Is Lilly About to Bloom?

Spring is supposed to be the consummate "out with the old, in with the new" time of year and it seems Eli Lilly (NYSE:LLY) is getting into the spirit. While total sales for the first quarter were up about 4% to $3.5 billion, new products made up 14% of the total -- about 50% more than in the year-ago period.

Of course, Lilly's older products still carried the day. Zyprexa sales totaled over $1 billion for the period, though that's a 5% decline from the year-ago period. Diabetes care grew 6% to about $725 million, mostly on the strength of the company's Humalog/Humulin insulin franchises. Gemzar and Evista were also important contributors to the quarter, coming in at $305 million and $249 million, respectively (up 9% and 7% over last year).

Seeing as how these four old soldiers still accounted for two-thirds of the company's total revenue, the importance of new drugs is easy to see, and they didn't disappoint in March. Cymbalta grew significantly on a sequential basis -- posting sales of nearly $107 million in the first quarter, compared to $61 million in the fourth. Altima also contributed sequential growth as sales rose from about $73 million in the fourth quarter to nearly $94 million for the first quarter.

On the operations side, things weren't quite so rosy. Gross margins fell by about 2.3% (to 75.4%), and the company blamed this largely on foreign exchange effects and continued investment in manufacturing capacity.

Stripping out a one-time, in-process R&D charge related to an acquisition, operating margins also fell from the prior March quarter. While some of that shortfall is due to gross margin, some of it is also due to higher R&D spending. Quite frankly, if a pharmaceutical company is going to post a negative year-over-year comparison in operating margin, higher R&D costs is a pretty forgivable reason.

Looking ahead into the remainder of 2005, Lilly should see some important milestones achieved. An FDA action date on exenatide -- developed and marketed in partnership with AmylinPharmaceuticals (NASDAQ:AMLN) -- is approaching in late April. Exenatide would be the first of an entirely new type of medication for type 2 diabetes, with at least a one-year head start on the competition. Later, in the second half of the year, the company is expected to ask for FDA approval of Arxxant (ruboxistuarin) -- a novel treatment for nerve damage caused by diabetes.

While investors might be a little disappointed that Lilly lowered its guidance because of expected wholesaler inventory adjustments in the second quarter, the firm still remains one of the relatively scandal-free names in big pharma. Although I wouldn't say Lilly shares are really "cheap" these days, there's a lot to like about a company with no legal overhang, several new drugs, and a decent dividend yield.

For more on big pharma, check out these earlier pieces:

• Relief Pitch for Eli Lilly
• Abbott's OK Quarter
• Can Obesity Fatten Your Wallet?
• Pfizer Pfaces Its Pfuture

Fool contributor Stephen Simpson owns shares of Amylin Pharmaceuticals. The Fool has a disclosure policy.