Should Investors Be Concerned About Eli Lilly?

| About: Eli Lilly (LLY)
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On Wednesday, October 24th, Eli Lilly (NYSE:LLY) will report its third quarter earnings report and, like many pharmaceutical stocks, it's grappling with patents that are expiring and a pipeline that that's less than inspiring. Moreover, Eli Lilly's much watched Alzheimer's disease drug solanezumab has thus far produced mixed results but it has also been drawing in investors or rather speculators betting on a big payoff should the drug prove effective. So what should investors do with Eli Lilly?

The Numbers Wall Street Expects from Eli Lilly

To begin with the upcoming earnings report, the latest summary of analyst estimates from Yahoo! Finance has the Wall Street consensus expecting Eli Lilly to report an 8.60% revenue decline to $5.62 billion along with an EPS of $0.82 verses $1.13 for the same period last year. The current EPS consensus estimate of $0.82 is slightly higher from the $0.79 consensus number three months ago.

For the year, the Wall Street consensus Eli Lilly calls for a 6.50% revenue drop to $22.72 billion while EPS is expected to drop from $4.41 to $3.39; and for next year, the Wall Street consensus expects a 2.3% revenue rise to $23.25 billion along with an EPS rise from $3.39 to $3.79. However, investors should remember that these Eli Lilly estimates for both revenue and earnings could still make moves in either direction.

In addition, investors should also keep in mind that other large cap pharmaceutical or health care related stocks scheduled to report earnings include Bristol-Myers Squibb (NYSE:BMY) on Wednesday, October 24th; Novartis (NYSE:NVS), Sanofi (NYSE:SNY) and AstraZeneca (NYSE:AZN) on Thursday, October 25th; and both Pfizer (NYSE:PFE) and GlaxoSmithKline (NYSE:GSK) on Wednesday, October 31st.

What Eli Lilly Reported Last Earnings Season

The last time Eli Lilly reported earnings, it reported a 10% revenue drop to $5.6 billion along with a 23% net income drop to $924 million namely due to patent expiries on schizophrenia and bipolar disorder drug Zyprexa late last year in most major markets outside Japan. Zyprexa sales had once hit the $5 billion mark annually but due to the patent expirations, its sales sank 73% to $379.5 million during the second quarter.

Nevertheless, China and Japan delivered pharmaceutical revenue growth of 28% and 15%, respectively while revenue for antidepressant drug Cymbalta rose 22% to $1.22 billion thanks to continued strong growth in both the US and international markets - making it the company's top performing drug. Eli Lilly also said it was on track to meet or exceed its minimum goals of having at least $20 billion in annual revenue and $3 billion in net income through the year 2014.

What You Need to Consider

With the second quarter earnings report in mind, investors should be aware that Eli Lilly is set to lose patent protection on Cymbalta after the FDA granted it another six months of exclusivity until December 2013. However, it's hard to tell how big of a hit because it's currently one of the most frequently prescribed antidepressants which could give Eli Lilly some protection but investors will still need to take a closer look at the company's drug pipeline but that's also where its problems seem to lie.

To start with, Eli Lilly took a hit last August when its Alzheimer's disease drug solanezumab failed two big studies to stop declines in patients with mild to moderate symptoms but since then, a secondary analysis by a third party indicated that the drug may slow the rate of cognitive decline in patients with mild Alzheimer's or those who have not yet developed symptoms. On the other hand, there was no indication of a significant decline and given the mixed results, more studies will be needed with FDA approval for anything still a long way off but given that the Alzheimer's is potentially worth $10 billion or more in sales, expect it to keep trying with solanezumab potentially being the first treatment attacking the disease's progression. Likewise, investors have been buying Eli Lilly's stock - more or less because of "lottery ticket" appeal that solanezumab has and the huge potential of the Alzheimer's market rather than the merits of the actually drug.

Otherwise, Eli Lilly has also just announced that its once-weekly diabetes drug Dulaglutide does help patients control their diabetes better than older treatments and the company is planning to seek US approval next year for the drug. If the drug is approved, Cowen & Co analyst Steven Scala estimates it could have $500 million in sales by 2018 but that is still a long way off for most investors.

However, Scala has recently downgraded and called Eli Lilly's drug pipeline "Pipeline broad, but undifferentiated." He then went on to chop up that pipeline so to speak and he also estimated that Eli Lilly has $10 billion in pipeline potential in 2018 - less than half the revenue level it's at now. Scala also believes that given the data we already know about solanezumab, it won't be approved and Elli Lilly might not even want to risk a big new study and instead choose to focus on other early stage Alzheimer's treatments. Such a development would be a huge blow to those who got in on all of the hype surrounding solanezumab.

A Final Word About Eli Lilly

Eli Lilly is about to enter its third quarter earnings report with a 14.52 trailing P/E and a dividend yield of around 3.70%. That may sound impressive but it's also important to remember that pharmaceutical companies live by their drug pipelines and potentially die once the patent life on their drugs expires - meaning Eli Lilly really needs to come up with a winner soon. However, given Eli Lilly's uncertain pipeline and the run-up it has from people speculating about the potential of yet unproven solanezumab, most investors will probably want to sit on the sidelines with this one or choose another pharmaceutical stock that has a more promising and attractive drug pipeline.

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.