Zacks_Analysts' Blog : Earnings Preview: Eli Lilly - Analyst Blog

Eli Lilly & Company (LLY) is scheduled to announce its third quarter 2011 results on October 20, 2011 before the start of trading. The Zacks Consensus Estimate for the third quarter is $1.13, representing a year-over-year decrease of 6.61%.

Second Quarter Recap

Eli Lilly & Company reported second quarter adjusted earnings per share of $1.18, a penny below the Zacks Consensus Estimate and $0.06 below the year-ago earnings of $1.24. Earnings in the quarter were hurt by higher operating expenses which offset the rise in revenues.

Second quarter revenues increased 9% to $6.3 billion, above the Zacks Consensus Revenue Estimate of $6.0 billion. Revenues were boosted by increased demand for Lilly’s major products. Exchange rates also favorably impacted revenues during the quarter.

Reported earnings (including special items), declined 12% to $1.07. Reported earnings included $132.3 million of restructuring costs.

(Read our full coverage on this earnings report: Eli Lilly Misses on EPS, Beats on Sales ).

Agreement of Estimate Revisions

The analysts project an optimistic sentiment on Eli Lilly’s to-be-reported quarter. Out of the 13 analysts covering the stock for the third quarter, 4 have revised their estimates upwards, while one moved in the opposite direction over the last 7 days. Foreign exchange is expected to impact Eli Lilly’s top line positively in the third quarter of 2011.

Estimate revisions have witnessed a negative bias over the last 7 days for the final quarter of 2011. Three analysts have trimmed their estimates with a sole upward movement. Foreign exchange is not expected to impact the top line significantly in the fourth quarter of 2011.

Moreover, we expect the top-and bottom-lines to remain under pressure from late 2011 as the contraction in lead product Zyprexa’s (a treatment for schizophrenia and bipolar disorder) sales due to genericization will more than offset growth in Cymbalta (approved for treating depression), the diabetes franchise and sales of new products.

The estimates for fiscal 2011 have been revised by 5 of the 17 analysts following the stock for 2011 over the last 7 days. Earnings estimates have moved in both directions with 2 analysts slashing estimates and the remaining moving in the opposite direction.

Magnitude of Estimate Revisions

Estimates for the third quarter of 2011 have remained static at $1.13 over the last 7 days due to a lack of significant estimate revisions by the analysts following the stock. Estimates for fiscal 2011 too are static at $4.33 over a similar time period due to lack of significant estimate revisions.

Surprise History

Eli Lilly has surpassed earnings estimates in three of the last four quarters, missing estimates by a whisker in the second quarter of 2011. On average, the earnings surprise was 2.82%.

Neutral on Eli Lilly

We currently have a Neutral recommendation on Eli Lilly, which carries a Zacks #3 Rank (short-term Hold rating). Eli Lilly will enter a tough period in late 2011 with the loss of exclusivity on Zyprexa. Barring significant cost-cutting efforts or additional revenue catalysts, 2013 will be the beginning of a very challenging period for Eli Lilly with Cymbalta losing US patent protection.

Moreover, we are also concerned about the intense competition faced by Eli Lilly’s products. We expect competition for Lilly’s diabetes care products to increase with the entry of Novo Nordisk’s (NVO) Victoza. We are also concerned about competition for osteoporosis drug Forteo from Merck’s (MRK) Fosamax. Cialis competes primarily with Pfizer’s (PFE) Viagra and GlaxoSmithKline’s (GSK) Levitra.

On the flip side, strong performance of the diabetes business, the ramp of Effient and upside from the ImClone deal should offer some downside support. We are also pleased to see Eli Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline.