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UPDATE: Lilly execs questioned about future

July 24, 2008
Second-quarter sales and profits rose by double digits for Eli Lilly and Co., but overhead increased just as fast as the company worked feverishly to find new revenue sources before key patents expire.

Investors yawned today after the Indianapolis-based drugmaker met Wall Street expectations of 99 cents per share. Lilly shares inched up 68 cents, to $48.30 apiece.

Profit rose 10 percent to $1.08 billion, excluding significant one-time charges. Sales climbed 11 percent to $5.15 billion.

But Lilly's profit margin fell slightly as expenditures on sales, marketing, administration, and research and development also surged 11 percent, to $2.65 billion.

Lilly executives spent much of their conference call with Wall Street analysts talking about progress and problems in the company's development pipeline. They even unveiled a deal that brings in outside money to quicken Lilly's testing of experimental treatments for Alzheimer's disease.

"My No. 1 priority is to speed up the flow of innovative new products through our development pipeline," CEO John Lechleiter said.

Speed is crucial at Lilly these days because its bestselling drug, the antipsychotic Zyprexa, already faces competition from generic versions of similar drugs. And it will lose patent exclusivity in Europe and the United States in 2011.

By 2014, Lilly will lose patent protection on four other drugs which, when combined with Zyprexa, represent 60 percent of annual sales.

Lilly is trying to push newer products - such as antidepressant Cymbalta, anti-diabetes drug Byetta and cancer drug Alimta - into more foreign countries.

In the second quarter, sales of those three drugs each grew 25 percent or more. Zyprexa sales crept up 2 percent as foreign exchange rates made up for fewer prescriptions.

Lilly is spending more money to advertise older drugs, such as the osteoporosis medicine Evista. Lilly recently won approval to tout Evista as a breast cancer treatment for some women.

Lilly also has signed a string of deals with smaller drug companies. In the second quarter, it spent $35 million to acquire research rights from Israel-based TransPharma Medical Ltd.

That expense, plus money Lilly spent to lay off manufacturing staff in Indianapolis, trimmed $120 million from total second-quarter earnings. Including those costs, it posted profit of $958.8 million, or 88 cents per share.

Lilly cut its profit forecast for the rest of the year by 11 cents per share. The company now expects to post full-year profit of $3.79 to $3.94 per share.

Later this year, Lilly hopes to launch a new blood thinner called prasugrel to compete with Plavix, a mega-blockbuster that garnered $8.5 billion in sales last year.

Lilly spent money on pre-launch activities in the second quarter because the U.S. Food and Drug Administration was expected to rule whether it would approve the drug in late June. However, the FDA delayed the decision until September.

"We pulled forward our launch expenses. We were prepared to go as early as the second quarter," said Chief Financial Officer Derica Rice. "You'll see as taking those kinds of bets in regards to our [overhead] expenses to be prepared to maximize our top-line opportunities."

Analysts questioned Lilly's bet on its Alzheimer's research. Lilly is trying to simultaneously develop two molecules to treat the disease, for which there is no treatment. A molecule called a gamma secretase inhibitor entered Phase 3 clinical trials in the second quarter. The other, known as an A-Beta antibody, is in Phase 2 clinical testing.

Lilly convinced North Carolina-based Quintiles Transnational Corp., the contract research organization performing the clinical trials, to invest in the project. Also, New York-based TPG-Axon Capital will put in money.

Lilly did not disclose how much either firm invested. But they will receive payments if Lilly's molecules achieve certain development milestones. They also will receive a percentage of any commercial sales in the "mid- to high-single digits."

"Our agreement," Lechleiter said, "effectively provides Lilly with a hedge as we enter new, uncharted territory."

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