By Peter Loftus
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).
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.
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)
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