Eli Lilly's Strong Outlook Is Comforting Amidst $6 Billion In Patent Expirations

| About: Eli Lilly (LLY)
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Shares of Eli Lilly (LLY) ended the first trading week of 2013 on a strong note. The pharmaceutical developer, manufacturer and distributor of a variety of drugs commented on its 2012 performance and gave an upbeat outlook for 2013 and beyond, sending shares 3.7% higher.

Updated Outlook For 2012

Eli Lilly previously guided for 2012 earnings per share of $3.68-$3.78, on a reported basis. Excluding a one-time benefit of $0.43 per share from the early payment of the exenatide revenue sharing obligation, non-GAAP earnings were guided to come in at $3.30-$3.40 per share.

On Friday, Eli Lilly reiterated the outlook for 2012. Results for the year will now exclude the impact of the delayed enactment of the Taxpayer Relief Act. The extension of the R&D tax credit for 2012 will consequently not be taken into account in 2012, but instead will boost earnings in 2013.

CEO and Chairman John C. Lechleiter commented on the outlook, "At Lilly, we continue to implement the three primary elements of our strategy to bridge our current period of patent expirations and return to sustainable growth. We have made substantial progress in recent years and expect 2013 to continue that trend. We are replenishing and advancing our pipeline, which now has 13 potential new medicines in Phase III testing."

Outlook For 2013 And Beyond

For 2013 Eli Lilly now expects earnings per share to come in between $4.03 and $4.18 on a reported basis, or $3.75-$3.90 on a non-GAAP basis excluding the impact of the exenatide related income. This guidance excludes the impact of the delay of the Taxpayer Relief Act.

Full-year revenue are expected to come in between $22.6 and $23.4 billion, despite the patent expiration of Cymbalta in the fourth quarter. The company expects to report significant revenue growth in Japan and emerging markets.

CFO Derica Rive commented on the long term guidance, "We remain on track to meet or exceed our minimum financial performance targets. From now through 2014, on an annual basis we still expect revenue to be at least $20 billion, net income to be at least $3 billion, and operating cash flow to be at least $4 billion."


Eli Lilly ended its third quarter of 2012 with $6.9 billion in cash, equivalents and short-term investments. The company operates with $5.5 billion in short- and long-term debt, for a net cash position of roughly $1.4 billion.

For the first nine months of 2012, Eli Lilly generated revenue of $16.6 billion. The company net earned $3.3 billion for the period, or $2.92 per diluted share. At its third-quarter earnings release, the company guided for annual revenue of $21.8 to $22.8 billion. The company guides for annual profits of $4.2 billion, or around $3.73 per share.

After Friday's gains, the market values Eli Lilly at $59.8 billion. This values operating assets around $58.4 billion, which values the firm at 2.6 times annual revenue and 13-14 times annual earnings.

The company pays a quarterly dividends of $0.49 per share, for an annual dividend yield of 3.8%.

Some Historical Perspective

Shares of Eli Lilly started the year of 2012 around $40 per share and gradually climbed to highs of $54 in October. Shares fell back a little from that point in time, but recovered to current levels around $51 per share.

Long-term holders of the shares have had a rough time. Shares of the company set all-time highs over $100 per share back in 2000. From that point in time, shares steadily lost terrain, trading below $30 at the start of 2009. Shares recovered in 2012 as investors seem to recognize the improved pipeline of the firm, which could drive future performance.

Between 2008 and 2012, Eli Lilly increased its annual revenue by roughly 10% to $22.3 billion in 2012. The company reported multi-billion dollar profits over the past years.

Investment Thesis

Investors are happy with the strong outlook for 2013. The midpoint of the revenue guidance at $23.0 billion comes in ahead of analysts expectations of $22.8 billion, and guides for 4.5% annual revenue growth. Non-GAAP earnings of $3.75-$3.90 per share are coming in ahead of expectations of $3.71 as well, driven by tighter cost control and productivity initiatives.

Two weeks ago, the Board of the firm announced a new $1.5 billion share repurchase program to be completed in 2013. The repurchase plan is sufficient to retire roughly 2.5% of its total shares outstanding.

The strong outlook for 2013 is comforting to investors given the uncertain future for the firm in the medium-term future. Eli Lilly will lose the patent on its anti-depressant drug Cymbalta, which generates annual revenue of $5 billion, in December of 2013. A couple months later, the firm will also lose the patent on its $1 billion Evista drug. Fortunately the firm has over 13 new drugs in late testing, and replenishing the drug pipeline is a top priority of the firm.

Shares are fairly valued at these levels and the strong outlook for 2013 is comforting. The outlook for annual sales of $20 billion for 2014 and beyond is comforting investors. In comparison, the firm guides for $22.3 billion in revenue for 2012, and patent expirations could result in $6 billion in lost revenue in the coming two years.

Shares trade at fair earnings multiples of 13-14 times earnings. The strong balance sheet allows the firm to continue to pay a fairly high dividend, while leaving financial flexibility to make bolt-on acquisitions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.