Lilly Posts Profit Dip in Q1, Announces Downward Revision in Full-Year Outlook Due to Healthcare Reform Impact

Although U.S. major Eli Lilly's total sales observed a 9% year-on-year (y/y) increase to US$5.5 billion in the first quarter (Q1) of 2010, the company suffered declines in both operating and net profits during the same period. The top-line growth was offset by the increase in all the three key expenditure items, namely cost of sales, R&D and marketing, selling and administrative costs. The 10% y/y rise in R&D spend primarily resulted from the increased costs for late-stage clinical studies, noted Lilly.

By contrast to the positive growth in profitability seen in previous quarters, Lilly's operating income and net income slipped by 3% and 5% to US$1.7 billion and US$1.2 billion respectively in the first three months of this year. The newly enacted healthcare reform bill has started taking its toll on the company's financial performance in the first quarter. Earnings were reduced as a result of the reform's impact including some US$60 million in higher Medicaid rebates and US$85.1 million for one-time tax charge registered in the financial results of the said quarter. Further charges reflected during the same period also included US$50 million incurred from the company's licensing deal with Acrux as well as US$26.2 million related to its strategic restructuring, which was announced last September.

In terms of the company's global product sales, Zyprexa remained as the best performer with its revenue standing at US$1.2 billion in the first quarter, representing an 8% y/y growth. The biggest y/y sales rise was observed in Alimta, which garnered sales of US$527.4 million with a 57% jump compared with the same period in 2009. The company attributed the positive growth to increased demand in both U.S. and overseas markets, especially the Japanese approval for non-small-cell lung cancer (NSCLC) treatment. The company's other key products including Cymbalta, Humalog and Cialis also saw double-digit growth in their sales. On the other hand, the sales slips Lilly's oncology agent Gemzar and osteoporosis drug Evista experienced in previous quarters continued in the first quarter with Gemzar's sales declining by 22% due to increasing generics competition.

Outlook and Implications

Together with the announcement of the company's first-quarter performance, Lilly also revealed that it is gong to lower its full-year outlook for 2010 to reflect the impact of the U.S. healthcare reform on its earnings. In addition to the reduction in the profit already reflected in the first quarter's results, further decrease in earnings are also expected throughout the year especially due to the government rebates raised by the reform. On a report basis, the full-year earnings expectations are now laid in the range of US$4.35-4.50 per share, representing a decrease of US$0.35 per share. Overall, the company is expecting its revenue to be slashed by US$350-400 million due to the Medicaid rebate impact in 2010.

Since Lilly is the first to report first-quarter results among major U.S. pharmas, it still remains to be seen how its primary competitors are going to reflect the impact of the healthcare reform. Nevertheless, the impact seen in the first quarter is likely to continue in the forthcoming quarters and years for Lilly, which has a major focus in the U.S. market as well as reliance in revenues through drugs covered under the Medicaid system.

On a positive note, the sales growth observed in products like Alimta, Cymbalta and Zyprexa is likely to continue in the ensuing quarters although the generic challenge on Gemzar is set to intensify at the same time to offset the positive growth. Axiron, the testosterone solution Lilly inlicensed from Acrux, is also holding the company's hope for potential revenue stream if its current regulatory review in the United States can turn a positive result.