April 20, 2009 / 11:24 AM / 10 years ago

RPT-UPDATE 4-Lilly profit rises; dollar helps inventories

(Adds dropped word “percent” in paragraph 2)

* Says far-improved margins may not persist

* Affirms 2009 profit forecast of $4 to $4.25 a share

* Shares close lower after early gains (Adds details on Evista patent challenge, updates shares)

By Ransdell Pierson

NEW YORK, April 20 (Reuters) - Eli Lilly & Co (LLY.N) reported higher-than-expected first quarter earnings on Monday as it controlled costs and revalued overseas inventory because of the stronger dollar.

The results far exceeded Wall Street forecasts, due to a sharp expansion in profit margins from the inventory adjustments. Company shares initially rose 4 percent, but closed down 2.25 percent after Lilly cautioned that margins would likely retreat in coming months.

“We do believe that the first quarter represents a peak in terms of the gross margin improvement,” Lilly Chief Financial Officer Derica Rice said in a conference call. “We do not anticipate that we’ll be able to sustain that level of gross margin for the remaining three quarters of the year.”

Sales of Lilly’s biggest product, schizophrenia treatment Zyprexa, were flat, but several of its other big medicines posted strong gains, including depression drug Cymbalta, which jumped 17 percent to $709 million.

The stronger dollar, by lowering the value of overseas inventories, improved the cost of goods sold — boosting profit margins 6.9 percentage points to 83.8 percent.

Net income rose to $1.31 billion, or $1.20 per share, from $1.06 billion, or 97 cents per share, in the year-earlier period, when results benefited from resolution of a tax audit.

Analysts on average expected net income per share of 99 cents, according to Reuters Estimates.

Despite what he termed “solid” quarterly results, JP Morgan analyst Chris Schott said investors are focused on whether enough new Lilly drugs will be approved in the next few years to offset looming generic competition for Zyprexa, Cymbalta, osteoporosis drug Evista and cancer treatment Gemzar.

“We continue to believe Lilly’s pipeline remains too early-stage to convince us of its ability to meaningfully offset the loss of core franchises,” Schott said.

An Indiana federal judge is expected on Thursday to decide whether to grant Lilly a preliminary injunction blocking Israeli drugmaker Teva Pharmaceutical Industries (TEVA.TA) from launching a cheaper generic form of Evista.

Analysts are concerned that Teva, which has challenged Evista’s patent, may launch its copycat if Judge Sarah Barker rejects Lilly’s motion and that it will quickly wrest away most of the branded drug’s $650 million in annual U.S. sales.

For future earnings growth, Lilly is counting on prasugrel, a blood clot preventer that is awaiting U.S. approval after a number of previous regulatory delays. The company also has big hopes for a longer-acting form of its Byetta diabetes drug.

Lilly’s quarterly revenue rose 5 percent to $5.05 billion, matching the Reuters Estimates forecast. The company said the stronger dollar crimped sales by six percentage points, yet helped profit margins because of the inventory situation.

The Indianapolis drugmaker said it still expects full-year earnings of $4 to $4.25 per share.

AMYLIN SAYS ICAHN SEEKS SALE TO LILLY

Lilly’s global share of revenue from Byetta, which it sells with Amylin Pharmaceuticals Inc AMLN.O, rose 18 percent in the quarter to $98 million on growing overseas sales. But U.S. sales of the drug, given by injection twice daily, were flat.

Lilly and Amylin plan to seek U.S. marketing approval in the first half of the year for a once-weekly form of Byetta. They hope its greater convenience will draw more patients.

Billionaire investor Carl Icahn, who is in a proxy fight with Amylin, is pressuring the biotechnology company to sell itself to Lilly, according to a regulatory filing issued on Monday by Amylin. [ID:nN20380356]

Sales of Zyprexa were hurt by generic competition in Germany and Canada and concerns the pill causes weight gains that can increase the risk of diabetes.

Gemzar, which treats numerous cancers, also was hurt by generics overseas, with sales falling 14 percent to $368 million. Global Evista sales fell 2 percent to $257 million.

Sales of Lilly’s Humalog brand of insulin jumped 11 percent to $450 million, and sales of lung cancer treatment Alimta soared 36 percent to $335 million. Revenue from anti-impotence pill Cialis rose 6 percent to $359 million.

Lilly shares closed down 76 cents to $32.99 on the New York Stock Exchange, amid big declines for the drug group and broad stock market. (Additional reporting by Lewis Krauskopf; Editing by Lisa Von Ahn, John Wallace and Carol Bishopric)

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