U.S. Markets open in 7 hrs 5 mins

Lilly says it must cut costs to meet goals; shares fall

By Ransdell Pierson

Oct 3 (Reuters) - Eli Lilly and Co, which is trying to rebound from painful patent expirations on its medicines, said on Thursday that it would have to cut costs to achieve its financial goals through 2014.

Shares of the U.S. drugmaker fell more than 3 percent even though it also said it would buy back $5 billion of its stock over time.

Lilly said slowing growth in emerging markets and the devaluation of Japan's yen were hurting its results. These "headwinds" will make it challenging for the company to meet its minimum revenue goal of $20 billion in 2014, Chief Financial Officer Derica Rice said.

Rice said Lilly was looking for ways to reach the revenue goal and would reduce costs to meet its objectives of at least $3 billion in annual net income and $4 billion in operating cash flow through 2014.

Lilly is counting on approvals in the next year for new treatments for diabetes and cancer, and for the drugs to expand its profit margins after 2014.

"One of the most important questions on investors' minds around the margin expansion guidance is: Will Lilly hit this guidance even if the (drug) pipeline largely fails?" ISI Group analyst Mark Schoenebaum said.

Lilly's revenue and profits have tumbled since 2011 due to the loss of patent protection on its Zyprexa schizophrenia treatment and other drugs.

Many analysts in recent years had hoped Lilly would restore earnings growth by merging with another large drugmaker, but the Indianapolis company has vowed to remain independent and to bounce back by introducing important new products.

Revenue and earnings have begun to improve this year, but will plunge again after Lilly's $6 billion-a-year Cymbalta depression treatment goes generic in December. The picture worsens in 2014, when blockbuster osteoporosis drug Evista loses patent protection.

Lilly officials are meeting with industry analysts on Thursday to review the company's medicines, including experimental treatments for a wide range of diseases.

Analysts on average expect Lilly's earnings before special items to drop 33 percent to $2.77 per share in 2014 from an estimated $4.14 this year.

Rice said analysts might be underestimating the impact of the Cymbalta and Evista patent expirations on profit margins. But he said the forecasts also might overstate Lilly's likely tax rate and not fully reflect the company's ability to reduce operating expenses. Lilly will provide its own specific 2014 earnings forecasts in January.


The company's experimental drugs include ramucirumab, which Lilly believes could become a new standard of care for stomach cancer, and necitumumab, which may be the first biotech treatment for the squamous form of lung cancer.

Both cancer drugs came from Lilly's acquisition in 2008 of ImClone Systems Inc and have prolonged lives of patients in clinical trials.

Lilly is placing most of its bets on new cancer drugs, with two dozen experimental compounds in various stages of testing. It is also testing a number of treatments for Alzheimer's disease, after two have failed.

Diabetes drugs have been a strong suit for Lilly over the past decade, but their sales have suffered because of rival products, including insulins from Danish drugmaker Novo Nordisk .

Lilly earlier this year asked U.S. and European regulators to approve two new diabetes treatments. One, a once-weekly pill called dulaglutide that is a so-called GLP-1 agonist, would compete with similar drugs sold by Novo Nordisk and Bristol-Myers Squibb. Another, called empaglifozin, is a member of an emerging new family of oral treatments called SGLT2 inhibitors that remove excess blood sugar through the urine.

Shares of Lilly were down 3.5 percent at $48.79 in morning trading.