Updated from 12:49 p.m. EDTEli 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
With Lilly shares trading at a 35% premium to peers because of its strong pipeline, the company could be priced to perfection at a time when it faces risks. Earlier in the year, generic drugmakers launched a challenge on Lilly's patent for Zyprexa, hoping to introduce cheaper versions before the company's exclusive rights expire in 2011. A ruling is expected this summer. But with Thursday's warning, Krensavage believes that even a favorable ruling on Zyprexa has limited upside. If Lilly wins, the company's earnings will remain unchanged, but if the company loses, estimates will have to come down again. "Based on earnings including charges, Lilly shares are trading at about 23 times estimated 2004 earnings, compared to a group average of 17," he said. "While a Zyprexa court ruling likely would expand Lilly's premium, decreasing quality of earnings suggests such a gain would prove short-lived." In reaction to the downgrade, shares of Lilly fell $1.49 to $63.25, after also declining Thursday on its earnings report. Second-quarter earnings results from the major drugmakers have been mixed. Industry No. 1 Pfizer beat analysts forecasts by a penny Wednesday, as its stable of drugs posted broad-based gains. Merck ( MRK) met expectations, while profit and revenue slipped a bit. Schering-Plough ( SGP) fell short of expectations in posting a tiny loss. Wyeth ( WYE) surpassed forecasts as revenue rose 13%. Switzerland-based Novartis ( NVS) easily beat consensus estimates as net income rose 19%. Bristol-Myers Squibb reports July 29.