Shares of Eli Lilly and Co. fell in morning trading after the company said health reform is taking a bite out of its business.

The Indianapolis-based drugmaker also lowered its forecast for full-year profits because the new health care law grants larger rebates on prescription drugs to federal health insurance programs.

Such rebates already cost Lilly $60 million in the first quarter, even though the law was signed on March 19. Lilly expects to lose $350 million to $400 million in revenue this year and as much as $700 million next year.

Lilly stock traded as low as $36.16 Monday morning, down 1 percent, while the broader markets were up. The company released its first-quarter financial results before the markets opened.

“The U.S. health care reform clearly provides a near-term challenge,” said Derica Rice, Lilly’s chief financial officer, during a conference call Monday morning with Wall Street analysts.

That’s a problem for Lilly, which needs to build up all the cash it can before its bestselling drug Zyprexa loses sales to cheaper generic copies beginning in late 2011.

Lilly shareholders were set to gather Monday in Indianapolis to hear an update on the company’s performance, including how it will keep paying its generous dividend during the lean years after Zyprexa’s patent expiration.

Also, Lilly’s board of directors has bowed to pressure from investors in past years and is now recommending that shareholders remove a supermajority shareholder vote to approve a hostile takeover of the company.

This barrier to unwanted takeovers has been in place for 25 years. It will require the consent of 80 percent of shareholders to remove it.

In its first quarter, Lilly earned $1.25 billion, down 5 percent from the same quarter last year. On a per-share basis, Lilly’s profits shrank from $1.20 a year ago to $1.13 in this year’s first quarter.

Excluding expenses for an acquisition and severance payments as Lilly lays off employees, the company would have earned $1.18 per share in the quarter.

Lilly incurred charges of 12 cents per share from the cost of the rebates as well as an $85.1 million tax because the health reform law will reduce the tax benefit given to companies who provide prescription drug coverage to their retirees.

Lilly’s results beat the expectations of Wall Street analysts, who were expecting earnings of $1.10 per share, according to a survey by Thomson Financial Network.

Lilly’s revenue for the quarter rose 9 percent to $5.49 billion, slightly below analysts’ expectations of $5.54 billion.

“We expect that the new U.S. health care reform legislation, while not perfect, will help seniors in the Medicare system better afford their prescriptions and will provide greater access to our medicines for millions of Americans who are currently uninsured,” Lilly CEO John Lechleiter said in a statement. “However, as a result of the new legislation, Lilly will incur substantial costs to our business.”

For the year, Lilly expects the health reform law to slice 35 cents per share from its profits. Those costs forced Lilly to reduce its profit forecast to a range of $4.40-$4.55 per share. In January, Lilly predicted it would earn $4.65-$4.85 per share this year.

The company said its underlying business is performing better than expected, partially offsetting the impact of health reform. But Lilly’s international profits were tempered in the first quarter by a weaker dollar, which caused the company’s cost of sales spiked 37 percent.