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Lilly says it must cut costs to meet goals; shares fall

By Ransdell Pierson

(Reuters) - Eli Lilly and Co, which is trying to rebound from painful patent expirations on its medicines, said on Thursday that it would have to cut costs to achieve its financial goals through 2014.

Shares of the U.S. drugmaker fell almost 4 percent even though it also said it would buy back $5 billion of its stock over time.

Lilly said slowing growth in emerging markets and the devaluation of Japan's yen were hurting its results. These "headwinds" will make it challenging for the company to meet its minimum revenue goal of $20 billion in 2014, Chief Financial Officer Derica Rice said.

Rice said Lilly was looking for ways to reach the revenue goal and would reduce costs to meet its objectives of at least $3 billion in annual net income and $4 billion in operating cash flow through 2014.

Lilly has already laid off thousands of employees in order to bolster earnings during its "patent cliff," which began in 2011 with generic competition for its biggest product, schizophrenia treatment Zyprexa. Its most recent round of cuts came in April, when Lilly said it would lay off about 1,000 U.S. sales representatives, or 30 percent of its sales force.

Most other large drugmakers have cut their workforces sharply in recent years, or closed research and manufacturing sites, because of expired drug patents which opened the door to cheaper generics.

Just two days ago, Merck & Co said it would cut annual operating costs by $2.5 billion and eliminate 8,500 jobs, or more than 10 percent of its global workforce, as generic competition for its Singulair asthma drug and setbacks for many of its experimental medicines hurt results.

Lilly is counting on approvals in the next year for new treatments for diabetes and cancer, and for the drugs to expand its profit margins after 2014.

"One of the most important questions on investors' minds around the margin expansion guidance is: Will Lilly hit this guidance even if the (drug) pipeline largely fails?" ISI Group analyst Mark Schoenebaum said.

Many analysts in recent years had hoped Lilly would restore earnings growth by merging with another large drugmaker, but the Indianapolis company has vowed to remain independent and to bounce back by introducing important new products.

"I'm even more confident we don't need a large-scale transaction to assist us during this period," Rice said on Thursday. Despite the need for cost cuts, Rice said the company remains interested in modest-sized acquisitions.

Revenue and earnings at Lilly have begun to improve this year, but will plunge again after the company's $6 billion-a-year Cymbalta depression treatment goes generic in December. The picture worsens in 2014, when blockbuster osteoporosis drug Evista loses patent protection.

Lilly officials met in Indianapolis on Thursday with hundreds of investors and analysts to review its medicines, including experimental treatments for a wide range of diseases.

Analysts on average expect Lilly's earnings before special items to drop 33 percent to $2.77 per share in 2014 from an estimated $4.14 this year.

Rice said analysts might be underestimating the impact of the Cymbalta and Evista patent expirations on profit margins. But he said the forecasts also might overstate Lilly's likely tax rate and not fully reflect the company's ability to reduce operating expenses. Lilly will provide its own specific 2014 earnings forecasts in January.

PRODUCT PIPELINE

The company's experimental drugs include ramucirumab, which Lilly believes could become a new standard of care for stomach cancer, and necitumumab, which may be the first biotech treatment for the squamous form of lung cancer.

Both cancer drugs came from Lilly's acquisition in 2008 of ImClone Systems Inc and have prolonged lives of patients in clinical trials.

Lilly is placing most of its bets on new cancer drugs, with two dozen experimental compounds in various stages of testing. It is also testing a number of treatments for Alzheimer's disease, after two have failed.

Diabetes drugs have been a strong suit for Lilly over the past decade, but their sales have suffered because of rival products, including insulins from Danish drugmaker Novo Nordisk.

Lilly earlier this year asked U.S. and European regulators to approve two new diabetes treatments. One, a once-weekly injectable drug called dulaglutide that is a so-called GLP-1 agonist, would compete with similar drugs sold by Novo Nordisk and Bristol-Myers Squibb. Another, called empaglifozin, is a member of an emerging new family of oral treatments called SGLT2 inhibitors that remove excess blood sugar through the urine.

Shares of Lilly were down 3.6 percent at $48.70 in late-afternoon trading.

(Additional reporting by Esha Dey in Bangalore; Editing by Saumyadeb Chakrabarty, Lisa Von Ahn and Chris Reese)

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