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Lilly suggests profit stumble after patent cliff

NEW YORK (Reuters) - Eli Lilly and Co LLY.N forecast 2010 earnings in line with Wall Street expectations, but shares were down more than 4 percent as the drugmaker suggested earnings could fall once its biggest medicines lose patent protection between 2011 and 2014.

“Lilly’s 2010 and longer-term guidance points to a company with continued strong near-term results but a significantly less certain long-term profile,” JP Morgan analyst Chris Schott said in a research note.

Wall Street is intently focused on the “patent cliff” years 2011-14, when Lilly faces generic competition for schizophrenia drug Zyprexa, antidepressant Cymbalta, cancer drug Gemzar and osteoporosis treatment Evista.

At its investor meeting in New York, Lilly provided only a general financial outlook for the patent-cliff period, but the numbers suggested possible sharp profit declines.

The company said it expects annual revenue of at least $20 billion in the years 2012 to 2014 and beyond. Wall Street has been expecting company revenue in 2011 of about $22.9 billion.

Lilly said its tax rate could rise during the patent-cliff period and suggested profit margins could decline.

“Under this scenario, net income would exceed $3 billion” in the patent-cliff years and beyond, the company said. That suggests a possible tumble from the Thomson Reuters projection of net income in the $5.3 billion range for 2011.

“That’s the minimum we think we can achieve,” company Chief Financial Officer Derica Rice said, referring to the $3 billion annual profit figure. “In fact, we think we can do better than that.”

Even so, Hapoalim Securities analyst Jon LeCroy said Lilly’s long-term outlook may have pulled down shares.

“Where all the pushes and pulls end up is that, long-term, it may not have been what people were looking for,” he said.

Lilly said it would not resort to a big merger as a means of withstanding looming generic competition.

“Many companies are seeking to lower risk by reducing their focus on innovative medicines; this is not our path,” Chief Executive John Lechleiter said.

He was referring to the kinds of big mergers recently completed by Pfizer Inc PFE.N as well as Merck & Co MRK.N that can produce huge cost savings for acquiring drugmakers, thereby boosting profits despite generic competition. But mega-mergers have fared poorly, in terms of creating important new drugs.

Lilly is known for its research bent -- Lechleiter was a company chemist before climbing the corporate ladder -- and expects to have 10 medicines in late-stage trials by 2011.

The company on Thursday said it plans to launch two new medicines per year beginning in 2013.

“If you look at all of Big Pharma, who’s launching one drug per year, let alone two?” Steven Paul, Lilly’s research chief said in an interview before the meeting. “Lilly’s focus is going to be on innovation, and it is going to be on innovation in a sustainable manner,” he said.

Analysts have cautioned that Lilly’s most promising treatments are for Alzheimer’s disease and cancer -- the types of drugs that often fail along the cumbersome research path.

However, Paul said that several company drugs in late-stage development carry lower risks because they work using “validated” disease pathways.

Those late-stage drugs include a successor to Lilly's Erbitux cancer treatment that patients may need to take less frequently; another cancer treatment in advanced testing for breast and gastric cancers that works similarly to Roche Holding AG's ROG.VX Avastin; and a follow-up to Lilly's Byetta diabetes drug.

For 2010, the drugmaker said it expects earnings of $4.65 to $4.85 per share. Analysts’ average forecast is $4.74, according to Thomson Reuters I/B/E/S.

Lilly’s outlook, which excludes any potential impact from U.S. healthcare reform, reflects growth of 5.2 percent to 9.7 percent over Wall Street forecasts for 2009.

The Indianapolis-based company reaffirmed it expects low double-digit annual earnings-per-share growth from 2007 to 2011, although that period is mostly in the rear-view mirror.

Lilly shares were down $1.59 at $34.97 in afternoon activity on the New York Stock Exchange.

Reporting by Ransdell Pierson and Lewis Krauskopf; Editing by John Wallace, Maureen Bavdek, Matthew Lewis and Gunna Dickson

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