UPDATE 4-Lilly profit tops Street view, but shares fall

* Q3 EPS ex-items $1.20; Wall Street view $1.02

* Q3 revenue rises 7 pct to $5.56 bln; St view $5.41 bln

* Raises FY profit forecast to $4.30-$4.40/share ex-items

* Inventory benefit to margins not seen continuing

* Shares fall nearly 3 percent (Recasts; adds analyst, company comments)

By Lewis Krauskopf

NEW YORK, Oct 21 (Reuters) - Eli Lilly and Co LLY.N posted third-quarter profit well above Wall Street expectations on Wednesday on strong performance of its major prescription drugs and lower taxes, but it said an inventory benefit that helped results might reverse in the fourth quarter.

Shares fell nearly 3 percent as the drugmaker failed to assuage persistent doubts about its ability to fill a revenue hole once its Zyprexa schizophrenia drug and other products face widespread generic competition in the next two years.

“People are getting more and more concerned about the patent cliff approaching for Lilly,” Morningstar analyst Damien Conover said. “While the current quarter was good, I think there is growing concern about future growth.”

Quarterly sales of lung cancer treatment Alimta, anti-depressant Cymbalta, Humalog insulin and schizophrenia drug Zyprexa all topped analysts’ forecasts. The drugmaker also raised its full-year earnings forecast, but by less than it beat expectations in the third quarter.

For the quarter, net income was $941.8 million, or 86 cents per share, compared with a net loss of $465.6 million, or 43 cents per share, a year earlier, when Lilly took big charges related to a marketing probe of Zyprexa.

The Indianapolis-based drugmaker took charges totaling $549.8 million in the latest quarter, including asset impairment and restructuring charges for the sale of a manufacturing plant and a charge tied to a legal settlement.

Excluding those charges, Lilly posted earnings of $1.20 per share. On that basis, analysts’ average forecast was $1.02, according to Thomson Reuters I/B/E/S.

Revenue rose 7 percent to $5.56 billion. Analysts were looking for $5.41 billion.

Volume increases drove revenue up 8 percent and price increases boosted it 2 percent, while the stronger dollar weakened the value of overseas sales, resulting in an overall negative effect of 3 percent.

Despite 25 percent earnings growth for the first three quarters of 2009, Lilly shares have trailed those of rival large drugmakers this year amid concerns over the looming patent expirations.

“All of the underperformance of this company is driven entirely by concerns about them replacing revenue that’s going away,” Leerink Swann analyst Seamus Fernandez said. “Ultimately, that’s the critical factor.”

Pfizer Inc PFE.N and Merck & Co Inc MRK.N have struck megamergers this year in hopes of softening the blow for their patent expirations. Asked about Lilly's interest in such large deals on a conference call with analysts, the company said its attention was elsewhere.

“We are solely focused on our No. 1 priority, which is progressing the assets in our pipeline,” Chief Financial Officer Derica Rice said on the call.

Lilly’s adjusted tax rate fell to 19 percent from 21.1 percent a year earlier. The lower taxes contributed 5 cents per share to the quarterly outperformance, Leerink’s Fernandez said.

Gross profit margins continued to benefit from the stronger dollar, as the company revalued its overseas inventories, a benefit it does not expect to sustain in the fourth quarter.

“It’s a bit of an artificial gain,” Conover said.

Zyprexa sales rose 3 percent to $1.22 billion, ahead of the $1.19 billion expected by analysts, helped by higher prices in the United States and the withdrawal of generic competition in Germany. The drug has faced continuing concerns about its tendency to cause weight gains that might lead to diabetes.

Higher demand helped drive Cymbalta sales up 10 percent to $790.2 million, a shade above the $788 million estimate. Alimta sales soared 47 percent to $461.9 million, compared with an estimate of $415.3 million, helped by expanded use.

Sales of new blood clot drug Effient, which Lilly hopes will help fuel future growth, totaled $22.6 million.

Lilly boosted its full-year forecast for earnings, excluding items, to a range of $4.30 per share to $4.40 per share, up from $4.20 to $4.30 previously. Analysts have expected $4.29.

Lilly said last month it plans to cut 5,500 jobs, or 13.5 percent of its workforce, as it girds for generic competition by 2011 for Zyprexa and its Gemzar cancer treatment. It aims to cut annual costs by $1 billion by the end of 2011.

Lilly shares fell $1.00 or 2.8 percent to $34.24 in late morning trading on the New York Stock Exchange. Through Tuesday, they had fallen 12 percent this year, compared with a 9 percent rise for the NYSE Arca Pharmaceutical index .DRG of large drugmakers. (Reporting by Lewis Krauskopf; Editing by Gerald E. McCormick and Maureen Bavdek)