Is It All Doom and Gloom for Eli Lilly & Co.?

Fourth-quarter results from Eli Lilly (NYSE: LLY  ) were pretty tough and showed that the company is struggling to replace many of its blockbuster drugs, as they come off patent and see reduced sales as a result of generic competition.

Q4 profit fell by 12% versus the same period in the previous year, with Eli Lilly losing U.S. patent protection for its top product, the antidepressant Cymbalta, which has caused the introduction of a number of low-cost generic substitutes.

As if this wasn't bad enough, 2014 looks set to get worse before it gets better, as Eli Lilly expects to also lose patent protection for bone-building drug Evista as soon as March, which is likely to mean profits fall further than those reported for the fourth quarter of 2013.

This situation is something that shareholders in AstraZeneca (NYSE: AZN  ) can identify with. It is currently experiencing a patent cliff, where many of its blockbuster drugs are coming off patent and are suffering from low-cost generic copies. Moreover, it could be argued that AstraZeneca's patent cliff is larger than that of Eli Lilly, but still the market seems to be warming to AstraZeneca's response to the problem.

The response from Eli Lilly seems to be to take a similar route as the one AstraZeneca is taking, in terms of making multiple acquisitions to replace the loss of patent protection on various blockbuster drugs. This strategy was discussed in the fourth-quarter results update by Eli Lilly management, who also intend to target emerging-market sales, just as AstraZeneca has done.

Adding to the challenges Eli Lilly faces is the continual setback of its research-and-development function, with the company confirming at the results update that it will no longer seek regulatory approval for liprotamase, an enzyme replacement treatment for pancreatic disorders.

However, it's not all bad news for Eli Lilly. It has submitted four new drugs for regulatory review and has the financial firepower to make a series of acquisitions with which to address its patent cliff.

Moreover, its fourth-quarter results weren't the only ones to disappoint, and it does seem as though the health-care space is going through a period of major change, as companies look to restructure and modify their business models -- often in response to losing patent protection for key drugs.

Bristol-Myers Squibb (NYSE: BMY  ) , for one, released fourth-quarter results that were slightly disappointing (although they beat Wall Street expectations) as it seeks to restructure away from being a mass-market producer of drugs and toward a specialist, niche player. Like Eli Lilly and AstraZeneca, it's expected to post declining profits for 2014, but it could yet be a great medium- to long-term play, as it develops higher margins and reinvests the capital from its various divestments.

So while all three companies are yet to see bottom-line growth (and are highly unlikely to do so in 2014), they could yet offer significant upside for investors, as the market begins to view their turnaround stories as legitimate. Therefore, while fourth-quarter results for Eli Lilly may seem more hopeful than happening, it isn't necessarily all doom and gloom for shareholders.

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