Pharmaceutical giant Eli Lilly (NYSE:LLY) reported decent first quarter results late in April 2012. Sales and earnings both fell, but investors have come to expect operational declines at Lilly and most of its key rivals. The above-average dividend yields have been the saving grace, and could be relied on for some time, until new drugs starting boosting industry prospects again.

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First Quarter Recap
Total reported revenues fell 4% to $5.6 billion. The biggest hit was the expiration of patent protection for Zyprexa in the United States and "many international markets." Overall, the sales decline was attributed to a 7% drop in volume, though pricing increased 4%. Currency fluctuations had a minimal impact on the sales figure for the quarter. Non-U.S. sales actually declined at a faster rate than domestically, dropping 9% to $2.5 billion, or nearly 45% of the total top line.

Net income also declined 4% to just over $1 billion, as did earnings per share, which came in at 91 cents per diluted share. Lilly paid out more than half, or 49 cents per diluted share in the form of a quarterly dividend. Its annual payout rate currently stands at 4.7%.

Outlook and Valuation
For the full year, analysts project a total sales decline of nearly 7% and total sales of just under $23 billion. Lilly expects to report earnings in a range of $3.14 to $3.29 for a decline of between 16 and 19% from 2011. On an adjusted basis, it expects to report $3.15 to $3.30 for an annual decline of as much as 25%. The current consensus earnings expectation is $3.26. At the current share price of $41.43, this represents a forward P/E of 11.21.

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The Bottom Line
An estimated 40% of Lilly's patented drugs will see their patent protection expire within the next three years. To offset this major loss of revenue are approximately 10 Phase III compounds that could achieve blockbuster status, or the achievement of $1 billion in annual revenue.

Lilly's predicament is quite common in the industry. Merck (NYSE:MRK), GlaxoSmithKline plc (NYSE:GSK), Bristol-Myers Squibb (NYSE:BMY) and Novartis (NYSE:NVS) are all seeing a large number of blockbusters face generic competition. Lilly has committed to supporting its dividend yield, which offers a certain level of stability, as income-minded investors are likely to stay put. However, the upside potential in the stock currently looks nonexistent. Positive news on the drug pipeline could boost the stock, but it will be some time before Lilly sees an extended period of steady, sustainable sales growth.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.