Updated from 12:49 p.m. EDT

Eli Lilly ( LLY) shares fell 2.3% on Friday as Raymond James downgraded the company to underperform from market perform while raising questions about the quality of the drugmaker's earnings.

On Thursday, Lilly issued an earnings warning along with second-quarter results , prompting Michael Krensavage, analyst at Raymond James, to downgrade the company. Krensavage believes the company's core business is faltering, noting that a 17% decline in new U.S. prescriptions for Zyprexa has forced the company to get creative with its accounting to offset the difference.

" Lilly reported second-quarter earnings that depict a company increasingly desperate to overcome declining U.S. demand for its largest-selling medicine, the schizophrenia treatment Zyprexa," said the analyst in his downgrade. "Zyprexa's estimated 2004 sales of $4.4 billion would represent about 31% of estimated revenue of $14 billion. It probably accounts for half the company's profits." (Raymond James does and seeks to do business with the companies covered in its research reports.)

Yesterday, Lilly warned that gross margins on Zyprexa would come in near 77.2% in 2004, down from earlier guidance of 78.7%. With so much at stake, Krensavage questioned whether Lilly is turning to rebates and discounts to boost use of the expensive drug, which faces stiff competition from Bristol-Meyers Squibb's ( BMY) Abilify and Pfizer's ( PFE) Geodon.

Ultimately, the analyst said Lilly is turning to a combination of accounting and cost-cutting to offset weakness in its best-selling product.

"Lilly hopes non-operating items will help it overcome the shortfall, allowing it to maintain its per-share earnings target, a range of $1.80 to $2.85," said Krensavage, noting the company raised guidance for "other income," adding between 5 cents and 8 cents a share to earnings. "Some of that benefit would stem from Lilly's plans to capitalize, rather than expense, interest charges."

If you liked this article you might like

Check the Math on Air Fares

Check the Math on Air Fares

US Airways Circles as Pilots Bicker

US Airways Circles as Pilots Bicker

Departure of Delta's Song Unit Boss Stirs Questions

Departure of Delta's Song Unit Boss Stirs Questions

Boeing Boosts Jet Deliveries

Boeing Boosts Jet Deliveries

CEO Gilmartin Will Survive Recall

CEO Gilmartin Will Survive Recall