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Eli Lilly banks on cost controls for higher 2013 profit

By Bill Berkrot and Caroline Humer

(Reuters) - Eli Lilly and Co said on Friday it expects profit in 2013 to increase by more than Wall Street had been forecasting, primarily due to cost controls and improved productivity.

Lilly, whose shares were up nearly 4 percent on Friday, said 2013 sales will be flat to a bit higher, despite the loss of patent on its $5 billion-a-year antidepressant, Cymbalta, in December.

The Indianapolis-based drugmaker is coming off a particularly difficult 2012 when sales declined sharply because of competition from cheaper generics.

It expects 2013 earnings to increase to $3.75 to $3.90 per share excluding items, from a forecast of $3.30 to $3.40 per share in 2012. In 2011, its adjusted earnings were $4.41 per share.

Analysts on average forecast earnings of $3.71 for 2013 and $3.36 per share for 2012, according to Thomson Reuters I/B/E/S.

"Overall, it was better than anyone expected," said Barclays Capital analyst Tony Butler. "From an earnings perspective, no one believed that operating expenses would be kept in check."

Morningstar analyst Damien Conover said, "They're cutting costs at a pace that's maybe a little quicker than people were anticipating, and that was one of the reasons for the outperformance in their guidance."

The company said 2013 net profit would benefit from a tax credit that had been pushed into this year because of the late signing of the American Taxpayer Relief Act of 2012 - the legislation that prevented the so-called fiscal cliff.

The company said it is not sure yet of the amount of the tax credit, which is related to research and development accounting, and said it would provide more information during its January 29 earnings conference call. Lilly said it excluded the impact from all of its financial guidance.

Similar uncertainty could face other drugmakers, as well as other corporate sectors with extensive research budgets, such as technology and defense. However, "It could be resolved by the time everybody else reports," Butler said of the pharmaceutical industry. "We've got another three weeks before anyone reports."

Lilly said the adjusted earnings forecast also excludes payment and income for revenue sharing with Bristol-Myers Squibb Co's Amylin unit on Byetta, a diabetes drug, and restructuring charges. Lilly severed ties with Amylin when it agreed to collaborate with Boehringer Ingelheim on diabetes drug development.

HELP ON THE WAY

Lilly forecast 2013 revenue of $22.6 billion to $23.4 billion, driven by sales of its drugs for diabetes, osteoporosis, cancer, erectile dysfunction and animal health. The company said it also expects significant revenue growth from Japan and emerging markets, such as China.

Analysts are looking for 2013 revenue of $22.82 billion.

While Cymbalta is not expected to start facing generic competition until the end of the year, the company cautioned that sales declines could begin sooner if wholesalers start to reduce inventory supplies prior to the patent expiration.

As a result, it said, the fourth quarter could look significantly different than the first three.

Lilly has already been battered by generic competition for its once top-selling schizophrenia drug, Zyprexa, and will face generic competition for its $1 billion-a-year Evista osteoporosis drug in early 2014.

But help is on the way. Lilly said it now has 13 drugs in late-stage testing, the most at any one time in its history. It could seek approvals this year for drugs for Type 1 and Type 2 diabetes, gastric cancer and for a type of lymphoma.

Chief Financial Officer Derica Rice told analysts on a conference call that the company was firmly focused on replenishing the developmental pipeline. "This is our future and it's our first priority."

The company also vowed to maintain its dividend payout and complete its share repurchase plan.

"Lilly has financially done a really good job. Obviously, you need the pipeline to come through," said Barclay's Butler, adding that positive late-stage data on ramucirumab in breast cancer could signal an important new product for Lilly. The drug is also in late-stage testing for the smaller gastric cancer market.

Other key events for Lilly in 2013 include the start of a new Phase III trial of solanezumab in patients with mild Alzheimer's disease after an earlier study failed but showed some signs of hope for the memory-robbing condition, and an August trial challenging a method of use patent on the $3 billion-a-year lung cancer drug Alimta.

Should Lilly prevail in court, the company could have patent protection on the medicine into 2022 even though the basic patent lapses in 2016.

Asked if the company would consider settling the case before it comes to trial, Phil Johnson, Lilly's vice president for investor relations, said: "Nothing is off the table, but we have not historically entered into those kinds of agreements."

Eli Lilly shares were up 3.8 percent at $51.60 on Friday afternoon on the New York Stock Exchange.

(Reporting By Bill Berkrot and Caroline Humer; editing by Grant McCool, Jilian Mincer and Matthew Lewis)

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