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Fitch flags big obstacles ahead for Eli Lilly

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Fitch Ratings is worried about Eli Lilly ($LLY). The credit-analysis firm confirmed the drugmaker's current ratings, but changed its outlook to "negative" from "stable." That's because Lilly is walking toward two big patent expirations, fresh off its recent loss of Zyprexa exclusivity.

Essentially, Fitch figures that Lilly will be struggling to shore up its margins as it loses control of the market for the antidepressant Cymbalta, now among its biggest sellers, and the insulin drug Humalog. Both of those patents expire next year, but the full effect won't be felt till 2014--and that's when Fitch sees Lilly's margins eroding.

"Fitch is highly concerned about the company's ability to counter the negative effects on earnings and cash flows from a patent cliff that lasts until the loss of market protection for Cymbalta in December 2013," the ratings group said in a statement.

The nitty-gritty? Lilly's sales will fall by a compound rate of almost 8%, even with the launch of potential new drugs. Because the company needs to invest in R&D to grow sales, it may not be able to hit its own goal of limiting that spending to 25% of sales, Fitch says. And even if it does, maintaining margins could be quite difficult; the firm expects a drop below 20%. And if Lilly continues its share buybacks and dividends, in spite of the sales lag, cash flow will suffer, along with its ability to repay debt coming due in the near term.

That's a lot of ifs. Fitch's job is, of course, to look out for the pitfalls. But with pipeline setbacks and looming generic competition, Lilly will definitely have its hands full.

- read the Fitch statement

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