LLY Eli Lilly and Co

By Peter Loftus 

Eli Lilly & Co. plans to cut its global workforce by about 8% and close several facilities, a step it said it needs to make to lower costs and raise investment in new drugs as the company faces patent expirations that will erode sales of older products.

The Indianapolis company, which makes the diabetes treatment Humalog and erectile-dysfunction pill Cialis, said Thursday it plans to eliminate about 3,500 positions globally, with about 2,000 of the cuts in the U.S. The jobs will be spread across various areas including manufacturing and research.

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

Lilly expects the moves to generate savings of about $500 million a year. Last year, Lilly 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.

"We would like to free up resources from fixed to variable costs to make sure we can invest behind R&D projects," Lilly Chief Executive David Ricks said in an interview.

Big drug companies have been cutting their workforces periodically for more than a decade, as they face generic competition to their top-selling medicines and troubles developing new drugs. In 2013, Merck & Co. announced a plan to cuts its workforce, then at 81,000, by 20% over two years. In 2013, Lilly laid off about 1,000 sales representatives.

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 Wednesday at $80.51.

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 still expects Lilly's sales to grow 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 margins to fall below 50% 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."

The job cuts also 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 Indiana and the U.S. "In fact, we're hiring manufacturing jobs as I speak," he said at the time.

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. Also, Lilly plans to close an R&D site in Shanghai, China.

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, including the early-retirement packages and severance pay.

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

(END) Dow Jones Newswires

September 07, 2017 09:30 ET (13:30 GMT)

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