2nd UPDATE:Lilly 3Q Net Up 38% After '09 Charges; EPS View Raised

Drug maker Eli Lilly & Co.'s (LLY) third-quarter profit rose 38% from the year-earlier period, which was weighed down by an asset-sale charge, while revenue growth was relatively weak.

The earnings report--in which Lilly also raised its 2010 profit forecast--follows a series of setbacks including drug-research failures and the erosion of patent protection for current blockbuster drugs, which have raised doubts among investors about the company's ability to successfully navigate the next few years.

But Chief Executive John Lechleiter said Lilly would continue on its current course of focusing its drug-research efforts to improve its outlook, while pursuing modest-size acquisitions and license deals and avoiding a large-scale merger.

He did say Lilly would continue to look "very carefully" at its cost structure, which suggests more spending cuts could be in the works on top of a restructuring plan announced last year that included the elimination of 5,500 jobs.

"We accept there are going to be occasional setbacks," he said in an interview. "The failure of one molecule or even two does not undermine our basic strategy."

Lilly shares fell 65 cents, or 1.8%, to $35.36 in recent trading.

Barclays analyst Charles Butler said in an interview he believes Lilly can probably avoid both a large-scale merger and a dividend cut--as long as it expands its cost-cutting efforts and its pipeline fortunes are reversed. "Lilly's not so deep in the forest that it can't see the field," he said.

Bernstein analyst Tim Anderson wrote in a note to clients that Lilly's third-quarter results were reasonable, "yet for many investors, it is the longer-term financial outlook that matters more and here, [Lilly] still looks challenged."

Lilly is expected to lose patent protection for drugs that account for about three-fourths of revenue in the next several years including the antipsychotic Zyprexa a year from now, which will clear the way for sales-eroding generic competition.

Lilly's pipeline challenges have become more acute in recent days. On Tuesday, the Food and Drug Administration declined to approve Bydureon, an experimental diabetes drug that Lilly developed in partnership with Amylin Pharmaceuticals Inc. (AMLN) and Alkermes Inc. (ALKS), with the agency asking for another study that will push out the drug's approval to 2012 at the earliest. Lechleiter said Thursday he was still confident the FDA would approve the drug.

Late Wednesday, Lilly and partner MacroGenics Inc. said they would halt studies of another diabetes drug, teplizumab, because it failed to meet efficacy goals.

The Bydureon setback prompted Moody's Investors Service to announce it is reviewing Lilly's long-term debt rating, for a possible downgrade. "Their patent exposure looks a bit worse than many of their peers," said Michael Levesque, Moody's senior vice president. "As we get closer and closer to the October 2011 patent expiration for Zyprexa, the pressure on Eli Lilly will grow." A downgrade could increase borrowing costs for Lilly.

For the three months ended Sept. 30, Lilly said it earned $1.3 billion, or $1.18 a share, compared with $941.8 million, or 86 cents a share, a year earlier. The latest quarter included a charge of $59.5 million for restructuring, while the year-earlier quarter featured charges $549.8 million for the sale of an Indiana manufacturing plant and litigation.

Excluding these items, earnings rose to $1.21 a share from $1.20 a year earlier and surpassed the mean estimate of analysts surveyed by Thomson Reuters of $1.15 a share.

Revenue rose 2% to $5.65 billion but fell short of the $5.77 billion Street estimate. Unfavorable currency-exchange rates shaved one percentage point off growth.

Lechleiter said a slowdown in the growth of certain markets, including drugs for osteoporosis and erectile dysfunction, contributed to the revenue miss, while wholesaler buying patterns also damped sales.

Lilly was able to offset the sales weakness from its continuing cost-cutting efforts. In addition, Lilly has lowered its estimate of costs associated with the new U.S. health-care overhaul to a range of $225 million to $275 million for 2010, from a prior range of $350 million to $400 million.

Sales of Lilly's biggest product, Zyprexa, fell 1% to $1.2 billion, while antidepressant Cymbalta posted sales of $825 million, up 4%. Sales of cancer drug Alimta rose 21%, and Lilly's animal-health unit sales rose 12%.

Lilly raised its forecast of 2010 earnings to a range of $4.55 to $4.65 a share, from $4.44 to $4.59 a share. Excluding certain costs, the new forecast is $4.65 to $4.75 a share, up from $4.50 to $4.65 a share previously.

-Peter Loftus, Dow Jones Newswires; +1-215-656-8289; peter.loftus@dowjones.com

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