As with many Pharmaceutical companies, Eli Lilly (NYSE:LLY) is struggling to counter the challenge posed by patent expiry and generic competition. Evidence of this could be seen in its full-year results, which were released at the end of January. They showed that fourth quarter net profit declined by 12%, as generic competition ate away at sales for many of its key drugs.

Furthermore, Eli Lilly is due to lose patent protection for its bone-building drug, Evista, as soon as next month. This, combined with the loss of patent protection on its top-selling drug, the antidepressant Cymbalta, means that 2014 could prove to be another tough year for the company.

However, shares have posted impressive gains so far in 2014, being up 16.8% while the S&P 500 is currently flat. Therefore, has the bad news been priced in, and can Eli Lilly deliver a strong performance in 2014?

News flow
Recent news flow has been mixed for Eli Lilly. On the one hand, it has lowered 2014 guidance, with earnings per share now forecast to be around $2.76, which is down from the $2.83 consensus market forecast. However, on the other hand, company news has been fairly encouraging, with Eli Lilly agreeing to buy a privately held, poultry vaccine maker to strengthen its Elanco animal health subsidiary. Although no further details have been announced, it is believed that acquisition costs are a major reason guidance has been reduced for 2014. The deal appears to make sense for Eli Lilly, because animal vaccines is an area in which it is aiming to expand in future.

Eli Lilly also announced last week that its experimental, once-weekly drug for type 2 diabetes, dulaglutide, was comparable to Novo Nordisk's once-daily drug, Victoza, in reducing a measure of blood sugar in a patient study. The drug could eventually deliver up to $2 billion of annual revenue (should it be approved by the FDA) and Eli Lilly is hopeful that the findings will give it a competitive advantage over Victoza.

Developments at pharmaceutical peers
Of course, animal health is also a key market for Merck (NYSE:MRK). It announced last week that marketing authorization has been granted by the European Commission for the veterinary medicinal product, Bravecto. This is positive news for Merck, since Bravecto is the first and only treatment that has been shown to quickly and effectively kill fleas and ticks for up to 12 weeks in a single dose.

Meanwhile, pharmaceutical peer GlaxoSmithKline (NYSE:GSK) received a positive opinion from the European Medicine Agency's Committee for Medicinal Products for Human Use regarding marketing authorization for two treatments for chronic obstructive pulmonary disease. The first is a once-daily maintenance treatment to relieve symptoms called Incruse, while the second is a once-daily maintenance bronchodilator treatment (also to relieve symptoms) called Anoro. The final decisions from the European Commission are expected in the next few months.

Looking ahead
So, while Eli Lilly is undoubtedly experiencing challenges with regard to generic competition, it seems as though the company is taking the necessary actions to counter this. Indeed, the market seems to be behind the company's strategy, as reflected in the share price strength seen in 2014. As a result, it could turn out to be a great year for investors in the stock.

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Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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