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Obama Ate My Profits! Lilly Blames Cost of Health Reform, But the Company's Problems Are Its Own Fault

Eli Lilly (LLY)'s Q1 2010 earnings announcement yesterday was dominated by its revelation that healthcare reform costs will wipe 35 cents a share off its annual guidance. But those relatively minor expenses are a distraction compared to the real reason Lilly's net income sank 5 percent to $1.25 billion: The company's inability to control its own operating expenses.

The press release shows how just a few lines of new commentary in a standard financial disclosure can set off a favorable PR firestorm.

Lilly gave this breakdown of how much the new Affordable Care Act will cost its business: a one-time tax charge of $85.1 million coupled with higher ongoing governmental rebates, which are expected to reduce revenue by up to $400 million for the year.

In Lilly's recent history, these expenses are a mere bagatelle. Remember, we're talking about the same company that lost $75 million of its drugs because it can't guard its own warehouses properly. More importantly, this is the company that wasted $3.9 billion in litigation costs on its antipsychotic drug Zyprexa since 2006, an expense that consumed 6 percent of the entire company's revenues through Q4 2009. (No Zyprexa legal costs were recorded this quarter.)

Wall Street failed to bat an eyelid at those expenses, but yesterday's disclosures triggered alarming headlines from Bloomberg, Forbes, Dow Jones Newswires, and the AP, among others, along with hurried notes from analysts complaining that their 1 cent per share estimates were too low.

It's not just the Zyprexa charges that make healthcare reform look negligible by comparison. It's Lilly's ongoing operating expenses that have nothing to do with reform. Here's a breakdown from Lilly's income statement:

  • Cost of sales/manufacturing: up 37 percent to $1.1 billion (up $306 million).
  • R&D up 10 percent to $1 billion (up $92 million).
  • Marketing and sales: up 6 percent to $1.6 billion (up $85.2 million)
  • Total extra non-reform costs: $483.2 million
Bottom line: in a single quarter Lilly added more costs to its operation than President Obama is projected to over the entire year.

And remember, some of these "substantial costs" from reform, as CEO John Lechleiter called them, aren't even "costs." They're merely a reduction in the amount of money that the government pays Lilly in return for its drugs. Consider that politically: If Medicare and Medicaid are socialist schemes to transfer wealth from taxpayers via the government to private business, then the "cost" to Lilly is merely a reduction in the level of socialism from which Lilly benefits.

Lastly -- and this in some ways is the most infuriating part of yesterday's one-angle coverage -- Lilly saw its revenues rise 9 percent to $5.5 billion. Most of these rises came from the higher prices Lilly was able to charge for its products.

So the big picture here is that Lilly has a fantastic underlying drug business that it is ruining through its inability to control its own costs. And somehow it has managed to blame the government for that.


Photo by Flickr user Jon Person, CC 2.0