Eli Lilly to Cut Jobs, Focus on New Drugs -- WSJ

By Peter Loftus Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 8, 2017).

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The drug industry has eliminated tens of thousands of jobs over the past decade. In a sign that the bleeding is far from over, Eli Lilly & Co. announced plans on Thursday to cut roughly 8% of its global workforce.

Indianapolis-based Lilly cited a number of issues that are plaguing many drugmakers, including the need to lower costs and raise investment in new drugs ahead of patent expirations that are expected to erode sales of older products. The company said it would eliminate about 3,500 positions globally, including 2,000 in the U.S.

Lilly said it expects to achieve most of the U.S. reductions through voluntary early-retirement packages; others will come from site closures and layoffs. Lilly has about 41,241 workers globally, including more than 18,500 in the U.S.

The pharmaceutical sector still enjoys some of the biggest profit margins of any industry, and continues to charge high prices for many brands. At the same time, a conflux of issues presents challenges: health insurers and politicians have stepped up pressure on prices; R&D is often expensive and unsuccessful; and competition from low-cost generics remains a threat. That has left companies leaning on cost cuts and efficiency improvements to drive profit growth. The result is a dramatically shrinking workforce.

Drug companies have cut more than 269,000 U.S. workers since the beginning of 2007, according to job-outplacement firm Challenger, Gray & Christmas Inc., though the annual number of industry job losses has declined over the past five years. "When the pressure gets heavy, the scrutiny turns to the size of a company's payroll," Challenger, Gray CEO John Challenger said in an interview.

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Last year, Novo Nordisk A/S said it would slash about 1,000 jobs to cut costs in response to tighter competition in the insulin business. In 2013, Merck & Co. announced a plan to cuts its workforce, then at 81,000, by 20% over two years. The same year, Lilly laid off about 1,000 sales representatives.

Lilly, which makes the diabetes treatment Humalog and erectile-dysfunction pill Cialis, expects the moves to generate savings of about $500 million a year. Last year, the drugmaker earned $2.7 billion in net income on $21.2 billion in revenue. About half the projected savings will go toward supporting new product launches and clinical development of new uses for its drugs, Lilly said.

"If you're in our business, if you look out in the world, it's uncertain, " said Lilly Chief Executive David Ricks in an interview. "It's probably wise to have more flexibility in our choices."

In the U.S., early cuts focused on whittling down pharmaceutical sales forces that pitched drugs to doctors, reflecting the increasing role of cost-conscious insurers and pharmacy-benefit managers -- and the declining role of physicians -- in determining which drugs get prescribed and dispensed. More recent cuts have also hit manufacturing and research teams, the latter suffering as pharmaceutical companies increasingly buy experimental drugs from smaller biotechnology firms or academic labs.

Lilly said it plans to close a research-and-development site in Bridgewater, N.J., and to move production of certain animal drugs from a plant in Larchwood, Iowa, to another plant in Fort Dodge, Iowa. The drugmaker also plans to close an R&D site in Shanghai.

Lilly's new cuts come at a delicate time in the pharmaceutical industry's relationship with U.S. President Donald Trump, who has criticized drug companies for charging high prices and manufacturing drugs outside the U.S. He has urged the industry to move more manufacturing jobs back to the U.S., and has said he would take steps to bring down prices.

Mr. Ricks was among several CEOs who met with Mr. Trump at the White House in January, when he told Mr. Trump that Lilly still makes many of its products in its home state of Indiana and elsewhere in the U.S. "In fact, we're hiring manufacturing jobs as I speak," he said at the time.

The job cuts come despite a general improvement in Lilly's financial fortunes over the past few years. Earlier this decade, Lilly's sales and earnings were hurt by a wave of patent losses that exposed drugs such as the antidepressant Cymbalta to generic competition.

But revenue and earnings have risen since 2014 following rising sales of several newer products such as diabetes drug Trulicity and cancer treatment Cyramza. Lilly's share price has roughly doubled since 2012, closing Thursday at $81.54.

Still, Lilly continues to face patent expirations. In May, the U.S. patent expired for the attention-deficit/hyperactivity disorder drug Strattera, clearing the way for inexpensive generic copies. The U.S. patent for Cialis is due to expire in November, putting the drug's $1.5 billion in annual U.S. sales at risk of erosion from generics.

Mr. Ricks, who took over as Lilly CEO Jan. 1, said he expects the company's sales to increase despite the patent losses, but the expirations contributed to his decision to cut costs.

Also, he said Lilly's operating expenses as a percentage of revenue -- about 55% in 2016 -- have been higher than the drug industry's average, and the cost cuts will make the company more competitive with rivals. Lilly expects operating expenses to fall below 50% of revenue next year.

"Our job is to do the right thing for our company," Mr. Ricks said. Noting that many of the cuts would be through voluntary-retirement packages, he added: "We're not throwing people out on the street."

Lilly expects to book charges of about $1.2 billion, or 80 cents a share, in the third and fourth quarters of 2017 to cover the costs of the job cuts.

Corrections & Amplifications Eli Lilly expects operating expenses to fall below 50% of revenue next year. An earlier version of this article incorrectly said Lilly expected operating margins to fall below 50%. (Sept. 9, 2017)

Write to Peter Loftus at peter.loftus@wsj.com

(END) Dow Jones Newswires

September 08, 2017 02:47 ET (06:47 GMT)