Eli Lilly’s 1st-quarter profit falls 5 percent on reform-related charges, research costs

Lilly 1Q profit falls 5 pct in part on reform cost

INDIANAPOLIS — Health care reform charges helped chop Eli Lilly and Co.’s first-quarter profit by 5 percent, offsetting strong sales growth from some of its top-selling drugs.

The Indianapolis drugmaker said Monday it took a one-time charge of $85 million in the three months that ended March 31 due to its retiree prescription drug coverage, and it expects Medicaid-related rebates to shrink revenue by $350 million to $400 million this year.

As a result, Lilly reduced its 2010 adjusted earnings guidance to between $4.40 and $4.55 per share. The company said late last year it expected a profit of between $4.65 and $4.85 per share for 2010.

Analysts polled by Thomson Reuters expect, on average, earnings of $4.73 per share for 2010.

Lilly is the first major U.S. drug company to report first-quarter earnings.

“It will be interesting to see what the other drug companies say about the impact of reform to their ongoing business,” Bernstein analyst Timothy Anderson said in a research note.

He added that Lilly has more exposure to health care reform than other drug companies due in part to a higher concentration of U.S. business and products like the antipsychotic Zyprexa, which sees strong use in Medicaid patients.

For the first quarter, Lilly said it earned $1.25 billion, or $1.13 per share. That’s down from the $1.31 billion, or $1.20 per share, last year.

Excluding charges, the adjusted profit was $1.18 per share.

Revenue rose 9 percent to $5.49 billion.

Analyst polled by Thomson Reuters expected, on average, a profit of $1.10 per share on revenue of $5.54 billion. Wall Street analysts typically exclude one-time charges or items, and Lilly spokesman Mark Taylor said they did not account for the impact of health care reform.

Sales for Lilly’s best-selling drug, Zyprexa, rose 8 percent to $1.2 billion, and sales of the cancer drug Alimta soared 57 percent to $527 million.

In contrast, the company’s newest drug, the blood thinner Effient, brought in only $8.8 million in the quarter. Lilly developed Effient with Japanese drugmaker Daiichi Sankyo Co.

Lilly’s research and development expenses rose 10 percent to $1.04 billion in the quarter mainly due to costs tied to late-stage drug trials. Lilly has eight drugs in late-stage testing, include a couple of potential Alzheimer’s disease treatments. The company aims to launch two new drugs a year starting in 2013.

Lilly said it took a charge of 8 cents per share in the quarter due to its retiree prescription drug coverage and the health care reform law passed last month by Congress. Several major corporations have already reported similar charges.

Under the new law, businesses will be prohibited from writing off a federal subsidy that covers part of the cost of retiree prescription drug coverage. The government provides the subsidies so companies will continue offering coverage to retirees, which keeps them off government-funded Medicare Part D.

That change doesn’t start until 2013, but Lilly, like other companies, had to recognize the tax law change as a one-time charge in the quarter in which it was passed.

Lilly also took a charge of 4 cents per share in the first quarter due to an increase in the rebate Lilly provides the government for drugs covered by Medicaid, the state-federal program that offers coverage to the elderly and disabled.

Lilly anticipates that the rebate increase will reduce annual earnings by 27 cents per share in 2010.

Next year, Lilly expects its revenue hit from reform to grow to between $600 million and $700 million, when drug companies start paying a government fee and certain customers of Medicare’s Part D prescription drug coverage begin receiving a discount.

Shares of Eli Lilly inched up 4 cents to close at $36.58 Monday.