Eli Lilly & Co.'s (LLY) first-quarter net income rose 23% and was well above Wall Street expectations, with the stronger U.S. dollar helping to expand profit margins.

The strengthening of the U.S. dollar against other currencies has generally hampered revenue growth at multinational drug makers, and Lilly is no exception. However, in Lilly's case, the currency trend also helped to substantially reduce its cost of sales by re-valuing international inventories of Lilly drugs.

Lilly shares rose 10 cents to $33.85.

But despite the strong quarter, Lilly's long-term future remains uncertain. It will face patent expirations on top-selling drugs including the antipsychotic Zyprexa early next decade, and it's unclear whether Lilly will have enough successful new drugs to replace revenue lost to generic competition. Lilly hopes one new drug, the anti-clotting pill prasugrel, receives approval soon from the U.S. Food and Drug Administration.

Lilly's CEO, John Lechleiter, has vowed to steer clear of the large-scale acquisitions that have hit the industry recently, preferring to pursue more modest deals. Last year, Lilly bought ImClone Systems, landing rights to cancer drug Erbitux and potential new cancer drugs.

Separately Monday, Amylin Pharmaceuticals Inc. (AMLN), Lilly's partner on diabetes drug Byetta, disclosed that activist investor Carl Icahn has urged Amylin to sell itself promptly to Lilly, but that Amylin's board believes a sale at this time would under-value the company.A Lilly spokesman couldn't immediately be reached to comment on the Amylin development.

"While Lilly reported a solid quarter, we continue to believe Lilly's pipeline remains too early-stage...to convince us of its ability to meaningfully offset the loss of core franchises...to generic entry," J.P. Morgan analyst Chris Schott wrote in a note Monday.

Indianapolis-based Lilly reported net income for the three months ended March 31 of $1.3 billion, or $1.20 a share, versus $1.1 billion, or 97 cents a share, a year earlier. The mean estimate of analysts surveyed by Thomson Reuters was 99 cents a share for the latest quarter.

The main driver of the earnings upside was a nearly 7 percentage point increase in gross margins to 83.8% of total revenue. Lilly cited "the impact on international inventories from the decline in foreign currencies compared to the U.S. dollar, resulting in a benefit to cost of sales."

Lilly's first-quarter revenue rose 5% to $5.05 billion, barely short of the Thomson estimate. U.S. revenue rose 13%, while non-U.S. revenue declined 4% due to the negative impact of currency-exchange rates. Price increases on certain drugs also played a role in the sales gain, contributing 3 percentage points of the overall growth. Increased volume added 7 percentage points, but the unfavorable currency rates wiped out most of that.

Lilly is among a slew of pharmaceutical firms that have raised some drug prices aggressively in recent months even as government and private insurers struggle to rein in health-care costs.

Lilly has increased U.S. prices for Zyprexa, the Cymbalta antidepressant, Humalog diabetes drug, Cialis anti-impotence pill, and Evista for osteoporosis and reduction in breast-cancer risk.

Sales of Lilly's biggest drug, Zyprexa, were roughly flat at $1.1 billion, with declining non-U.S. sales and lower U.S. demand offsetting higher product prices and favorable wholesaler buying patterns in the U.S. Sales of Cymbalta rose 17% to $709 million. Lilly also saw gains in sales of Humalog, Cialis and cancer drug Alimta. Cancer drug Gemzar and osteoporosis drug Evista posted sales declines.

Despite the strong first quarter, Lilly left unchanged its previous forecast of 2009 earnings of $4 to $4.25 a share, excluding certain items.

Chief Financial Officer Derica Rice told analysts on a conference call that Lilly was sticking to its prior guidance partly because the first quarter's gross margin expansion isn't sustainable for rest of year and sales of cancer drug Gemzar will continue to be hurt by generic competition.

Analysts see 2009 earnings of $4.14 a share on revenue of $21.4 billion.

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

 
(Mike Barris contributed to this article.)