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Eli Lilly's Pipeline Springs a Leak, but Don't Worry

NEW YORK ( TheStreet) -- Never one to shy away from a contrarian position, back in October I rushed to the defense of Eli Lilly (LLY - Get Report) following some harsh words and several downgrades from the Street. Investors had many concerns.

Chief among them were worries about Lilly's pipeline of drugs in development and production. Although I wasn't necessarily Lilly's biggest fan at the time, I didn't agree with the idea the stock, which then traded at around $49 per share, would see the 20% downside suggested by Jefferies analyst Jeffrey Holford, who cut his price target to $40.

Holford cited pipeline fears, which have been a known issue with Lilly for some time. But I believed this was already priced into the stock. Lilly had retraced 15% in the couple of months before Holford's note.

Fast-forward two months later: The Food and Drug Administration (FDA) announced it approved generic versions of Cymbalta, Lilly's blockbuster anti-depressant drug that accounts for more than 25% of Lilly's revenue. Even more interesting: Unlike most generic approvals, FDA announced that it had, in fact, granted not one, but six approvals to, among others, Teva Pharmaceuticals (TEVA).

But here's the thing -- the market didn't flinch. Everyone knew the so-called "patent cliff" was coming. Lilly is still trading at around $49 per share, as of the Monday close -- the same price from back in October when I told you not to worry. It seems that I was right the Street had already priced in the competition from generics.

Having said that, Lilly is still not out of the woods yet. These new generic rivals must still compete on price.  I believe it is safe to say their prices will be much cheaper than Lilly's. Even so, it will take several quarters before Lilly will feel the impact on its consolidated results.

Here's another thing that no one is talking about: the fact that the FDA issued six approvals may actually play into Lilly's favor. Not only must these generics compete with Lilly's branded drug, but they must also compete with each other on price. The production of these new generics will be based on the profits these companies are able to produce.

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