It's little secret that pharmaceutical giant Eli Lilly (NYSE:LLY) faces drug patent expirations on its top-selling drugs over the next few years. The question is the extent to which this is already reflected in the share price and whether the company can find a way to put billions in cash flow to good use and find a way out of its predicament.
IN PICTURES: 9 Ways To Use A Tax Refund

First-Quarter Highlights
Total sales advanced a healthy 9% to $5.5 billion as LLY's four highest-grossing drugs - Zyprexa, Cymbalta, Alimta, and Humalog - all reported strong top-line trends. Zyprexa, which is used primarily for the treatment of schizophrenia and bipolar disorders, accounts for 22.1% of sales and saw an 8% boost while the rest of the top four experienced double-digit increases.

Reported net income fell 5% to $1.25 billion, or 23.6% of sales, as cost of sales and income taxes rose by more than 30%. Higher shares outstanding sent earnings down 2% to $1.18 per diluted share. However, the company's definition of operating earnings resulted in 8% growth and didn't include charges related to expected health care reform costs in coming years and a number of other small non-recurring expenses.

Outlook
Health care reform costs also resulted in the lowering of company full-year earnings guidance to between $4.35 and $4.50 per share. Management expects 35 cents in charges from the reforms and mid-single digit sales growth on volume increases on most of its top-selling drugs as well as Cialis and Effiant. (Learn about the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?)

Bottom Line
Lilly's quarterly profits came in ahead of analyst expectations and based off earnings guidance the company is trading at a seemingly bargain-basement forward P/E multiple of under nine. However, 2011-2013 will see close to have of sales fall victim to generic competition from the likes of TEVA Pharmaceuticals (Nasdaq:TEVA) and Mylan (NYSE:MYL) and includes patent expiration of Zyprexa and Cymbalta, Lilly's two top sellers.

Lilly, along with Forest Labs (NYSE:FRX), has so far chosen to go it alone in developing new drugs to replace those with expiring patents. This is in contrast to other industry leaders, including Merck (NYSE:MRK) that has chosen to also pursue mergers to diversify away from drugs losing patent protection. The go-it-alone bias is risky, but the low earnings multiple offers a good degree of downside protection. And in the case of Lilly it will have more than $5 billion in annual free cash flow over the next few years to try and stem its top-line predicament.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  5. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  8. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  9. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  10. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center