Eli Lilly outlines innovation strategy, sets 2010 financial guidance, but disappoints Wall Street

At its annual meeting with the investment community yesterday, US drug major Eli Lilly outlined how its innovation-based strategy will enable it to better serve patients and compete effectively in a challenging health care environment.

As far as financials were concerned, the company forecast earnings per share for 2009 of between $4.30 and $4.40, while analysts polled by Thomson Reuters expected $4.42 a share. However, growth of more than 10%, with 2010 EPS guidance set at $4.65-$4.85 (excluding the potential impact of health care reform), but this still disappointed investors, and the firm's stock fell 4.2% to $35.02 by the end of trading last night, meaning the shares have fallen 13% this year.

Lilly also said it expects annual revenue of at least $20 billion in the years 2012 to 2014 and beyond. Wall Street expects company revenue this year of about $21.5 billion. "Under this scenario, net income would exceed $3 billion" in the patent-cliff years and beyond, the company said.

"In 2009, Lilly has once again exhibited strong performance in a tough environment, and we've continued with a series of actions aimed at speeding innovation to patients and delivering greater value to our customers," said John Lechleiter, Lilly's president and chief executive. "Through these actions and more, we are transforming Lilly to compete and to win in an ever more demanding and challenging environment. We see a divergence of strategies among our peers to deal with these challenges, including the wave of consolidation this year.'

Big acquisitions not on the agenda

He continued: 'Many companies are seeking to lower risk by reducing their focus on innovative medicines. This is not our path. Our strategy is to create value by accelerating the flow of innovative new medicines that provide improved outcomes for individual patients. We aim to discover, develop, or acquire innovative new therapies - medicines that make a real difference for patients and deliver clear value for payers." He later indicated that Lilly's will not be distracted by major acquisitions.

Among the specifics noted by the drugmaker, it said:

' The company remains focused on speeding innovation to patients and delivering greater value to customers; prepared to maximize growth opportunities in multiple therapeutic areas and geographies;
' Lilly advances ranking to ninth in worldwide pharmaceutical sales; fastest growing top 10 pharma company in the USA, major Europe and globally;
' Its R&D pipeline boasts more than 60 molecules in clinical development, including 25 in Phases II and III;
' The company expects 10 Phase III molecules in 2011, plans to launch two new medicines per year beginning in 2013;
' Has continued strong cash flow expected to fund R&D investment and business development transactions, while at least maintaining the current dividend; and
' longer-term guidance is reconfirmed at low double-digit compound annual EPS growth between 2007 and 2011

Among the negatives facing the company is the loss of patent protection for its best-selling drug, the antipsychotic Zyprexa (olanzapine), in 2011.The drug generated $4.7 billion in sales last year. In 2013 and 2014, Lilly will lose protection for four drugs that each produced over $1 billion in annual sales last year. They include the antidepressant Cymbalta (duloxetine), its second-best seller, the cancer drug Gemzar (gemcitabine) and osteoporosis treatment Evista (raloxifene).

Analysts' caution

Additionally, analysts quoted by Bloomberg, noted, among other things, that 'Many of these compounds have novel, unproven mechanisms of action. Novelty is clearly a good thing, but it also implies a higher chance of clinical failure' (Sanford Bernstein analyst Tim Anderson); and 'Although Lilly has a growing mid-stage pipeline, these assets remain several years away from the market, leaving the company in the difficult position of needing to heavily invest in its next wave of product opportunities at a time of significant erosion' (Chris Schott, an analyst with JP Morgan Securities).