Eli Lilly to cut 5,500 jobs as Big Pharma winter approaches

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It's no secret drug companies have been bracing for hard times. There are several factors at play, but none more serious as the growing number of drugs set to go off patent in the next two to four years, including several blockbusters. As the pharmaceutical companies prepare to face increased generic competition, they have very few new drugs in their pipelines to replace the lost sales.

Many companies have had no choice but to resort to restructuring to cut costs, including massive layoffs by the tens of thousands. Unfortunately, this coincided with the worst recession since the Great Depression. Since 2007, one company after another kept announcing job cuts, and today Eli Lilly & Co. (LLY) added another 5,500 people to the ranks of the unemployed.
Eli Lilly says it will reorganize into five global business units -- oncology, diabetes, established markets, emerging markets, and Elanco animal health -- in an effort to slash costs and speed up development of potential new drugs. The company has set a goal to reduce its cost structure by the end of 2011 by $1 billion, which entails reducing its work force to 35,000. It has about 40,500 now, according to Thomson.

Just like Pfizer, which has taken similar steps recently, half of Lilly's revenue will become exposed generic competition between 2010 and 2013 as four of its five top-selling drugs, including Zyprexa, face patent expiration. Lilly's sales of these drugs, which totaled nearly $11 billion last year, can decline by 80 percent. And just like the rest of the industry, Lilly doesn't have enough in its pipeline to offset the lost revenue.

John C. Lechleiter, chairman and CEO sounded confident though and said the changes "will accelerate the progress of the most exciting pipeline in our history, with more than 60 molecules currently in clinical development." He further explained, what hasn't really been news -- that the global pharmaceutical industry is facing unprecedented challenges - slowing innovation, rising costs, patent expires and increased generic competition, demands from payers to deliver greater value, and health care reform. These forces are reducing industry growth rates and profitability.

While the number sounds alarming, Lilly's is just the recent in a wave of layoffs in the industry that mostly took place in 2007-2008, but included some recent ones.
  • In January, Pfizer Inc. (PFE) announced its plan to reduce its workforce by approximately 10 percent, about 8,000 workers, also due to its merger with Wyeth (WYE). Estimates put the total layoff figure post merger at 15 percent at both companies, for a total of 19,500 jobs. And this was already after announcing different scale job cuts consistently since 2004, and again since 2007.
  • Last September, Schering-Plough Corp. (SGP) axed 5,500 jobs in its cost cutting drive. When it merges with Merck & Co., Inc. (MRK), 15 percent of their combined workers are also expected to see the door, or 16,000.
  • Medtronic (MDT) said in May it's going to slash 1,500 to 1,800 jobs.
  • Even Johnson & Johnson (JNJ) announced in April 2009 it was eliminating 900 positions.
These are just samples of what's been a systemic reduction in the pharmaceutical workforce, mostly drug reps, but not just as plants have been shut down and some R&D operations scaled down. No doubt, the 35,000 number announced by Lilly is eye popping, but not that surprising. We can just hope the massive layoff wave is behind us as the industry restructuring starts bearing fruit.
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