Will Eli Lilly's Big Bets Pay Off?

Tomorrow, Eli Lilly (LLY 1.60%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

The pharmaceutical industry has a lot of opportunities for growth right now, and Eli Lilly has done its best to claim its share of those opportunities. But Lilly faces a tough road in building up its pipeline to offset the impact of expiring patent protection on some of its blockbuster drugs. Let's take an early look at what's been happening with Eli Lilly over the past quarter and what we're likely to see in its quarterly report.

Stats on Eli Lilly

Source: Yahoo! Finance.

Will Lilly deliver healthy results this quarter?
In recent months, analysts have gotten more optimistic about Lilly's earnings prospects. They've made a $0.07 per share increase both to their first-quarter and full-year 2013 estimates, helping to send the stock to about a 10% gain since mid-January.

The toughest obstacle for big pharma lately has been the wave of patent expirations hitting the industry. Pfizer (PFE 1.10%) has had to deal with the loss of Lipitor, which produced more than $130 billion in lifetime sales, as well as several other important drugs in its lineup. Fellow giant Merck (MRK 1.03%) had to lower its 2013 forecast when its Singulair patent protection expired. Yet even with the whole industry facing the patent cliff, Lilly is having to deal with expiring patents on drug after drug, including Zyprexa in 2011 and Cymbalta at the end of this year, and its pipeline hasn't delivered on its full promise to replace those lost sales.

To address those concerns, Lilly has turned to oncology and diabetes treatments, which make up the vast majority of its stable of clinical-stage drugs. Just last week, the company announced favorable results on phase 3 trials of its dulaglutide treatment for type 2 diabetes, including signs of superiority over Sanofi's (SNY 0.68%) Lantus. In addition, Lilly is still seeking to address Alzheimer's disease, having made a deal with Germany's Siemens (SI +1.00%) to obtain imaging tracers that could help it develop treatments for the disease.

Still, Lilly has had to take tough measures in light of its patent cliff. Earlier this month, the company said it would have to restructure its sales force, with job cuts expected by July 1. The restructuring could result in a net job loss of roughly 700 workers as the company strives to contain costs.

In Lilly's report, watch closely for signs of how well its cost-containment measures are doing at preserving profits. Lilly needs to make the most of Cymbalta before it loses patent protection, and shoring up its finances to withstand the coming hit is essential.

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