Lechleiter: It’s morning at Eli Lilly

The numbers were bad—as expected—when Eli Lilly and Co. announced its third-quarter financial results.

But Lilly CEO John Lechleiter kicked off the company’s quarterly conference call with investors and analysts by declaring an end to the “unprecedented challenge” that Lilly lived through the past four years.

Internally, Lilly called this period Years YZ—when the company watched the patents on four of its bestselling products expire. That has meant nearly $9.5 billion in annual revenue has evaporated as consumers switched to cheaper generic versions of those medicines, which include the antipsychotic Zyprexa, the antidepressant Cymbalta, the cancer drug Gemzar and the osteoporosis drug Evista.

Lilly has said for most of the past decade that its pipeline would produce new drugs to make up for the lost sales. But not until this year has the company started to launch new drugs in sufficient numbers—and with sufficient sales potential—to make a dent in the lost revenue.

Lechleiter said: “we begin to turn the corner with multiple new product launches over the course of this year and next, having withstood the profound economic impact of patent expirations for four of our largest products.”

The 2014 version of Lilly looks quite a bit different from the one Lechleiter inherited when he became CEO in 2008.

Lilly posted 2008 revenue of $20.4 billion, which then peaked at $24.3 billion 2011—the year Zyprexa’s U.S. and European patents expired.

But this year, Lilly will pull in revenue of just $19.7 billion, according to the estimates of Wall Street analysts. That’s down more than 14 percent from 2013 and more than 18 percent from 2011. It will take years for Lilly to get back to its 2011 peak.

During that same time period, Lilly eliminated more than 5,500 jobs. The pain has been especially acute in the Indianapolis area, where Lilly employs nearly 2,000 fewer local workers than it did in early 2008. It had 10,735 Indianapolis-area workers as of Sept. 30, with another 1,030 around the state.

With average compensation—including wages and benefits—of $143,000 per Hoosier employee, Lilly’s shrinking workforce is a negative for the local economy.

Some of those jobs have moved over to other companies but stayed in Indiana, as when Lilly sold off its Greenfield Laboratories to New Jersey-based Covance Inc. It did something similar in Lafayette, selling its Tippecanoe manufacturing facility to Germany-based Evonik Industries AG.

“Leading up to and through this period of patent expirations, our management team made disciplined choices so that we could invest to drive growth in key brands, geographies and businesses and replenish and advance our pipeline,” Lechleiter said. “We stayed focused on executing our strategy, and I'm proud of the results we've delivered to date.”

Lechleiter, a scientist by training, rejected two major demands from investors and analysts: he refused to do a major merger with another large pharmaceutical company, in large part because the record of other pharmaceutical megamergers has been negative for research and development. Also, Lechleiter kept investing in R&D, in spite of investors’ calls to cut it.

In 2013, Lilly spent 23.9 percent of its sales on R&D—the highest ratio among all major pharmaceutical companies, according to the Wall Street Journal.

“We increased our R&D spending as a percentage of revenue over this period. Again, investors have said to us and to other companies, ‘You’re spending too much on R&D, you’ve not been productive with it, you need to slash R&D and return that cash to shareholders.’ We think that’s absolutely the worst thing you can do in an industry where R&D is the lifeblood and where these investments are long term in nature,” Lechleiter said in an interview with the Wall Street Journal published Oct. 19.

Lilly stock price has risen 33 percent this year—best among large pharma companies and five times faster than the broader markets. But Lilly remains a controversial stock among analysts.

According to Thomson Reuters, 12 analysts rate Lilly’s stock as hold or underperform—categories which are typically interpreted as a suggestion to sell. Nine analysts rate Lilly’s stock as either a buy or strong buy.

The bear case highlights that the new drugs Lilly is bringing to market are second and third entrants into their respective markets, which will keep their sales modest.

“We Remain Cautious, Would Take Profits Here,” is how BMO Capital Markets analyst Alex Arfaei titled his Oct. 23 note to investors on Lilly.

But the bull case is that Lilly’s new drugs are relatively low-risk, meaning that Lilly is sure to get some revenue for them. Then in a couple years, Lilly will start releasing human trial results of drugs that could be home runs: solanezumab for Alzheimer’s disease and evacetrapib, which is part of a new class of cholesterol drugs. Lilly is also working on a new drug, called a CGRP inhibitor, that could be an effective treatment for migraine headaches.

Bernstein Research analyst Dr. Tim Anderson, referring to Lilly by its ticker symbol, wrote in Oct. 23 note investors, “While still off in the distance a bit, the approach of evacetrapib data and solanezumab data could start to get investors excited again about the ‘what if they work after all’ scenario–these two drugs could be very large in size and transformative for LLY's financials.”