With so many drugs in different stages of development, one single product rarely defines an entire drugmaker. Merck (NYSE: MRK) lost Vioxx and kept on ticking; GlaxoSmithKline's (NYSE: GSK) Avandia is all but dead, but it won't break the company.

Somehow, things aren't working out that way for Eli Lilly (NYSE: LLY). The company managed to line up a whole mess of blockbusters that will see patent expirations in a very short window of time.


2009 Sales (in billions)

Patent Expires













Source: Company 10-K. *May be Nov. 2010 if current court decisions hold.

This means that you basically have to throw out any valuation metric that involves trailing data. Price/earnings, price/sales, and price/free cash flow ratios all make the company look cheap, but none of them are really relevant when sales, earnings, and cash flow are sure to fall after generics hit the market. Even the dividend yield is up in the air. The company has plenty of cash to cover it now, but down the line, we could very well see a cut to the dividend.

The solution, of course, is to bring more drugs on the market to make up for those going off-patent -- but that's easier said than done. Eli Lilly does have quite a few compounds in clinical trials, but most are in the early stage. Management was out in full force this week, touting the prospects of buying its way to a beefed-up pipeline.

I like the idea of buying in bits and pieces, rather than making a major purchase like Pfizer (NYSE: PFE) and Merck did. Licensing drugs also allows you to pin some of the risk back on the inventor through milestone payments tied to FDA approvals or even sales. But it's not like every drug is a blockbuster. How many purchases must Lilly make to replace its multibillion-dollar drugs?

If the patent cliff is the one thing you need to know about, the additions to the pipeline are the one thing you need to watch going forward.

Matt Koppenheffer urges you not to listen to stock market stupidity.