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Lilly to buy back $5B as sales goal harder to reach

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Eli Lilly and Co. said Thursday that meeting its sale target will be a challenge, and it plans to repurchase $5 billion in shares and introduce new diabetes drugs to help navigate through patent losses.

Less-than-expected profit in emerging markets and a decline in the yen have slowed growth across the pharmaceutical industry. That may make it more difficult for Lilly to meet a reaffirmed goal of at least $20 billion in revenue through 2014, the Indianapolis-based company said in a prepared statement.

The new products and buybacks are part of Lilly’s strategy to return to growth after next year. Pfizer Inc., the biggest U.S. drugmaker, is splitting its businesses to offset its patent losses, while Merck & Co. earlier this week increased job cuts and refocused its research program.

“I am confident in our outlook to return to a period of growth and expanding margins,” Lilly Chief Financial Officer Derica Rice said in the statement.

Lilly reiterated goals of at least $3 billion in net income and $4 billion in operating cash flow through next year.

The company filed U.S. and European regulatory submissions for two diabetes treatments -- empagliflozin and dulaglutide -- and a European submission for a new insulin glargine product.

Lilly also is seeking approval for ramucirumab to treat advanced gastric cancer. Necitumumab, a lung-cancer medicine, performed well in a trial and the company may file for regulatory approval as early as next year, according to the statement.

Investors will keep a close eye on the pipeline, said Mark Schoenebaum, an analyst with International Strategy & Investment Group LLC in New York, in a report.

“Will Lilly hit this guidance even if the pipeline fails?” Schoenebaum said was the question on investors’ minds. “We would like to understand if a ’Plan B’ exists.”

Lilly is meeting with investors Thursday in Indianapolis. The company’s shares fell 3.5 percent, to $48.80 each, in morning trading.

“Market factors, including the devaluation of the yen and slower market growth in key emerging market countries, have moderated the company’s near-term revenue growth expectations,” Lilly said in the statement. “These headwinds will make it challenging for the company to meet the minimum revenue goal of $20 billion in 2014.”

Part of Lilly's challenge for meeting its 2014 profit goals is Obamacare, which required drugmakers to give larger rebates to federally funded health plans and will add a tax onto all U.S. sales of prescription drugs. Those impacts, as well as Obamacare's elimination of a tax benefit for retiree drug coverage, will cost Lilly about $500 million this year.

"The net impact, negative impact, to our bottom line this year is going to be around half a billion dollars," Lilly CEO John Lechleiter told investors during a question-and-answer session at Lilly's headquarters on Thursday morning. Next year, Obamacare's expansion of health insurance, as well as its increased drug benefits for seniors with Medicare coverage, will boost Lilly's sales of medicines.

But Lilly might see its sales hampered by the Obamacare exchanges, the online marketplaces that started on Tuesday in all 50 states. That's because health insurers, in an attempt to keep premiums low, are creating narrower formularies that exclude some drugs from coverage. Similarly, insurers are creating "narrow networks" that offer coverage for fewer doctors and hospitals.

"What's pretty clear is that the formularies are going to be more on the narrower side," said Enrique Conterno, president off Lilly's diabetes business unit, during the Q&A with investors.

That market dynamic led Lechleiter to conclude that Obamacare's long-term impacts on Lilly will be small, although hard to determine precisely at this point in time. He predicted further efforts at health reform in coming years.

"We're not at the beginning of the end and were not even at the end of the beginning," Lechleiter said. "I think we're going to continue to see other health care reform measures undertaken."

 

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