Eli Lilly and Co.'s first-quarter profit fell 15 percent because of severance costs and a development agreement designed to help the drugmaker weather a wave of patent expirations that will start hitting later this year.
The Indianapolis company in the next two years will lose U.S. patents protecting drugs that produced 46 percent of its 2010 revenue. That starts in October, with the patent protecting its top-seller, the antipsychotic Zyprexa, from competition from lower-priced generic versions.
Lilly's first-quarter performance topped analyst expectations. But the looming patent losses remain daunting and may eventually pressure the company to reduce its dividend, now 49 cents per share, Edward Jones analyst Linda Bannister said.
"I think they're probably as ready as they can be, but I don't know how you really prepare for something like this, because it's going to be a challenge to get through the next couple of years," Bannister said.
Lilly officials have said they have no plans to cut the company's dividend. They tout sales in emerging markets and Japan as keys to filling the revenue hole.
Lilly said Monday that it earned $1.06 billion, or 95 cents per share, in the three months that ended March 31. That's down from $1.25 billion, or $1.13 per share, in the same quarter last year. Revenue climbed 6 percent to $5.84 billion.
Excluding one-time charges, Lilly's profit was $1.24 per share. Analysts surveyed by FactSet expected, on average, earnings of $1.17 per share on $5.71 billion in revenue.
Analysts say Lilly faces one of the most challenging patent expiration waves in the pharmaceutical industry. Aside from Zyprexa, Lilly also will lose protection for its second-best seller, the antidepressant Cymbalta, and the insulin Humalog in 2013.
Zyprexa revenue climbed 6 percent to $1.28 billion in the first quarter, but Lilly said it expects "rapid and severe erosion" after patent expirations hit.
It's already seen that with the cancer treatment Gemzar. Lilly lost patent protection for Gemzar last November, and revenue from the drug fell 46 percent to $156.1 million in the first quarter.
The company also has eschewed big acquisitions and plans to depend on its pipeline of drugs in development. But some analysts doubt that those products, if they make it to market, can generate enough revenue to replace what Lilly loses.
The drugmaker showed some signs of its strategy unfolding in the first quarter. Lilly said revenue outside the U.S. rose 13 percent to $2.76 billion.
Cymbalta revenue increased 43 percent outside the U.S. due mainly to product launches in Japan and other international markets. The drug brought in a total of $908.8 million in the quarter.
Research and development costs climbed 8 percent to $1.12 billion because of a rise in late-stage clinical trial costs. The company has nine potential drugs in late-stage testing, one short of its goal for the year. It hopes to launch two new products every year starting in 2013.
In January, Lilly announced an agreement with German drugmaker Boehringer Ingelheim to develop diabetes treatments. The drugmaker recorded a $388 million first-quarter research and development charge tied to that deal.
Lilly also recorded a $76.3 million charge tied to severance costs from a previously announced restructuring plan. It said in 2009 it would eliminate 5,500 jobs over two years and reorganize into five business units as part of a plan to cut $1 billion in annual costs.
Lilly said the health care overhaul reduced first-quarter earnings by about 10 cents per share and revenue by about $90 million while increasing expenses by about $45 million. Lilly and other drugmakers began paying a fee this year to help fund the overhaul and also will cover rebates to patients in the Medicare prescription drug program.
For 2011, Lilly expects the overhaul to lower revenue by $400 million to $500 million.
On Monday, the company backed its adjusted earnings guidance of $4.15 to $4.30 per share. Analysts expect $4.25 per share.
Company shares fell 56 cents to $35.45 in late-morning trading Monday.