UPDATE: Lilly To Cut $1B In Costs, 5,500 Jobs Next 2 Yrs

Eli Lilly & Co. (LLY) said Monday it plans to reduce its work force by nearly 14%, or 5,500 employees, and revamp its operating structure to help brace for a challenging decade ahead in which it will face heavy competition from generic drugs.

Between 2010 and 2013, more than half of Lilly's current revenue will become exposed to generic competition due to U.S. patent expiration on four of its five top-selling drugs including the blockbuster antipsychotic Zyprexa. Sales of those drugs - nearly $11 billion last year - can be expected to decline by as much as 80%. Lilly currently doesn't have enough firepower to offset the lost revenue, having had some notable failures in recent weeks in efforts to bring new drugs to market.

Lilly isn't the only pharmaceutical company to face patent and pipeline woes, but its situation has been among the most dire in the industry, which helps account for the nearly 18% year-to-date decline in Lilly shares. While rival drug makers including Pfizer Inc. (PFE) and Merck & Co. (MRK) have engineered large-scale acquisitions to address their challenges, Lilly Chief Executive John Lechleiter has pledged not to make a large deal, preferring instead to make smaller purchases to beef up Lilly's drug pipeline.

"We believe these actions are consistent with our goal to ensure the company is well positioned during the challenging period we have ahead, and positioned to grow out of that period with a sustainable flow of innovation," Lechleiter said Monday in an interview. He reiterated his intention to avoid a large-scale combination, saying such deals "provide short-term relief but don't fundamentally address the issue of innovation and how to make pipelines more productive."

Shares of the Indianapolis-based company rose 26 cents to $33.08 Monday. Lilly also reiterated its previous earnings forecast for 2009, a range of $4.14 to $4.24 per share.

JPMorgan analyst Chris Schott said Lilly's actions are a step in the right direction in addressing the company's operating costs, but Lilly currently doesn't have a research pipeline sufficient to offset the future loss of revenue from patent expirations.

The planned job cuts and other measures would reduce Lilly's costs by $1 billion by the end of 2011, excluding planned strategic additions in emerging markets and Japan, Lilly said Monday. Lilly sees its work force declining to 35,000 by the end of 2011 from 40,500 today (and versus 46,000 at its peak in 2004).

The job cuts will be spread across the company, both in the U.S. and abroad, a spokesman said, but Lilly hasn't yet determined the impact on specific corporate functions or geographies.

The sizable employee layoffs contrast with the more incremental job cuts Lilly has made in the past, including a recent offer of voluntary buyouts to its U.S. sales representatives that were expected to eliminate a few hundred workers.

The company will now reorganize its operating structure to have five global business units: oncology, diabetes, established markets, emerging markets and the Elanco animal-health unit. Previously most of these businesses have been operating as one. Lilly expects to transition to the new organization in January 2010.

Lilly also created what it's calling a "development center of excellence" within its research arm, which Lilly hopes will help streamline its drug development and accelerate the launch of new Lilly products.

The company named internal executives to lead the newly created divisions. Bryce Carmine, currently head of worldwide sales and marketing for Lilly's entire drug operations, was named leader of the established-markets business, which includes its neuroscience, osteoporosis and cardiovascular drugs. The newly created units for Lilly's oncology and diabetes drugs will each have its own leader. Lilly named John Johnson head of the oncology unit; he was head of ImClone Systems, which Lilly acquired last year for $6.5 billion.

Lilly's challenges were underscored in recent weeks when it announced negative clinical-trial results for experimental drugs for multiple sclerosis and osteoporosis, and one of its patents for cancer-drug Gemzar was invalidated in a U.S. court.

Lechleiter said Monday the drug-research setbacks "certainly were part of our consideration" in the restructuring, but he said Lilly probably would have made significant changes even if those drugs hadn't failed. He noted that Lilly faced both internal and external challenges, including higher standards for regulatory approvals of new drugs.