Surely, Eli Lilly didn't throw it's restructuring plan together in a couple of weeks, but it was just the end of last monthwhen Leerink Swann analyst Seamus Fernandez said LLY needed to cut costs and/or do a big deal. So, kudos to him for getting out ahead of it.
The drug company today saidit will get rid of 5,500 people by the end of 2011 to save a billion dollars a year. As is often the case when a company cuts costs the stock goes up. LLY shares are no exception. But the drugmaker is late to the cost-cutting game. Its competitors have been doing it and escalating it for years. Challenger, Gray & Christmas, which closely follows employment trends, says there's been a "dramatic rise" in pharmaceutical industry downsizing. CG&C says so far this year the sector has announced more than 53,000 job cuts. That's 113 percent more than the number eliminated by this date last year. Of course, a lot of that is due to Pfizer buying Wyeth and Merck buying Schering-Plough . Not to treat job cuts lightly, especially in the current economic environment, but pharma cost-cutting has become so commonplace it just doesn't come as a big shock when yet another drugmaker announces so-called headcount reductions. But look at what a huge story itis in Lilly's hometown of Indianapolis.
As Fernandez pointed out in his August 31st note, LLY is facing an enormous amount of generic drug competition over the next several years. On top of that, the company has had some drug development pipeline disappointments recently and the financial fate of its brand new bloodthinner Effient is the subject of analyst debate. Some think it's gonna be a billion-dollar-plus blockbuster, others don't.
Lilly headlined its press release, "Lilly Unveils Blueprint for Speeding Innovative Medicines to Patients." Part of the restructuring includes dividing the company into five new parts. The effort might be designed to -in corporate-speak- prove efficiencies, but streamlining a drug company is certainly no guarantee that suddenly the odds go up for having more drug development success.
In a research note to clients, JPMorgan analyst Chris Schott is raising his earnings estimates for LLY starting next year. But he still has an "Underperform" or "Sell" rating on the stock. "We do not see Lilly's current pipeline as meaningful enough to offset the company's wave of 2011-2014 patent expirations," Schott writes. In fact, he has a compound annual growth rate of negative five percent from 2009-2015. "We expect the focus of the Lilly store to remain on the company's M&A strategy and the launch of Effient," he says.