Lilly protects research budget as generics loom

By Ransdell Pierson and Lewis Krauskopf

NEW YORK (Reuters) - Eli Lilly and Co <LLY.N> is again defying the accepted wisdom of its pharmaceutical industry peers.

While rivals have engineered huge mergers and whittled, or slashed, research budgets, Lilly said on Thursday it will remain independent and may even boost research spending through 2014 to produce a new crop of drugs as its top-sellers lose patent protection.

Lilly outlined its spending plans at a meeting with analysts and investors in New York. It also pledged to maintain its hefty dividend, while avoiding large-scale mergers.

Global spending on research and development has begun to slide as companies try to shore up profits in the face of generic competition and the failure of their big budgets to produce important drugs.

But Lilly's chief executive, in an interview with Reuters, said he could not understand how the drug industry still expects to come up with promising new treatments while short-changing research.

"It would be a mistake for us to disinvest in any significant way in R&D," CEO John Lechleiter said.

"As a company that is focused on innovation and seeking new treatments and cures, it's important that we maintain a steady approach and a consistent approach in investing in R&D, and I'm confident it will pay off," Lechleiter said.

Pfizer Inc <PFE.N>, whose Lipitor cholesterol fighter loses U.S. marketing exclusivity in November, said earlier this year it would chop its research budget by up to $2 billion and lay off thousands of researchers in the process. Britain's GlaxoSmithKline <GSK.L> has slashed 28 percent of its research staff in the last five years.

The global drug industry cut research spending for the first time ever in 2010 after decades of relentless increases, according to Thomson Reuters data released earlier this week.

"It's crazy; first of all, by definition this is a research and development-based industry," Lechleiter said.


Lilly sees an end to a five-year dearth of big new drugs, with new and experimental medicines in diabetes -- where it aims to be the global market leader by the end of the decade -- as well as for cancer, rheumatoid arthritis, lupus and Alzheimer's disease.

Lilly said it still expects annual revenue of at least $20 billion between 2011 and 2014, down from more than $23 billion last year. It expects a full-year profit of at least $3 billion during the period, meaning a possible 40 percent decline from the $5.1 billion generated in 2010.

Lilly plans to earmark as much as 25 percent of annual sales for research and development. That would mean perhaps $5 billion a year, or more, during the three-year period, when top medicines will lose patent protection. Lilly spent $4.88 billion on R&D last year, or 21 percent of sales.

"Lilly is showing it is very committed to the innovative R&D model," JP Morgan analyst Chris Schott said at the meeting. "We will have an answer to this investment in the next two years."

Lilly has 70 medicines in clinical development and said it was on track to meet or exceed its goal of 10 new drugs in late-stage clinical studies by the end of the year.

"They're coming out of a fairly dry spell over the last five years," Leerink Swann analyst Seamus Fernandez said. "It looks like that's poised to change."


Lilly recently launched Tradjenta, a once-daily tablet for diabetes. Research chief Jan Lundberg said the drug could be simpler to prescribe for patients with liver or kidney problems than Merck's <MRK.N> similar, and widely used, Januvia.

Lilly has a handful of experimental diabetes medicines that could hit the market in the next five years, including Bydureon -- a once-weekly version of its Byetta treatment that has been approved in Europe but delayed by U.S. regulators.

"Diabetes is one of the great opportunities for Lilly moving forward," Lundberg said in an interview, adding that the company aims to be the No. 1 player by the end of the decade.

Two late-stage studies for Lilly's closely watched Alzheimer's treatment solanezumab are expected to be completed in the first half of next year.

"Solanezumab is a risky bet, but if the data are positive it's a huge opportunity," Chief Financial Officer Derica Rice said in an interview.

Lilly's $5 billion-a-year Zyprexa schizophrenia treatment will face generics in October. Anti-depressant Cymbalta -- with annual sales of $3.5 billion -- goes generic in 2013 or 2014. Cancer drug Gemzar already faces generic competition and its Evista osteoporosis medicine could face steep declines beginning March 2014.

Patent expirations will slash annual revenue from the four drugs by $7 billion from 2010 to 2014, Lilly said. The company said the decline will be significantly offset by higher sales in Japan and emerging markets, as well as demand for the company's animal-health products.

Lilly expects its earnings per share to decline from 2011 to 2012, rise in 2013 and then fall again in 2014. It expects to return to profit growth after 2014.

Lilly shares were up 0.7 percent at $37.51 in afternoon trading on the New York Stock Exchange.

(This story is corrected in paragraph 21 to clarify that Lilly is testing a separate drug for lupus.)

(Reporting by Ransdell Pierson and Lewis Krauskopf; Editing by Derek Caney, Dave Zimmerman, Gary Hill)