Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

It's much easier to tell a story of unlimited promise and sales growth than to deliver on it. 

Eli Lilly & Co. has been aggressively talking up its revamped drug pipeline. Investors who bought into this got a rude awakening Friday, when the company disclosed that the FDA had declined to approve baricitinib, an expected blockbuster arthritis treatment. Many investors assumed baricitinib would hit the market this year. But the FDA has asked for data on the drug's safety and optimal dose, meaning it may not be approved for years. 

Lilly is the most highly valued pharma or big biotech firm on the market, based on this year's earnings expectations. This blow from the FDA emphasizes how much projection is built into the stock, and the extent to which investors are underestimating its risks. 

Doing Alright
Eli Lilly's shares took a blow from a negative FDA decision, but are still doing just fine in 2017
Source: Bloomberg

Shares fell about 4 percent on Monday (after a market holiday on Friday). But that left Lilly's industry-leading valuation firmly intact:

Despite several setbacks, Eli Lilly's shares are still expensive relative to peers
Source: Bloomberg
Note: Price to earnings ratio, blended 12-month-forward earnings estimates

Investors are giving Lilly too much benefit of the doubt. The company still depends on a set of older drugs facing competitive pressure, and will for some time to come.

Humalog, Cialis, and Alimta accounted for more than a third of Lilly's pharmaceutical revenue last year. The company is offering huge discounts on Humalog as it fights to maintain market share in a crowded insulin market. Cialis could face generic competition as soon as next year. And key Alimta patents are being challenged. Analysts expect these drugs to lose $3 billion in total annual sales by 2020, and there is substantial downside potential for those estimates. 

Fade Out
Eli Lilly's three biggest products are set to slow and decline over the next few years
Source: Bloomberg

Lilly needs new medicines to succeed in order to make up for those declines. Baricitinib was supposed to do exactly that. But now the scenarios for the drug range from merely bad -- there's a chance Lilly could work something out with the FDA and resubmit the drug for approval in relatively short order -- to pretty disastrous.

Analysts from Morgan Stanley and BMO say the drug may only get initial U.S. approval in 2020, rather than hitting the $1 billion in annual sales analysts expected that year as recently as Friday. The delay will give competing drugs years to establish a commercial foothold in the U.S. Baracitinib is approved in Europe, but a large majority of sales were expected to come from the U.S. 

It's not the first pipeline blow for Lilly; a highly anticipated Alzheimer's drug failed outright in a Phase 3 study in late 2016, removing another potential blockbuster. 

These failures put even more pressure on Lilly's newer diabetes medicines, Trulicity and Jardiance, both approved in 2014. Both are growing, but are in competitive classes. If these medicines don't keep growing, then Lilly's already endangered target of 5 percent annual revenue growth through 2020 may be unattainable. 

Up next in the vaunted pipeline? A breast-cancer drug that may be third to market behind drugs from Pfizer Inc. and Novartis AG, and a risky migraine drug that will likely face multiple competitors if it ever gets to market.   

Lilly's sky-high valuation rests on the promise of its new and incoming drugs. As bad news keeps mounting for these medicines, that foundation looks more and more precarious.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Max Nisen in New York at

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Mark Gongloff at