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Eli Lilly & Co. (LLY), the pharmaceutical company behind antidepressant drug Prozac and erectile dysfunction treatment Cialis, reported strong sales in the fourth quarter, as expected. The company swung to a profit of $915.4 million, or 83 cents per share. That compared with a loss of $3.63 billion, or $3.31 per share, in the same period last year on charges related to its ImClone acquisition. Excluding special items, Lilly earned 91 cents share, inline with analyst estimates.The company posted solid, double-digit sales growth of 14%, selling $5.93 billion and nicely beating estimates of $5.64 billion. But this figure may be slightly misleading as without the impact of foreign exchange, sales would have risen only 11%. Still, Lilly's top-seller, the antipsychotic Zyprexa, jumped a formidable 19% in the quarter, and sales of cancer therapy Alimta shot up 64%. Most of Lilly's other blockbuster drugs also posted double-digit sales growth, including painkiller Cymbalta, Cialis and diabetes med Humalog.

"Lilly's financial results in the fourth quarter completed a year of strong operational performance, highlighted by volume-based revenue gains, improved gross margins and quality earnings growth," said John Lechleiter, Lilly's chairman and CEO. "In 2010, we are well-positioned, through our new operating structure and development center of excellence, to maximize the value of our portfolio of products worldwide and advance the promising medicines currently in our clinical pipeline."

But despite management's optimism, and even as Zyprexa sales continue to grow, overcoming competition from Johnson & Johsnon's (JNJ) Risperdal, Lilly is about to lose patent protection on the antipsychotic beginning 2011. And investors are concerned about the lost revenue -- $4.9 billion in 2009 -- when faced with generic competition. They are not yet convinced that Lilly will be able to replace the lost revenue with its current pipeline. It sure hasn't done it so far.

Sales of Lilly's blood-thinner Effient, once billed as a competitor to Bristol-Myers Squibb's (BMY) Plavix, slid to $3.8 million worldwide in the fourth quarter after selling $22.6 million in its third-quarter debut. Effient was going to be the drugmaker's next blockbuster, helping to replace some of the upcoming revenue losses. And for a company claiming to be building an oncology powerhouse, a 25% decline in sales of cancer drug Gemzar isn't helping its cause.

Meanwhile, sales of Byetta, Lilly's other diabetes drug, grew 9%, and could get a further boost should its once-weekly version be approved by the FDA, a likely scenario following a recent approval of a similar drug from Novo Nordisk (NVO). But Lilly's bone drug Forteo, whose sales also increased 9%, could soon face competition if Amgen's (AMGN) denosumab is approved.

Lilly also announced it had reached an agreement with Bristol to co-develop a promising experimental lung cancer drug that Lilly acquired through its purchase of ImClone.

Lilly reaffirmed its earnings guidance for this year in the range of $4.65 to $4.85 per share, excluding special items. Analysts' average forecast is $4.73 per share. Lilly expects revenue to grow in the high single-digit range.

Over the past year, LLY shares significantly underperformed their peers and the general market. Shares were initially higher in premarket trading after the announcement, but the longer the conference call went, the worse they performed. As of noon, LLY shares were down over 2%. It seems Lilly couldn't sell its plan to investors.

Lilly has avoided large acquisitions and mergers, preferring small and mid-sized deals. Perhaps next, as some analysts now speculate, it could find itself on the other side of such a deal.

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