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Lilly's quarterly profit falls, but tops analyst expectations

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Eli Lilly and Co. reported a second-quarter profit that was better than analysts estimated after higher sales for the antidepressant Cymbalta helped trim losses from generic competition to its former top-seller, Zyprexa.

Earnings declined 23 percent, to $924 million, or 83 cents a share, Indianapolis-based Lilly said Wednesday. Profit excluding one-time items beat by 6 cents the average of 15 analyst estimates compiled by Bloomberg.

“If you take Zyprexa out of the equation, our underlying sales grew 8 percent,” Lilly CEO John Lechleiter said in a telephone interview after the earnings announcement.

Cheaper copies of the schizophrenia therapy Zyprexa came on the market last year, and exclusivity ends in 2013 for Cymbalta, now the company’s best-seller. Lilly is counting on a pipeline of experimental drugs, including the osteoporosis treatment Forteo and blood-thinner Effient, to help fuel sales after 2014, and is reining in expenses to help expand margins.

“Lilly has, for the first time, guided to operating margin expansion post-2014, and the magnitude is impressive,” wrote Mark Schoenebaum, a New York-based analyst with ISI Group, in a note to clients Wednesday.

Revenue overall dropped 10 percent, to $5.6 billion, Lilly reported.

Adjusted profit for the full year will be in the range of $3.30 to $3.40 a share, up from a previous forecast of $3.15 to $3.30. The company also said it plans to bring research and development costs to 18 percent to 20 percent of revenue after 2014, and reduce selling general and administrative expenses to 28 percent to 30 percent of revenue.

“Taken together, the company now is effectively guiding operating margin improvement of 7 percent to 11 percent, which would be in-line with” industry peers, Schoenebaum wrote.

Lilly shares rose 2.5 percent, to $43.02 each, in mid-morning trading Wednesday. That followed Tuesday's fall of 4.2 percent after competitors reported poor test results for an Alzheimer's treatment similar to one Lilly is developing.

The dollar’s strength against other currencies reduced quarterly sales by about 2 percentage points for the company, which gets at least half of its revenue from outside the United States. The U.S. dollar index, which reflects the value of the dollar against major world currencies, was on average 8.1 percent higher in the second quarter than a year earlier.

Sales of Cymbalta helped make up for some of the drop in revenue from Zyprexa. Cymbalta revenue increased 22 percent, to $1.22 billion, while Zyprexa fell 73 percent, to $380 million.

Revenue for Lilly’s animal health business rose 32 percent, to $512 million.

Lechleiter pointed to Forteo, Effient and cancer therapy Alimta as other sources of growth. He also cited the animal health business and sales opportunities in Japan and China.

“These were areas we invested in in advance of our YZ period,” he said, referring to the years of patent expirations. “Knowing they could be sources of growth that could cushion the blow we took when we faced generic competition for Zyprexa.”

Investors are also shifting attention to Lilly’s new Alzheimer’s treatment, which the company is expected to report initial data by the end of September, said Jami Rubin, an analyst with Goldman Sachs Group Inc. in New York.

“We expect the key focus to remain on Lilly’s high-risk, high-reward Alzheimer’s drug solanezumab and potential mitigating factors if unsuccessful, such as a program to cut costs,” Rubin said in a report before the earnings release.

Lilly shares fell Tuesday after Pfizer Inc., Johnson & Johnson and Elan Corp. reported data July 23 showing a similar experimental Alzheimer’s treatment failed in the first of four late-stage clinical trials.

Lechleiter said conclusions on Lilly’s Alzheimer’s medicine shouldn’t be drawn from those results.

“They’re different from one another,” he said. “We just need to wait and see our own data.”

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