Eli Lilly & Co. (LLY) is entering a challenging period, brought about by recent pipeline disappointments, most notably uncertainty surrounding antiplatelet drug, Prasugrel. Although we believe the underlying fundamentals of the company remain solid, the recent pipeline setbacks and the high price of the ImClone (IMCL) acquisition will likely limit the upside to the stock.

We also believe that sales of Zyprexa will begin to decline later in 2008 as generic Risperdal eats into market share. We see little movement in the stock due to these issues. For 2008 Lilly expects to grow EPS to $3.97 to $4.02 or 11.8% to 13.2% over 2007. While we've been mildly surprised by the recent performance, for the reasons that we've discussed above, we don't believe the stock will outperform.

While we model EPS (ex-ImClone) to grow at a three-year CAGR of about 10% from 2007 through 2010, we then expect EPS growth to turn slightly negative into 2011 as Zyprexa loses patent protection. Based on the stock trading at a discount to industry peers and the fact that key drugs continue to post solid growth we do not believe there's much downside risk to holding the name. We rate the stock a Hold with a $35 price target, representing 8.8x our 2008 EPS estimate of $4.00.