Lilly Whacked on Outlook

That thud you hear is the sound of Eli Lilly & Co.'s stock.

Facing future competition from generic drugmakers, Lilly disappointed investors today with its update on new medicines. The Indianapolis-based company faces the loss of patent protection in the next few years on products that make up 40 percent of sales. Lilly's shares fell as much as 5 percent, which is a lot for a company with a $40 billion market cap. The stock fell $1.54 to close at $35.02.

Lilly says it will introduce two new medicines a year beginning in 2013. Long term, that's a good thing, but the company will have to invest to keep bringing new products to market. That timing happens to come when revenue begins to take a dive.

New medicines "remain several years away from the market, leaving the company in the difficult position of needing to heavily invest in its next wave of product opportunities at a time of significant erosion," JPMorgan analyst Chris Schott says in a note to clients.

Facing their own patent issues, Lilly's biggest competitors snapped up other large pharma companies this year to solve their pipeline problems. Pfizer Inc. took over Wyeth, and Merck & Co. will soon close on the acquisition of Schering-Plough Corp.

Lilly CEO John C. Lechleiter made clear today that he has no intention of finding his own dance partner. Lechleiter, who has made statements about his company's independence in the past, seems resigned to do it his way rather than follow the lead of his rivals.

"We see a divergence of strategies among our peers to deal with these challenges, including the wave of consolidation this year," Lechleiter says in a statement. "Many companies are seeking to lower risk by reducing their focus on innovative medicines. This is not our path. Our strategy is to create value by accelerating the flow of innovative new medicines that provide improved outcomes for individual patients. We aim to discover, develop, or acquire innovative new therapies—medicines that make a real difference for patients and deliver clear value for payers."

Looks like he's willing to take his lumps in the short term.