Eli Lilly & Co. Set To Cut Jobs As Patents Expire

Story from the Wall Street Journal

Eli Lilly & Co., confronted with the possibility of a steep revenue decline because of looming patent expirations, on Monday said it plans to reduce its work force by nearly 14%, or 5,500 employees, and revamp its operating structure.

The job cuts and other measures would reduce Lilly's costs by $1 billion by the end of 2011, excluding planned strategic additions in emerging markets and Japan, the Indianapolis-based company said. Lilly expects its work force to decline to 35,000 by the end of 2011 from 40,500 today and 46,000 at its peak in 2004.

Between 2010 and 2013, drugs accounting for more than half of Lilly's current revenue will face generic competition as U.S. patents expire on four of its five top-selling products, including the blockbuster antipsychotic medication Zyprexa. Sales of those drugs -- nearly $11 billion last year -- could decline by as much as 80%.

Lilly, which doesn't have the product array to offset the lost revenue, also had some notable setbacks in recent weeks in its efforts to bring new drugs to market.

In August, the company discontinued development of arzoxifene, an experimental osteoporosis drug, because of side effects and a lack of effectiveness in a clinical trial. A few weeks earlier, Lilly said the experimental multiple-sclerosis drug dirucotide, which it licensed from BioMS Medical Corp., didn't help patients significantly in a clinical trial. Analysts had estimated that each drug had the potential to exceed $500 million in annual sales.

Chief Executive John Lechleiter, in an interview on Monday, said the drug-research setbacks "certainly were part of our consideration" in the restructuring, but he said Lilly probably would have made significant changes even if those drugs hadn't failed. He noted that Lilly faced both internal and external challenges, including higher standards for regulatory approvals of new drugs.

Rival drug makers, including Pfizer Inc. and Merck & Co., have engineered large-scale acquisitions to address their challenges, but Mr. Lechleiter has eschewed a large deal in favor of smaller purchases. On Monday he reiterated his intention to avoid a large-scale combination, saying such deals "provide short-term relief but don't fundamentally address the issue of innovation and how to make pipelines more productive."

Still, if Lilly sidesteps a large merger, it probably would need to pony up billions of additional dollars on midsize acquisitions or drug-licensing deals to fill its pipeline gap. J.P. Morgan analyst Chris Schott said that while Lilly's moves are a step in the right direction in addressing costs, the company doesn't have a research pipeline sufficient to offset revenue losses from patent expirations.

The job cuts will be spread across the company, both in the U.S. and abroad, a spokesman said. Lilly hopes to achieve some of the reductions through retirements and voluntary departures but can't rule out layoffs.

The company will reorganize its operating structure into five global business units: oncology, diabetes, established markets, emerging markets and the Elanco animal-health unit. Lilly expects the new structure to be in place in January.

Lilly also created a development center within its research arm, which it hopes will help streamline drug development.

Lilly has had some research success. In July, the Food and Drug Administration approved Effient, an anticlotting drug Lilly co-developed with Daiichi Sankyo Co., of Japan.