INDIANAPOLIS ? Eli Lilly and Co.'s third-quarter net income 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 revenue during the third quarter and more than $5 billion last year.
Lilly said Thursday it expects "rapid and severe erosion" of Zyprexa sales, which accounted for 19 percent of its third-quarter revenue. The company plans to fill that revenue hole by relying on its pipeline of drugs under development, its animal health business, emerging markets like China and sales in countries like Japan. The company has 10 potential drugs in late-stage testing, the last phase before seeking regulatory approval.
It also launched a diabetes drug development collaboration with German drugmaker Boehringer Ingelheim earlier this year. Lilly cited that deal 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, which is essentially the cost to make its products, 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 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.
Some analysts question Lilly's ability to overcome all these patent losses and still maintain its dividend, which currently stands at a quarterly rate of 49 cents per share. Company officials have said they expect to at least maintain the dividend.
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 2 cents to $38.68 in premarket trading Thursday.
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