UPDATE 3-Lilly's drug, animal health sales disappoint

Wed Apr 24, 2013 11:24am EDT

* Lower tax rate, cost cuts help profit beat estimates

* Lilly pins hopes on new products

* Shares down 2.8 percent

By Ransdell Pierson

April 24 (Reuters) - Eli Lilly and Co posted weaker-than-expected quarterly sales of its veterinary drugs and treatments for diabetes and lung cancer as it awaits new promising products in its pipeline.

Shares of the company fell nearly 3 percent.

Lilly's medicines for pets and livestock, which typically bolster results, flagged in the first quarter. Sales rose only 2 percent to $499 million, compared with an 18 percent jump in the prior period.

Company officials said livestock products had run into a cyclical slump globally, but that unit, called Elanco, should post robust results for the full year.

ISI Group analyst Mark Schoenebaum said the weakness was in line with the rest of the industry.

In addition, sales of Lilly's Evista osteoporosis drug fell 6 percent to $241 million in the quarter, while sales of its Humulin insulin edged up only 1 percent to $312 million. Sales of Alimta, a lung cancer drug that has grown by leaps and bounds in recent years but is now facing increasing competition, rose 2 percent to $617 million.

Demand for antidepressant Cymbalta, by far the company's biggest product, offset the weakness of other medicines. Its sales surged 19 percent to $1.33 billion.

Cymbalta goes generic in December, and Evista loses U.S. patent protection three months later. With those twin setbacks, analysts forecast a 28 percent drop in Lilly's earnings in 2014.

Even so, Lilly shares at Tuesday's close were up 20 percent this year on hopes that potentially lucrative new drugs will be approved and revive earnings starting in 2015. They include ramucirumab, which is being tested for stomach and breast cancer, and diabetes treatments empaglifozin and dulagludide.

"Beyond the quarter, Lilly's pipeline clearly remains the core focus of the story," said JPMorgan analyst Chris Schott.

FAVORABLE TAX RATE

Lilly said first-quarter net income rose to $1.55 billion, or $1.42 per share, from $1.01 billion, or 91 cents per share, a year earlier.

Excluding special items such as income of $529 million from the transfer of its overseas rights to a diabetes drug, Lilly earned $1.14 per share. Analysts on average were expecting $1.05.

Lilly spokesman Mark Taylor said some analysts apparently did not account for a sharply lower tax rate from the reinstatement earlier this year of a federal tax credit for research and development.

"The benefit from the tax credit was in our 2013 guidance," said Taylor. He noted that the company's effective tax rate in the quarter was 15.5 percent, compared with almost 24.5 percent a year earlier.

Cost cuts also buoyed earnings, as Lilly chopped marketing and administrative expenses by 11 percent, to $1.65 billion.

Revenue was flat at $5.60 billion, coming in below Wall Street expectations of $5.67 billion. It would have risen 1 percent if not for the stronger dollar, which hurts the value of sales in overseas markets.

A weaker yen, which has hurt sales of other drugmakers and industries in the quarter, crimped Lilly sales in Japan by 13 percent, Leerink Swann analyst Seamus Fernandez said.

The declining currency may reduce Lilly's sales in Japan by $300 million to $400 million this year, the company said.

Lilly said it still expected earnings to increase this year by as much as 17 percent to between $3.82 and $3.97 per share, compared with a 23 percent drop in 2012.

The company forecast a return to profit growth as plunging sales of its Zyprexa schizophrenia drug, which lost patent protection in late 2011, level off during the rest of the year, and sales of other drugs grow.

In the first quarter, Zyprexa sales fell 49 percent to $285 million.

Lilly shares were down 2.8 percent at $56.72 in morning trading.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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