Eli Lilly has unveiled plans to create a leaner organisation which will see its workforce cut to 35,000 from 40,500, by the end of 2011.

Chief executive John Lechleiter said that the firm was acting at a time when the global pharmaceutical industry is facing “unprecedented challenges”, such as slowing innovation, rising costsand demands from payers to deliver greater value, plus health care reform. However the challenge that looms largest for Lilly is US patent expiry on the drug that has been its earnings driver for a long time, the antipsychotic Zyprexa (olanzapine). Generic competition is already eating into revenues of big-selling chemotherapy Gemzar (gemcitabine).

Given this, 5,500 jobs are to go in the next couple of years and while Lilly has yet to specify where the cuts will come, they do exclude “strategic sales additions in high-growth emerging markets and Japan”. The company also noted that the company is establishing the Development Center of Excellence “to help address the industry-wide challenge of a drug development process that is increasingly complex, slow and expensive” and is reorganising around five global business units – oncology, diabetes, established markets, emerging markets, and Elanco animal health.

Mr Lechleiter said that "while our financial performance during the past few years has been strong, we will soon enter the most challenging period in our company's history”. He added that “this calls for strong measures to speed our output of new medicines, better meet the changing needs of our customers and reduce our costs”.

He went on to say that “while our structure and approach served us well in the past, we must take measures now that will make us leaner, more focused, more customer-oriented, and more competitive". Mr Lechleiter added that the changes will accelerate the progress of “the most exciting pipeline in our history, with more than 60 molecules currently in clinical development”.

Lilly is the latest in the long-line of firms that are restructuring in order to cut costs. Analysts at Collins Stewart noted that “most of big pharma faces patent issues in the next five years, and most now have defined cost-cutting programmes in place”.

They add that “there is ample opportunity” across all areas of these drugmakers, “not to mention general largesse”, noting that the sector is “one of the last bastions of corporate jet culture”. Most pharma firms will need to take-out costs worth 5-10% of sales over the next five years to achieve this, and Collins Stewart notes that Lilly’s plan is 5%.

The analysts concluded by saying that “whilst it is a theme which will probably play out, and be validated, over the next two-three years, it is interesting that more and more managements are talking the story”.