Lilly warns of 'challenging' bid for 2014 sales goal, thanks to yen, emerging markets

Eli Lilly CEO John Lechleiter

Eli Lilly's annual dog-and-pony show for investors is today, and though its press release at first seems to promise everything but a pony for everyone, underneath, the news is more beastly. Meeting next year's minimum revenue goal of $20 billion will be "challenging," the company says, and analysts are already speculating about "savage" cost cuts if R&D doesn't come through as Lilly hopes.

Lilly ($LLY) blames circumstance for its new apprehensions about 2014 results. "Market factors, including the devaluation of the yen and slower market growth in key emerging market countries, have moderated the company's near-term revenue growth expectations," Lilly said in a statement. "These headwinds will make it challenging for the company to meet the minimum revenue goal of $20 billion in 2014."

How did this happen after Lilly hiked its 2013 guidance just a few months ago? The yen and emerging markets are part of the answer. For example, China is one of Lilly's 5 "must-wins," according to a presentation scheduled for today's meeting, and China is an increasingly thorny market, what with a corruption probe apparently linked to arm-twisting on price cuts. (Interestingly, the slides for Lilly's emerging markets presentations don't even hint at Lilly's worries about next year.)

But there's also the fact that Lilly's second-quarter revenue growth largely depended on higher prices, primarily on its top-selling antidepressant, Cymbalta. And Cymbalta goes off patent in December, leaving Lilly in a multibillion-dollar lurch; for the first half of 2013, the drug brought in $2.8 billion, about one-fourth of total revenue.

CFO Derica Rice said Lilly is casting about for ways to hit that $20 billion revenue target in spite of circumstance. With sales looking iffy, he zeroed in on net income and margins, highlighting previously announced cuts in sales and administration--which include 1,000 or so layoffs--and R&D savings as pipeline drugs exit expensive Phase III trials. More cuts are likely to come, he warned; according to the company statement, he said Lilly "can and will take additional actions" to hit targets by cutting costs.

What Rice and Lilly really want investors to do is look past 2014. Focus on the three new products the company hopes to introduce next year, the company says, and remember the drugs, like Cialis and Strattera, that won't go off patent for awhile. And by the way, enjoy the $5 billion in stock buybacks planned for the coming years.

Problem is, the new drug introductions may not deliver as much money as Lilly once hoped. One of them, ramucirumab, just failed a breast cancer trial, so it's down to a possible indication in gastric cancer--and the survival benefit there is less than impressive. Another, empagliflozin, has stronger data, but it would be the third entrant in the SGLT-2 inhibitor market, after Johnson & Johnson's ($JNJ) Invokana (canagliflozin) and AstraZeneca ($AZN) and Bristol-Myers Squibb's ($BMY) Forxiga (dapagliflozin). Plus, the entire class is under scrutiny for safety concerns, with J&J on the hook for 5 postmarketing trials.

Which brings us to the company's long-term margin goals. ISI Group analyst Mark Schoenebaum noted this morning that Lilly plans to expand margins by 2019, squeezing combined R&D and sales/admin expenses down to 46% to 50% of sales, from about 54% last quarter. What if Lilly's pipeline largely fails?, Schoenebaum asked. Does Lilly have a Plan B for hitting those margin targets? If so, "Plan B would be painful as it would likely involve savage cost-cutting in the face of continued pipeline disappointments," he wrote.

We'll hear much more from Lilly during today's presentations. Stay tuned for updates.

- see the release from Lilly
- get the presentation slides (PDF)

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