Eli Lilly and Co.'s third-quarter earnings fell 5 percent on rising expenses fueled by foreign exchange rates, the health care overhaul and the drugmaker's preparations for a critical patent expiration.
The Indianapolis company loses U.S. patent protection for its top seller, the antipsychotic Zyprexa, on Sunday. Zyprexa generated $1.18 billion in sales during the third quarter, or 19 percent of total revenue.
Lilly has said it expects "rapid and severe erosion" of Zyprexa sales. It hopes to fill that hole by relying on its animal health business, emerging markets like China, sales in Japan and its pipeline of drugs under development.
It has 10 potential drugs in late-stage testing, the last phase before seeking regulatory approval, including treatments for Alzheimer's disease and depression. Lilly also is collaborating with German drugmaker Boehringer Ingelheim to develop diabetes drugs, and the company cited that as a factor behind its 10 percent rise in operating expenses to about $3.2 billion in the quarter.
The company's cost of sales, or the expense of making its products, also climbed 35 percent to $1.34 billion. Spokesman Mark Taylor said a stronger euro, which helps revenue, leads to higher overseas manufacturing costs.
Lilly reported on Thursday net income of $1.24 billion, or $1.11 per share, in the quarter that ended Sept. 30. That's down from $1.3 billion, or $1.18 per share, in last year's third quarter. Revenue climbed 9 percent to a better-than-expected $6.15 billion.
Excluding $25 million in restructuring charges, adjusted profit was $1.13 per share, and that matched Wall Street expectations. Analysts surveyed by FactSet expected, on average, earnings of $1.13 per share on $6.07 billion in revenue.
Lilly said the U.S. health care overhaul, which aims to eventually cover millions of uninsured people, delivered a $465-million hit in the quarter. Rebates for Medicare prescription drug coverage reduced revenue by $330 million, and a drugmaker's fee increased expenses by $135 million.
Revenue from Lilly's second-best seller, the antidepressant Cymbalta, climbed 29 percent to $1.07 billion in the third quarter, helped mostly by higher prices and demand. Revenue from its animal health business jumped 28 percent to $451 million.
But cancer drug Gemzar's revenue plunged 72 percent to $91 million. Gemzar lost patent protection last year.
Lilly also loses U.S. patent protection for Cymbalta in 2013, and the drugmaker faces one of the steepest so-called patent cliffs in the pharmaceutical industry.
Analysts expect Lilly earnings to drop through about 2014 before possibly rebounding with newer revenue sources. Edward Jones analyst Linda Bannister said the company's challenge is sharpened because it will lose revenue sources while raising expenses with late-stage testing of several drugs. Those studies are the most expensive phase of testing because they typically involve a large number of patients.
"It's going to be a challenging time for the management of Lilly, I don't think there's any doubt about it," she said.
Some analysts have questioned Lilly's ability to maintain its dividend, which currently stands at a quarterly rate of 49 cents per share. Chief Financial Officer Derica Rice addressed that during a Thursday morning conference call with analysts.
"As we head into the teeth of our patent expiration period, we have positioned the company to fund the (research and development) necessary to fuel our future growth, recapitalize our fiscal assets and maintain our dividend," he said.
For the full year, Lilly now expects adjusted earnings of $4.30 to $4.35 per share, compared with its forecast in July for earnings of $4.25 to $4.35. The new forecast would result in a drop of between 8 percent and 9 percent compared with last year's results.
Lilly shares fell 9 cents to close at $38.61 Thursday.
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