavorable currency fluctuation (1%). The lower volume was mainly due to the loss of exclusivity for Zyprexa, which is facing competition from several generic players.

US revenues grew 2% to $3.1 billion mainly due to price increases that were partially offset by the loss of market exclusivity of Zyprexa. Ex-US revenues declined 2% to $2.5 billion, mainly due to the loss of exclusivity for Zyprexa, unfavorable currency fluctuation and lower prices.

During the first quarter, Zyprexa recorded a 49% decline in revenues, which came in at $284.8 million. US revenues plummeted 84% due to lower prices. International revenues decreased 30%, mainly due to the loss of market exclusivity in major markets apart from Japan. Zyprexa sales in Japan were affected by the weakening yen.

Products which performed well in the first quarter included Cymbalta (19% growth to $1.3 billion), Cialis (up 11% to $515 million), and Humalog (7% growth to $632.7 million).

Eli Lilly’s Animal Health segment contributed $499.1 million (up 2%) to revenues. Sales declined on a sequential basis. Eli Lilly reported lower demand for food animal products.

Effient revenues remained flat at $115.9 million. While US revenues declined 7% to $83.7 million, due to lower prices and unfavorable wholesaler buying pattern, ex-US revenues increased 24% to $32.2 million driven by higher demand.

Expenses

Eli Lilly’s adjusted operating expenses remained flat at $3 billion. Research and development (R&D) expenses increased 17% to $1.3 billion due to higher late-stage trial costs. Marketing, selling and administrative expenses declined 11% to $1.7 billion reflecting the company’s cost control efforts.

Guidance Maintained

Eli Lilly continues to expect earnings of $3.82 - $3.97 per share on total revenues of $22.6 billion - $23.4 billion in 2013. The Zacks Consensus Estimate for earnings and revenues currently stands at $3.90 per share and $23 billion, respectively.

While Eli Lilly expects marketing, selling and administrative expenses of $7.1 - $7.4 billion, R&D expenses are now expected in the range of $5.3 - $5.6 billion (old guidance: $5.2 - $5.5 billion).

Our Take

Eli Lilly’s first quarter results were better than expected with products like Cymbalta, Cialis and Humalog managing to offset a part of the negative impact of the genericization of Zyprexa and the weakness in the animal health segment.

Eli Lilly expects revenues to remain flat or increase by about 3.5% in 2013 despite the expected loss of US exclusivity for Cymbalta later this year. Eli Lilly, which is currently going through a patent cliff with the loss of exclusivity on Zyprexa, will be losing US exclusivity on Cymbalta in December.

While revenues will be impacted by the loss of Cymbalta exclusivity and the loss of the 15% royalty on exenatide sales, products like Humalog, Humulin, Cialis, Strattera, Forteo, Alimta, Cymbalta (outside the US), Effient, Tradjenta and Axiron, and the animal health segment should contribute to sales. Emerging markets, especially China, should also drive sales. However, revenue growth in Japan could be adversely affected by the weak yen.

Eli Lilly currently carries a Zacks Rank #3 (Hold). Companies that currently look attractive include UCB (UCBJF), Catalyst Pharmaceuticals Partners Inc. (CPRX - Snapshot Report) and Onyx Pharmaceuticals, Inc. . All three are Zacks Rank #1 (Strong Buy) stocks.

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