Stop us if you've heard this one before: As Eli Lilly ( LLY) prepares to issue another financial report, analysts are wondering if pipeline prospects outweigh questions about current products.

Alas, this balancing act is becoming an uncomfortable quarterly event for Lilly, whose stock has been cruising closer to a 52-week low of $50.34 than the high of $60.98. The shares closed at $52.62 Friday.

Analysts polled by Thomson First Call expect earnings of $772.3 million, or 71 cents a share, on revenue of $3.62 billion for the third-quarter report that will be unveiled Oct. 20. For the same period last year, Lilly served up a profit of $755.2 million, or 69 cents, on revenue of $3.28 billion.

Wall Street is becoming increasingly neutral. Hold ratings now outnumber buy recommendations by 16 to 10, says Thomson First Call. Three months ago, buy and hold recommendations were evenly matched.

Support is softening even though analysts say Lilly has less generic-drug exposure than its Big Pharma peers, some strong new products and an attractive research and development pipeline. That's because at the same time, it's seeing greater potential risk to its usual source of anxiety -- falling U.S. prescriptions and revenue for Zyprexa, the schizophrenia drug that accounted for 30% of sales in the first half.

Risk Profile

Although Zyprexa has survived a patent challenge, it has been in a long-term slide in the U.S. as competing drugs with fewer side effects erode its market share. In the second quarter, worldwide sales dropped 10% to $1.1 billion. U.S. sales sank 21% vs. the same period last year, and foreign sales rose 6%.

Lilly has predicted "a slight decline" in worldwide sales for 2005. The company has also said that the U.S. growth rate in the second half should improve vs. the same period last year and that full-year foreign sales should grow "in the single digits" vs. 2004.

A recent federally sponsored study said Zyprexa is the most effective among several peers, but it also causes the most side effects.

"The largest risk in the Lilly story remains further Zyprexa market share erosion, particularly in Europe," says Banc of America's Chris Schott in a recent research report. "The good news is that the worst appears to be over for Zyprexa in the U.S. market." Schott recommends buying the stock. He doesn't own shares, but his firm has had an investment banking relationship with Lilly.

Jon LeCroy of Natexis Bleichroeder doubts U.S prescriptions will stabilize this year. He says the results of the study, published last month in The New England Journal of Medicine, won't improve Zyprexa's market share. He doesn't own shares, and his firm doesn't have an investment banking relationship.

LeCroy told clients in a recent research report that physicians may continue to be spooked about litigation involving Zyprexa. In June, Lilly set aside $690 million to settle 75% of some 8,000 claims alleging that the company failed to adequately warn patients about the drug's side effects. Lilly said the claims had no merit, but it decided to settle in the "best interests" of patients, their doctors and the company.

Needing a Spark

Another growing concern is Strattera, a treatment for attention deficit hyperactivity disorder. Early on, Strattera, which was approved for the U.S. market in 2002, attracted a lot of attention because it isn't a stimulant like other ADHD drugs. But it also isn't giving a jolt to revenue like Lilly or analysts had expected.

Both new prescriptions and total prescriptions have been slipping. Meanwhile, competitors such as Adderall XR from Shire Pharmaceuticals ( SHPGY) and Concerta from Johnson & Johnson ( JNJ) are widening their leads over Strattera, according to the medical data firm IMS Health.

Analysts say sales have been hurt by the toughening of Strattera's label to reflect Food and Drug Administration concerns about potential liver damage. The FDA requested the stronger label after two patients experienced liver damage out of more than 2 million who've taken the drug.

More recently, the agency told Lilly to place a "black box" warning -- the strictest FDA alert -- on the drug's label, referring to reports of suicidal thinking among children and adolescents. The FDA also told Lilly to develop a medication guide for patients and caregivers. It's too early to determine the impact of the latest FDA action on Strattera, but sales could be hurt.

The FDA acted after reviewing 12 clinical trials involving more than 2,200 patients who were given Strattera or a placebo. The average risk of suicidal thinking was four per 1,000 Strattera patients vs. zero for those treated with a placebo.

Another drug sparking concern among some analysts is the antidepressant Cymbalta, which was launched in the U.S. in August 2004 and in Europe during the first quarter of 2005. The drug "has gained almost no new U.S. prescription share since the second week of July," says Richard T. Evans of Sanford C. Bernstein in an Oct. 6 research report.

"Cymbalta is very much a third- or fourth-line option" among high-prescribing physicians interviewed by Evans. Although this isn't uncharacteristic of newer products, Evans says Lilly needs to improve its marketing message to make Cymbalta a first choice. He says doctors are expressing confusion, as the Lilly sales force promotes Cymbalta as a treatment for depression and for nerve pain associated with diabetes.

"Of greatest concern, Cymbalta has little traction with generalists, who are critical to the goal of first-line use," says Evans, who has a market-perform rating on Lilly. He doesn't own shares, but his firm has had a noninvestment banking relationship with the company.

Evans advocates more promotional spending for Cymbalta, which he calls "the key to Lilly's mid- to long-term growth." He expects the drug to produce $2.4 billion in sales by 2009, or 13% of corporate revenue.

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