Analysts are looking forward to Eli Lilly's ( LLY) earnings presentation Wednesday with all the anticipation of expectant parents.

They are waiting just as they have been waiting with increasing discomfort for months for news of a verdict in a patent challenge to Lilly's antipsychotic drug Zyprexa in the U.S. Even though many believe Lilly will win the case, the uncertainty appears to be the biggest obstacle between good reviews and rave reviews for the company's prospects. The difference between a win and a loss in the Zyprexa case is about six years of patent protection.

"The biggest overhang for the stock remains the early generic threat to Zyprexa," said C.J. Sylvester, of Banc of America Securities, in a recent report to clients. "We expect a favorable court decision within the next several weeks ... Yes, there's risk. But this is the one Big Pharma stock you have to own long-term."

If Lilly is to win a Zyprexa victory, Sylvester, who has a buy rating, predicts 2005 earnings per share of $3.06, compared to a Thomson First Call consensus of $3.10. With a Zyprexa defeat, the company's 2005 EPS could slide to $2.55 to $2.65, Sylvester says.

There are a lot of Lilly watchers who might raise their stock rating if the company wins because they believe Lilly has some of the best prospects among Big Pharma companies. Until then, however, the hold ratings (13) outnumber the buy recommendations (11), according to Thomson First Call. Three analysts advocate selling the stock.

For the fourth quarter of 2004, the consensus view is a profit of $802.6 million, or 74 cents a share, on sales of $3.58 billion. That compares to a profit of $747.2 million, or 69 cents a share, on revenue of $3.47 billion for the same period in 2003.

For fiscal 2004, analysts are predicting earnings of $3.06 billion, or $2.81 per share, on revenue of $13.79 billion, vs. a 2003 fiscal year profit of $2.56 billion, or $2.37 a share, on revenue of $12.58 billion.

Zyprexa continues to have an overwhelming effect on Lilly. In 2003, it produced $4.28 billion in sales, or 34% of corporate revenue. (Sylvester said the patent challenge would affect $1.9 billion of that revenue).

And despite a 16% growth rate in worldwide sales between 2002 and 2003, Zyprexa's U.S. sales have been taking a hit from competitors. Sylvester calls this impact "somewhat dramatic." He predicts Zyprexa's worldwide sales will peak at $4.42 billion in 2004, then slip 5% or 6% in 2005 and 2006, assuming Lilly wins the patent case. (He doesn't own shares; his firm has had an investment banking relationship within the last 12 months).

The erosion of U.S.-based Zyprexa revenue is one reason why Jamie Rubin of Morgan Stanley has an equal weight rating on Lilly's stock. She has a 12-month price target of $60 -- Sylvester's target is $67 -- assuming that U.S. Zyprexa sales keep sliding during the next three years and also assuming that Lilly wins the Zyprexa patent challenge by Ivax ( IVX), Teva Pharmaceutical Industries ( TEVA) and Dr. Reddy's Laboratories ( RDY).

Rubin likes the near-term growth prospects of Cymbalta, an antidepressant that reached the market last year and is also approved for nerve pain associated with diabetes. But she is "less optimistic" about Strattera, a drug for attention deficit/hyperactivity disorder, whose sales are still growing but whose future is uncertain "given physician concerns about the slow onset of activity and the drug's efficacy relative to competing therapies."

Last month, Lilly added a stronger warning to the drug's label about possible liver problems based on studies that, Lilly said, showed two cases of "severe liver injury" among the 2 million people who had received the drug. (She doesn't own shares; her firm has had an investment banking relationship within the last 12 months).

Rubin said she'll have to revise her estimates downward if Lilly loses the Zyprexa case or if there are setbacks in the development of experimental compounds, most notably exenatide for diabetes and prasugrel, which prevents blood platelets from clogging arteries. The FDA is expected to rule on exenatide in late April. Lilly will probably file its prasugrel application with the FDA in late 2006 or 2007.

Sylvester said the prasugrel R&D strategy has both high risk and high reward because key clinical trials are comparing it to Plavix, which is made by Sanofi-Aventis ( SNY) and Bristol-Myers Squibb. ( BMY)

A midstage clinical test showed no significant difference in safety -- as measured by bleeding problems -- between patients receiving both drugs at 30 days, Sylvester said. But the clincher will be late-stage testing involving 13,000 patients who still are being enrolled. If Lilly prevails, prasugrel "could be a multibillion drug for the next decade," Sylvester said.

Another hot prospect, he added, is ruboxistaurin for nerve pain associated with diabetes. Lilly expects to seek FDA approval in the second half of 2005.

Assuming Lilly wins the Zyprexa case, the company would have "no significant patent risk until the next decade," Sylvester said. If you take the three experimental drugs plus three newer drugs like Cymbalta, Lilly could be well-stocked for the rest of the decade. "No single Big Pharma company will be able to add a cumulative estimated $16 billion in incremental revenue between now and 2009," he said. "No company has the product flow, and even if they did, it would likely be replacing revenues lost to generics."

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