Lilly’s Drugs Closer to Edge of Patent Cliff (LLY, PFE, JNJ, BMY, SNY, MRK)

Drug maker Eli Lilly & Co. (NYSE: LLY) reported third-quarter earnings this morning, and the company did a little better than analysts expected, but worries persist that the company will be hit hard by drug patent expirations. In fact, the company loses patent protection on is anti-psychotic Zyprexa drug on Sunday. How much of its 2010 sales of Zyprexa – about $5 billion – Lilly will lose and how it will replace those lost sales on patented drugs are questions that neither Lilly nor most of its competitors have been able to answer fully.

Lilly’s Zyprexa lost patent protection in Europe just last month, and European sales in the quarter fell by -3%. Two other Lilly drugs, anti-depressant Cymbalta and osteoporosis drug Evista lose patent protection by 2014. Regarding the loss of protection on Zyprexa in the US, the company said that it “expects the introduction of generics to result in a rapid and severe decline in Zyprexa sales.”

For the first three quarters of 2011, Zyprexa has accounted for $3.9 billion in Lilly’s sales. Cymbalta brought in another $3 billion, up 19% over 2010 Cymbalta sales.

The company also noted the impact of the Affordable Care Act, which it says reduced EPS in the third quarter by -$0.13. Lilly said the ACA has lowered revenue by $330 million as a result of higher rebates and subsidies, and added $135 million in expenses related to mandatory manufacturing fees.

Lilly now expects full-year 2011 adjusted EPS to be $4.30-$4.35, up to -9% lower than 2010 EPS of $4.74. The revised guidance is in-line with the existing consensus EPS estimate from analysts of $4.33. The company’s gross margin guidance was unchanged, with an expected decline of 2%-3%.

Lilly’s position at the edge of the patent cliff is perhaps more frightening than that of its major competitors. The company does not have a product to replace any of those that are losing patent protection, and so far its only answer has been to announce a $1 billion cost-cutting plan that will eventually cost 5,500 jobs.

Shares in Lilly are down about -0.7% in the first hour of trading this morning, at $38.43, in a 52-week range of $33.46-$39.78. For the past 12 months, Lilly’s shares have risen 6.8%, about the same as Pfizer’s gain, but far behind Bristol-Meyers’ gain of 21%.

Paul Ausick