Lilly Plans Cuts as Pricing Pressure Drives New-Drug Push

(Bloomberg) -- Eli Lilly & Co. plans to cut 8.5 percent of its workforce in a bid to free up resources to fund new drugs, amid acute pricing pressure for some of its biggest products.

The Indianapolis company said some of the 3,500 job cuts will come from early retirements, with about 2,000 positions set to be eliminated in the U.S. Lilly plans to close a research facility in Bridgewater, New Jersey, and consolidate some manufacturing operations in its animal health unit, it said in a statement.

Faced with expiring patents on a number of its medicines, Lilly has been focused on diabetes drugs, which account for three of its 10 top-selling products. Its biggest seller is insulin. But intense competition from a flurry of new treatments in that market has helped drive down prices and profits.

“Around the world we have pricing pressure and I think it’s understandable,” Chief Executive Officer David Ricks said in an interview. “Patients and health-care systems, governments, want us to be more efficient. This is a step toward efficiency. It gives us flexibility and latitude to respond to events that may put pressure on our prices in the future.”

Lilly has cut thousands of jobs in recent years amid a slide in sales caused by generic rivals. It’s been hurt by research failures, as well. Last year, it eliminated 500 positions following the failure of an experimental Alzheimer’s disease drug. It had about 41,000 employees as of June.

Shifting Focus

Ricks, who started as CEO in January, said the reductions will let the company focus on newer drugs. Lilly has said it can introduce 20 new products between 2014 and the end of 2023. Its newer products have proven more successful than anticipated, prompting Lilly to seek expanded indications, he said.  

Ricks cited its cancer drugs, including experimental treatments abemaciclib and baricitinib, as well as diabetes treatment Jardiance, that recently saw its label expanded. 

He said the company also wants to continue to look for small- to mid-size deals and the oncology space remains a “prime target.” Ricks said the company is watching, but not invested, in the groundbreaking yet risky cancer therapy known as CAR-T. Last week the U.S. FDA just approved the first such treatment.

Lilly shares rose 1.9 percent to $82 at 2:35 p.m. in New York.

Broad Struggles

The company’s decision to close some plants suggests that its struggles aren’t limited to the diabetes market, Kurt Kemper, an analyst at Hilliard Lyons Inc. who rates Lilly shares as long-term buy, said in an interview. Lilly’s animal health division, Elanco, has operating margins much below rival Zoetis Inc., he said. 

“There’s some fat to cut there,” Kemper said. 

The moves announced on Thursday are expected save about $500 million annually starting in 2018, Lilly said, and result in charges of $1.2 billion, or 80 cents a share, in the second half of this year. 

Lilly spokesman Mark Taylor said half of the $500 million in savings would be invested in research & development. The rest will help help Lilly reach its promise to investors to bring down operating expenses to 50 percent of revenue or less by 2018. 

To contact the reporter on this story: Jared S. Hopkins in New York at jhopkins38@bloomberg.net.

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Timothy Annett