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Lilly is carving up to $1B out of its struggling R&D division

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It's make-or-break time for Eli Lilly's late-stage pipeline. The struggling pharma giant says revenue this year will fall just below $20 billion as the company absorbs the punishing financial body blows delivered by generic competition to Cymbalta, exposed late last year, and Evista, which will be exposed in March. But after several years of setbacks highlighted by one of the worst records for new drug approvals in Big Pharma, Lilly insists that it's prepared to deliver on its long-standing promise to launch "multiple products each year for the next few years" even as it preps big cuts to its R&D budget.

Those are the words--or mantra--of Lilly CEO John Lechleiter, who faces the increasingly difficult task of convincing the investment community that the company's 13 late-stage products can return Lilly ($LLY) to growth.

R&D expenses have been running a little over $5 billion a year over the last two years, hitting an estimated $5.4 billion in 2013. This year, Lilly says it plans to cut back significantly, down to between $4.4 billion and $4.7 billion--which is up to $1 billion less. As we noted back in October, those kinds of cuts could well involve layoffs in the R&D group, which might hit the Indiana group particularly hard.

Lilly has few alternatives, though. At one point $20 billion was the least amount that Lilly had expected to bring in this year. But with generics eating into revenue, R&D became a likely source of cost savings as the pharma giant vowed to maintain profits.

Lilly will still have one of the largest shares of revenue committed to research among the top 10 biopharma companies. It's also the final big holdout in the global restructuring of R&D. After Merck finally abandoned its "everything's fine" stand in 2013, Lilly's Lechleiter remains the last pharma chief standing to insist that the company's internal innovation machine and a tradition of innovation can produce the next generation of drugs needed to preserve the company in the face of the patent cliff.

To the company's credit, it has continued to hold on to the respect of some key analysts.

"I currently rate LLY Hold, but have become increasingly constructive on the stock as (1) it lagged badly in 2013; (2) many of the expected pipeline failures are now behind the company yet expectations remain incredibly low; (3) pipeline read outs in 2014 might be more positive than in 2013 (ramu lung; dulaglutide); (4) LLY is assembling the broadest diabetes portfolio in all of pharma; and Phil Johnson (Lilly's head of investor relations) is freakin' awesome," ISI's Mark Schoenebaum noted this morning.

Of course, Lilly executives promised several years ago to start delivering two new drug approvals a year in 2013, which failed to materialize and won't be hard to beat in 2014. Now the company will largely rely on its me-too Phase III diabetes portfolio to make its case. Just weeks ago, Lilly announced that the FDA had accepted its application for a knockoff of the long-acting insulin Lantus, Sanofi's ($SNY) big blockbuster. Lilly has a better chance of garnering some excitement with dulaglutide, possibly one of the best GLP-1 drugs in the field, now up for an approval.

For every advance, there's a "but" to consider. Lilly touts the chances of ramucirumab to be approved for stomach cancer, but the drug failed a pivotal study on the more lucrative indication for breast cancer. Dulaglutide has produced impressive efficacy results for diabetes, but other GLP-1 drugs have already made it to the market, and there are many unanswered questions about safety--a major issue at the FDA. And the litany of trial failures at Lilly include a range of programs extending from edivoxetine (LY2216684), a depression drug scrapped weeks ago, to the late-stage failure of solanezumab for Alzheimer's. The last approval Eli Lilly won was for Amyvid, a beta amyloid imaging agent which can't be used for what it is designed to do--flag Alzheimer's--and has no market outside of clinical trials. Since 2009 it's won exactly one actual new drug approval.

Lilly also needs to do more than gain multiple approvals. It has to quickly demonstrate that these new drugs have the ability to garner blockbuster revenue to replace standard bearers like Zyprexa and Cymbalta. And that's far from certain.

"We continue to drive productivity gains across our business in order to adequately fund R&D, invest in the launch of new products, support necessary capital spending, engage in business development and return additional cash to shareholders through our dividend and our share repurchase program," Lechleiter said in a statement. "We believe our strategy is the right one for Lilly and one that will continue to create value for all of our stakeholders."

- here's the press release

Special Reports: An ominous trend resurfaces as new drug approvals plunge in 2013 | Top 15 Drug Patent Losses for 2013 - Cymbalta | Top 10 Drug Patent Losses of 2014 - Evista

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