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Lilly Reports Solid 4Q and Reiterates Guidance

Written by on April 12, 2013

Like many pharmaceutical firms, Lilly faces daunting growth prospects in the foreseeable future because of patent expirations on key drugs. Through 2017, patents will expire on several key blockbusters, including antidepressant Cymbalta in December 2013 (22% of Lilly’s sales), osteoporosis drug Evista in early 2014 (4% of Lilly’s sales), cancer treatment Alimta in 2017(11% of Lilly’s sales), erectile dysfunction drug Cialis in 2017 (9% of Lilly’s sales), and ADHD drug Strattera in 2017 (3% of Lilly’s sales).

To reinvent itself, Lilly is placing big bets a late stage pipeline that could start offsetting these losses around 2014 and 2015. In the pipeline, we see several promising diabetes, cancer, and Alzheimer’s treatments. However, even with the probabilityweighted success of these new drug programs, we think free cash flow may remain constrained around $4.0 billion annually during the next five years, or similar to what it produced in 2012.

The good news for debtholders is Lilly operates with a very conservative balance sheet. At the end of 2012, Lilly held $12 billion in cash and investments compared with $5.5 billion in debt. With this solid net cash position and the potential for substantial cash flows through its major debt maturity dates, which are concentrated from 2014 to 2018 and then in 2025 and beyond, analysts remain confident in Lilly’s ability to repay all debt obligations through internal means.

However, given its stagnant growth prospects, we wouldn’t be surprised to see Lilly make capital allocation decisions that are unfriendly to debtholders in an attempt to appease shareholders.



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