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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

SEE: 5 Must-Have Metrics For Value Investors

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.

SEE: Earning Forecasts: A Primer

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

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

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!