Updated from 8:12 a.m. EDT

Eli Lilly

(LLY) - Get Report

is singing the manufacturing blues. Investors aren't clapping.

The Indianapolis-based drug maker reported in-line second quarter results but said it hasn't resolved previously disclosed manufacturing problems that could delay the approval of several new drugs crucial to its turnaround.

Lilly shares are off $2.60, or 5%, to $48.30 in recent Thursday trading, following a 90-minute conference call that appeared to do did little or nothing to assuage skeptical Wall Street analysts and fund managers. Lilly shares were off about 13% earlier in the day.

The Indianapolis-based drug maker reported lower second-quarter salesand profits as expected, hurt once again by slumping sales of theantidepressant Prozac, which is losing the battle against genericcompetition.

But more importantly, Lilly warned that it is still in the process ofworking with the Food and Drug Administration on resolvingmanufacturing problems at eight of its drug-making plants. While the plantscould be ready for FDA reinspection in early 2003, Lilly warned thatapproval for three drugs -- a new formulation of the already-approvedschizophrenia treatment Zyprexa, Cymbalta for depression and theosteoporosis drug Forteo -- could be delayed.

Two additional products -- Strattera for attention deficit andhyperactivity disorder, and the impotence medicine Cialis -- might not beimpacted by the manufacturing problems, but could nonetheless be delayedbecause the FDA might not approve any Lilly drugs until all issues areresolved, the company said. Shares of biotech firm

Icos

>

(ICOS)

, which is co-developing Cialis, were off $1.59, or 9%, to $15.22.

As a result, Lilly took 2003 financial guidance completely off the table, although it said it's still hopeful that new drugs will be launched, which will allow the company to once again deliver earnings growth. Previously, the company had said it expected "teens" earnings growth for 2003.

Wall Street analysts are expecting Lilly to earn $2.98 a share in 2003,compared with $2.61 this year, according to Thomson Financial/First Call.But those 2003 estimates could be cut because of the unresolvedmanufacturing issues. The company earned $2.76 a share in 2001.

The content of Lilly's conference call didn't differ much from its earnings press release, but the tone of the call didn't inspire much confidence. CEO Sidney Taurel expressed his "disappointment" several times for the company's inability to resolve manufacturing problems quickly, and he couldn't predict with any greater accuracy when it would all be resolved.

The FDA first dinged Lilly for problems at its plants in late 2001, following up with additional complaints in March. Eight plants currently under the microscope are involved in the manufacture of drugs that are awaiting approval and launch.

To put an even greater scare into Wall Street, Lilly executives even brought up the possibility that it may be forced to enter into a consent decree with the FDA over its manufacturing procedures. The last drug maker to go that route,

Schering-Plough

(SGP)

, was forced to pay $500 million to the FDA. Lilly executives insisted that the FDA hasn't discussed the possibility of a consent decree with them, yet company executives seemed compelled to bring up the subject unprovoked.

Unlike most of Big Pharma, Lilly has a strong pipeline of drugs awaiting launch, but that doesn't matter much, at least in the short term, if manufacturing woes keep the drugs off the market.

To get a sense of just how bad it might get, Deutsche Bank Securities drug analyst Barbara Ryan, on the conference call, said she is contemplating the possibility that none of the five drugs Lilly expects to launch in 2003 actually get there. If that happens, she said, her forecast for 2003 earnings falls to $2.75 per share. While that represents growth over 2002, it's still below Lilly's 2001 earnings of $2.76 per share. Ryan rates Lilly a buy and her firm doesn't have a banking relationship with the company.

Getting back to the second-quarter results, Lilly said net income fell20% to $658.5 million, or 61 cents a share, matching Wall Street estimates.

Total revenue fell 9% to $2.78 billion, as Prozac sales plunged 72% to$194.9 million. Sales of Zyprexa grew 23% to $906.8 million.

But Lilly's new sepsis drug, Xigris, continues to disappoint, totalingjust $22.6 million in the quarter, compared with $22 million in the firstquarter. Xigris was deemed a blockbuster drug by the company and WallStreet analysts when it was launched late last year, but it now looks as ifit will struggle to even generate $100 million in 2002 sales -- anotherreason Lilly is hurting.

On the conference call, Lilly executives said they are taking steps to improve the drug's performance, including boosting the number of visits made to doctors by its sales force. But at the same time, the company said it is aware of an upcoming editorial in the New England Journal of Medicine that will knock Xigris. Lilly says the negative issues raised in the editorial have already been raised and found to be baseless.

If Lilly can't accelerate Xigris's sales growth, it will likely further downgrade 2003 earnings, analysts say.

As for guidance, Lilly said it expects third-quarter earnings in therange of 67-69 cents, which is within existing Wall Street expectations.For the full-year 2002, the drugmaker has narrowed earnings guidance to$2.60 to $2.62 per share, from $2.60 to $2.65 per share.