Lilly to cut 3,500 jobs, take a $1.2B hit as it aims for $500M in savings

In CEO David Ricks' first major restructuring move, Eli Lilly plans to cut 3,500 jobs. (Twitter @KellySchool)

Under mounting pressure in diabetes, Eli Lilly has just become the latest drugmaker to undergo a major shakeup. The pharma giant on Thursday announced plans to cut 3,500 employees by the end of the year as it shoots to achieve $500 million in annual savings.

The company said it expects most of the cuts to come from an early retirement program in the U.S. in which participants will receive “enhanced retirement benefits.” Lilly disclosed the program to eligible employees today and expects the retirements to be done mostly done by the end of the year. Altogether, the announcement is the first major restructuring effort by new Lilly CEO David Ricks since taking the helm this year.

Other cuts will come from site reductions and closures. Research sites in New Jersey and Shanghai are slated to shutter as part of a streamlining effort, according to a release, with further consolidation coming elsewhere. The company plans to move animal health manufacturing from a site in Larchwood, Iowa, to an existing site in Fort Dodge, Iowa.

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Lilly expects the closures, severance expenses and the retirement program will cost $1.2 billion pre-tax, 80 cents per share after tax, impacting EPS guidance for the year. Half of the savings will go toward improving the drugmaker’s cost structure, while the company plans to reinvest the other half in product launches and R&D.

The cuts represent about 8% of Lilly’s global workforce as Lilly had nearly 42,000 employees by the end of 2016, according to an SEC filing. The drugmaker announced a big round of cuts—5,500—back in 2009.

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Like its peers Sanofi and Novo Nordisk, Lilly has been under increasing pressure in diabetes as payers play the drugmakers against each other to secure better pricing. Back in March, the drugmaker released a transparency report showing that an average 14% list price hike in 2016 for its medicines amounted to a net 2.4% increase after discounts. Across its portfolio, Eli Lilly said it is chopping half the list price off of its drugs in behind-the-scenes negotiations.

It’s not alone, however. Sanofi and Novo have had to announce sizable layoffs over the last year as sales in the treatment area erode. Novo cut 1,000 staffers last fall, while Sanofi announced its own cuts in December, part of a larger restructuring effort.

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Lilly is working to boost its fortunes in other areas of business with new psoriasis entrant Taltz quickly picking up sales this year. The company also has big plans in cancer with late-stage pipeline drugs such as abemaciclib and ramucirumab.

Thursday’s cuts at Eli Lilly follow another round earlier this year as the drugmaker had to let go of 485 employees in the wake of a failed phase 3 trial for Alzheimer’s candidate solanezumab. The company had staffed up in anticipation of an approval and launch.

Before that, the Indianapolis-based drugmaker changed some management and brought in former Novartis executive Christi Shaw, while also naming Enrique Conterno to president of Lilly USA as well as diabetes chief. Former USA head for the company, Alex Azar, left Lilly as part of the shakeup.