July 21, 2011 / 10:57 AM / 9 years ago

UPDATE 4-Lilly's feared patent cliff becomes real

* Matches Q2 profit forecast

* Gemzar sales plunge 62 pct, hurt by generics

* Shares rise 3 pct as 2011 forecast nudged higher

* 8 to 10 percent profit decline now seen for full year (Adds interest in Pfizer animal products; product sales)

By Ransdell Pierson

NEW YORK, July 21 (Reuters) - Eli Lilly and Co’s (LLY.N) long-feared “patent cliff” has begun in earnest, with quarterly earnings falling as generic competition hit demand for its Gemzar cancer medicine and as other top-selling drugs brace for cheaper copycats.

The Indianapolis drugmaker’s profit, excluding special items, fell to $1.18 per share from $1.24 in the year-earlier second quarter, in line with Wall Street expectations.

But Lilly shares rose 3 percent, outpacing a 1.4 percent gain for the drug sector, after sales topped forecasts and the company slightly raised its full-year earnings view.

Although an improvement, the new forecast translates into a profit decline of 8 to 10 percent from last year. Earnings rose 8 percent in 2010.

Sales of Gemzar, whose U.S. patent lapsed in November, plunged 62 percent to $112 million in the second quarter.

“Lilly’s earnings peaked in the first quarter, and we’re not likely to get back to that point for several years,” said Atlantic Equities analyst Richard Purkiss, who has an “underweight” rating on the company’s stock.

Rival drugmaker Roche Holding AG ROG.VX said on Thursday its core earnings per share for the first half of the year slipped 4 percent to 6.68 Swiss francs ($8.11), but that topped the average estimate of 6.48 francs in a Reuters poll. [ID:nLDE76H0GX].

Lilly is expected to suffer one of the industry’s worst generic onslaughts of the decade, with its top-selling Zyprexa schizophrenia drug losing U.S. marketing exclusivity in October. Its Cymbalta anti-depressant faces generics in mid-2013, with copycat forms of its Evista osteoporosis drug flooding the market in 2014.

The three threatened drugs accounted for 43 percent of quarterly company sales and their growth underscored Lilly’s reliance on them.

Zyprexa revenue jumped 12 percent to $1.4 billion, while Cymbalta’s grew 16 percent to $1 billion. Evista sales rose 2 percent to $263 million.

Lilly has vowed to avoid large-scale mergers as its patent lapses mount and rely instead on its pipeline of experimental drugs to eventually restore earnings growth.

“The whole dynamic of this company now is how much you buy into their pipeline, but I think it’s high-risk,” Purkiss said.

Although Lilly’s products in the late stages of testing have big sales potential, especially a treatment for Alzheimer’s disease, Purkiss said the likelihood of success in clinical trials for that drug and many others was questionable.

The company’s net earnings fell to $1.2 billion, or $1.07 per share, from $1.35 billion, or $1.22 per share, a year earlier.

Global revenue rose 9 percent to $6.25 billion, but would have risen only 5 percent if not for the weaker dollar, which raises the value of sales in overseas markets. Sales topped Wall Street expectations of $6.03 billion.

Lilly raised its 2011 profit forecast to between $4.25 and $4.35 per share, excluding special items. It previously forecast $4.15 to $4.30.

Despite the patent cliff, Company Chief Financial Officer Derica Rice told analysts Lilly remains interested in acquisitions, including perhaps some of the animal-health brands Pfizer Inc (PFE.N) is expected to divest.

Pfizer said two weeks ago it might sell or spin off its animal health unit, which had revenue of $3.6 billion last year, to focus on its main pharmaceuticals business. Analysts put the value of the business at $10 billion to $16 billion.

“Clearly, we will watch how that situation evolves,” said Rice, who forecast Lilly’s Elanco animal-health business would continue to have strong growth “with or without an additional transaction.” (Reporting by Ransdell Pierson; editing by Lisa Von Ahn, Ted Kerr and Andre Grenon)

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