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Cuts At Lilly Yield Painful Progress

Cuts At Lilly Yield Painful Progress [The Indianapolis Star]

From Indianapolis Star (IN) (October 2, 2010)

Oct. 02--Thousands of pink slips. Wave after wave of employees packing their stuff into boxes. Two huge, empty buildings Downtown, and lots of empty cubicles in office buildings around the world.

And it’s not over yet.

The largest restructuring in Eli Lilly and Co.’s 134-year history, which started about a year ago, is almost halfway completed, with a goal of cutting 5,500 jobs worldwide and $1 billion in annual costs by the end of next year.

Lots of pain. But what’s the gain?

Lilly said the sweeping overhaul, while painful and disruptive, already has provided numerous benefits. In recent months, the drug maker has closed a handful of deals to acquire new products, including a statin for cholesterol and an experimental drug to treat low testosterone.

In the meantime, it has identified some new markets for existing products, such as Persian Gulf states for its diabetes medicines. And in the U.S., Lilly has edged out a major competitor to win pharmacy shelf space at Walmart stores for insulin.

Moreover, Lilly is performing well, despite all the turmoil. The company has posted robust sales and profits every quarter since its restructuring announcement in September 2009. It has raised guidance on corporate profits twice this year.

"You have to give them credit. They are executing very well," said Seamus Fernandez, a drug industry analyst at Leerink Swann in Boston. "They are building sales at one of the fastest paces in the industry."

But the process has included plenty of emotional upheaval. Lilly has chopped jobs in just about every office and department across its sprawling global empire, including research labs, sales offices and information technology. That has spawned a huge, angry response from many workers. Internet chat rooms are filled with angry messages from Lilly sales reps, researchers and others about the contraction.

Meanwhile, some employees privately say friends and neighbors ask them almost daily whether they still have a job.

The company forbids employees from talking to the media without permission. Several former employees said they have signed agreements not to talk about the layoff process as a condition of their severance. Lilly gave laid-off workers severance packages of three to 18 months of pay, depending on length of service.

John Lechleiter, chairman and chief executive, said the company does not like to shed workers but had no choice. The company is facing the loss of patent protection for many of its blockbuster drugs over the next seven years that account for about three-quarters of its revenues. In addition, the industry is trying to navigate the choppy waters of health-care reform, tough regulatory hurdles and demands from payers to hold down prices.

"We’ve tried to be thoughtful in the way we’ve accomplished this and very mindful of a core value of ours, which is respect for people regarding how we handle any individual situation," he said in an interview.

Lilly’s restructuring is also taking a toll on the Indianapolis economy. The office vacancy rate Downtown jumped to more than 20 percent during the third quarter as a result of Lilly moving out of two large buildings at its Faris campus, near Meridian and South streets. That’s up from 17.8 percent just three months earlier.

Real estate brokerage CB Richard Ellis said the big jump in the vacancy rate was the "direct result" of the newly emptied Lilly buildings, holding 321,000 square feet, being dumped on the market. Lilly said it no longer needed the space on the Faris campus, about three blocks from its massive headquarters campus, because of the downsizing.

Lilly is far from the only drug maker stepping on the brakes. In the first eight months of this year, the industry shed more than 37,000 jobs, according to Challenger, Gray & Christmas, an outplacement consulting firm. That compares with 53,000 for the same period last year.

"It’s been another tough year for Big Pharma," said Les Funtleyder, a drug analyst at Miller Tabak & Co. in New York. "Lilly is not in this boat alone, by any means. But they probably have the biggest immediate challenge, because their patent cliff is so steep."

The company said it began the restructuring process in the spring of 2009, driven by the need to cope with business pressures and the uncertainty of health-care reform.

At the core of the restructuring were the goals of spotting opportunities quickly, listening more closely to customers, speeding up product development and increasing productivity, said Peter Johnson, Lilly’s vice president of corporate strategy.

The benefits to date have been fairly modest, with a handful of small deals closed that could result in a small boost to revenues. But Lilly said the bigger payoff will come in four or five years, when its laboratories begin to launch products faster, due to a new mandate to speed the process and provide drugs demanded by customers.

Meanwhile, Lilly said it is on schedule with the job cuts, expecting to finish this year at least halfway to chopping 5,500 positions. Lechleiter declined to say how many cuts have taken place in Indianapolis, except to say they have been made proportionately across the company. Indiana has been home to about one-third of Lilly’s 40,000 employees.

Lechleiter said Lilly has no immediate plans for another round of cuts after this one is completed, but he refused to rule it out if business conditions deteriorate.

With its smaller footprint, however, Lilly still swings a mighty bat. The company pays more than $1 billion in annual statewide payroll and billions more in purchases, employee spending and taxes.

"We’re confident we can deliver," Lechleiter said. "We’ve exciting products in development. We have a new structure for getting them into the market faster."

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Posted: October 2010