The moral of Eli Lilly's first-quarter performance is this: Raise prices and cut costs. The drugmaker ($LLY) beat analyst expectations on earnings, partly because of sales layoffs and other savings measures. And it kept sales in a respectable range, despite a painful 51% drop in Zyprexa sales, thanks to a series of price hikes.
And then there's the tax credit. Lilly spokesman Mark Taylor told Reuters that analysts hadn't accounted for a big drop in the company's tax rate--to 15.5% from 24.5%--thanks to a reinstated federal R&D tax credit. Plus, the company recorded a one-time, $495 million gain on its transfer of diabetes drug rights to Amylin.
So, topping analysts' earnings expectations might not be as impressive as it seems at first. As Leerink Swann analyst Seamus Fernandez said in an investor note this morning, Lilly's individual product sales were mixed, with some falling short of expectations. Still, the company's ability to withstand generic erosion should hearten investors. It's a contrast to GlaxoSmithKline's ($GSK) first-quarter shortfall and Amgen's ($AMGN) report, which showed worrisome sales declines in some key products.
"Lilly reported what appears to be a generally good quarter," ISI Group analyst Mark Schoenebaum told Bloomberg. "Hopefully this reasonably clean print will help offset some of the fear that the poor Amgen quarter last night may have instilled in the hearts of pharma and biotech investors."
The company's $5.6 billion in sales fell slightly short of street estimates, and while generic Zyprexa was a key culprit, it wasn't the only source of trouble. Its animal health business lagged, posting sales growth of only 2%, and Japanese sales suffered on the yen's weakness against the dollar. As for Zyprexa, during the first quarter of 2012, Lilly's previously top-selling drug had fewer generic competitors; its patent had expired the previous October, and the 180-day exclusivity period hadn't yet expired. Now, Zyprexa competes with a host of rivals, and that drove sales down to $285 million. Growth in some other products--notably Cymbalta, which increased by 19% to $1.33 billion--helped offset that decline. The bad news is that Cymbalta loses patent protection later this year, and that's one reason why the company has been slicing sales jobs.
The real question is whether Lilly's R&D investments will pay off. A company can't cut costs forever, as Lilly CEO John Lechleiter recently said. Nor could Lilly ride price increases quarter by quarter. It will take some new drugs to really make up for that painful generic competition.
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