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UPDATE 2-Lilly tops forecast on cost cuts, sales fall short

* Q3 EPS $0.21 vs. forecast of $0.15/shr

* Q3 sales $5.66 bln, shy of $5.77 bln forecast

* Marketing, selling, administrative expenses flat in qtr

* Ups 2010 view, cites lower healthcare reform costs

* Shares little changed in premarket trading (Adds revised 2010 profit forecast, quarterly sales, byline)

By Ransdell Pierson

NEW YORK, Oct 21 (Reuters) - Eli Lilly and Co LLY.N on Thursday reported better-than-expected quarterly earnings, helped by tight cost controls, but sales fell short of Wall Street forecasts.

The Indianapolis drugmaker earned $1.3 billion, or $1.18 per share. That compared with $942 million, or 86 cents per share in the year-earlier period, when Lilly took a number of special charges.

Excluding special items, Lilly earned $1.21 per share. Analysts on average expected $1.15 per share, according to Thomson Reuters I/B/E/S.

Lilly said global revenue rose 2 percent to $5.65 billion, due to to higher prices, coming in below Wall Street expectations of $5.77 billion.

“Overall a reasonable quarter for the company ... yet for many investors it is the longer-term financial outlook that matters more, and here Lilly still looks challenged,” Sanford Bernstein analyst Tim Anderson said in a research note.

JP Morgan analyst Chris Schott said the earnings beat was due to lower-than-expected expenses, while disappointing sales were due mainly to decreased stocking by U.S. wholesalers.

Based on earnings trends so far this year and lower estimates of costs of U.S. healthcare reforms, Lilly raised its full-year 2010 earnings forecast, excluding special items, to between $4.65 and $4.75 per share. In July, it had forecast $4.50 to $4.65 per share. The new forecast reflects profit growth of 5.2 to 7.5 percent.

But then things get tougher. Wall Street expects Lilly earnings to fall steadily from next year to 2014, when the company loses patent protection on many of its best-selling medicines.

The real pain begins in October 2011, when the U.S. patent lapses on its biggest product -- the $5 billion-a-year Zyprexa schizophrenia treatment. Its No. 2 product, $3.5 billion a year Cymbalta, an anti-depressant, faces generics in mid-2013 and its Evista osteoporosis treatment will also face cheaper copycats in the next few years.

Even as Lilly girds for generic competition, some of its most promising medicines have fallen by the wayside or suffered regulatory setbacks.

Shares of the drugmaker fell almost 4 percent on Wednesday after U.S. regulators spurned Bydureon, a long-acting form of its Byetta treatment for Type II diabetes, until more data on its heart-safety are provided. That could delay introduction of the potential blockbuster by 18 months, or threaten its approval.

Later on Wednesday, Lilly said another of its drugs failed to improve Type I diabetes in a late-stage trial.

Third-quarter Zyprexa sales slipped 1 percent in the quarter to $1.21 billion, while sales of Cymbalta rose 4 percent to $825 million. Lung cancer treatment Alimta rose 21 percent to $560 million, helped by growing demand in Japan. But sales of Strattera, a treatment for attention deficit disorder, fell 12 percent to $128 million -- hurt by safety concerns.

Shares of Lilly were little changed in premarket trading on Thursday from their closing price Wednesday of $36.01 on the New York Stock Exchange. (Reporting by Ransdell Pierson and Lewis Krauskopf; Editing by Derek Caney, Dave Zimmerman)

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