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Is Eli Lilly about to start cutting its blockbuster R&D budget?

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Eli Lilly CEO John Lechleiter

The litany of clinical trial failures for Eli Lilly's ($LLY) pipeline programs is likely to force the company to start carving up its R&D budget as the pharma giant enters a 7-year drought on the sales side, according to a group of analysts tracked by the Indianapolis Business Journal.

The IBJ has been tracking analysts' forecasts for the company, and it's looking distinctly bleak as Lilly's $5 billion franchise for Cymbalta inches closer to the edge of the patent cliff. Profits are expected to slide a painful 33% in 2014, the "trough" year, and stay lean until 2019 or 2020. And that means that as the company economizes to find earnings, it will likely slash into R&D costs as well.

A group of 6 analysts estimate on average that Lilly will cut its R&D budget from a record $5.4 billion this year to $4.7 billion in 2018, according to the business journal. Those kinds of cuts could well include layoffs in the R&D group, which includes about 60% of Lilly's Indiana workforce.

Lilly has made big bets on a series of long shots on Alzheimer's and cardiovascular drugs. Solanezumab and evacetrapib both face long odds in huge Phase III studies, but after repeated failures in both fields analysts rarely offer any peak sales projections. Its best near-term shot at adding to its revenue will come in the diabetes field, with drugs like dulaglutide and empagliflozin. But even if they are approved, Lilly faces some major league competition that could limit their commercial potential.

Grim expectations on Wall Street have been adding to the substantial headwinds that Lilly faces in pursuing CEO John Lechleiter's strategy to largely stick with its pipeline efforts, avoiding the kind of dealmaking and buyouts that have been changing the face of most of the Big Pharma companies' R&D efforts over the last three years. Merck ($MRK) was the latest company to join the Great Restructuring, which has transformed Pfizer ($PFE), Roche's ($RHHBY) pRED, GlaxoSmithKline ($GSK) and others.

Recently ISI's Mark Schoenebaum sized up Lilly's plans and financial forecasts and asked what happens if more trial failures pile up. "Plan B would be painful as it would likely involve savage cost cutting in the face of continued pipeline disappointments," he concluded.

But many analysts see some big cuts coming even if the pharma company largely performs as expected.

- here's the story from the Indianapolis Business Journal

Special Report: Biopharma's Top R&D Spenders of 2012 - Eli Lilly

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