Eli Lilly ($LLY) has long been warning about a yearslong sales trough, and those years have officially arrived. But the company says it's now projecting a deeper-than-expected drop in profits for 2012, as generic rivals for its blockbuster antipsychotic Zyprexa take a $3 billion chunk out of sales.
Lilly's earnings forecast—$3.10 to $3.20 per share—fell short of Reuters' analyst estimate of $3.61, and even further short of Bloomberg's $3.67. Shares immediately dropped 3.5%, despite Lilly's promise to maintain dividends at least as large as those it's currently funding.
Lilly's patent cliff is emblematic of the entire industry. Zyprexa is its biggest product at $5 billion in 2010 sales, and its next-biggest, the $3.5 billion antidepressant Cymbalta, loses exclusivity next year. Several other meds lose patent protection over the next several years. And like its competitors, Lilly has been scrambling to make up the billions it stands to lose from its revenue stream. It's also been cutting expenses—and laying off workers—to put its cost basis more in line with its sales.
"We've been preparing to meet these challenges for many years," Lilly CEO John Lechleiter (photo) said in a statement, "and [we] have the plans in place to enable us to bridge this period and return to sustainable growth after 2014." Key to Lechleiter's plan is R&D, of course; the company has been spending big on its pipeline, with investments this year amounting to $5 billion to $5.3 billion.
And therein may lie the disappointment on profits, Barclays Capital analyst Anthony Butler told Bloomberg. "This may be Lilly saying, 'We've cut as much as we're going to cut, and we're going to maintain research and development at a fairly healthy level," Butler said. Unfortunately for investors—and Lillyites—there's no way of knowing whether the strategy will pay off until results roll in.
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