Opinion and Taking Issue

EDITORIAL: Eli Lilly’s cuts are necessary evil

October 19, 2013

If Eli Lilly and Co. sneezes, Indianapolis catches a cold. The statement has been so oft-repeated that it’s become a cliché.

But it’s indisputably true. While central Indiana’s economy is diverse, the pharmaceutical giant remains its most important corporate engine.

That’s why the more than 2,000 job cuts Lilly has made in Indianapolis since 2010 have been a drag on the economy. And that’s why it’s worrisome that pressures for deeper reductions to its 38,000-person global work force are intensifying as the company braces for the expiration of U.S. patents on Cymbalta—an antidepressant with $5 billion in annual sales—in December.

In a report this month, Citi Research said one of the biggest risks facing Lilly is its potential “inability to cut costs adequately as the company goes through a patent cliff [Cymbalta].”

It would be easy to call on Lilly brass to hold the line on deeper job reductions at all costs, especially in its hometown. But such a position would be naïve.

On the surface, Lilly’s financials look stellar—the company earned more than $4 billion on $23 billion in sales last year. Lilly, along with Cummins Inc., WellPoint Inc. and Simon Property Group Inc., were the only Hoosier public companies to earn more than $1 billion last year. Lilly’s profit as a percentage of revenue was an enviable 18 percent.

But such comparisons overlook the reality that, for Lilly to maintain its $53 billion stock market value, it must remain highly profitable and stack up favorably against its drug industry peers, from Bristol-Myers Squibb to Merck.

Keeping the stock price up is of broad importance in Indianapolis, where Lilly shares are widely held. Its biggest shareholder, in fact, is the $7 billion Lilly Endowment Inc., cornerstone of the state’s philanthropic community.

Lilly’s top brass have done a masterful job avoiding an investor exodus. Executives continue to reiterate that they are committed to continuing the company’s 49-cents-per-share quarterly dividend, a rich payout that has swayed investors to stick around as they wait for the company’s R&D labs to bring new blockbusters to market.

The company this month unveiled another carrot: a $5 billion stock buyback program. Repurchasing shares reduces the amount of stock outstanding, giving remaining investors a bigger slice of the earnings pie.

Such moves help calm the nerves of jittery investors. But they aren’t a long-term solution. For Lilly to again thrive, it must hit the jackpot with more of its drugs in development—pushing sales higher.

In the interim, however, cost-cutting is a necessary evil. That could mean more hits for the Indianapolis economy. But the consequences of the alternative—a weakened Lilly that has lost the confidence of investors—would be even more dire.•

To comment on this editorial, write to ibjedit@ibj.com.

ADVERTISEMENT

Recent Articles by IBJ Staff

Comments powered by Disqus