But the news in October wasn’t all bad for the pharmaceutical company, as intense lobbying efforts paid off in the form of one of the largest federal tax breaks in decades.
Pharmaceutical stocks in general have suffered tremendously as a result of the arthritis drug Vioxx being pulled from the market by its manufacturer Merck at the beginning of the month.
Nervous investors also fear this season’s campaign promises of lower drug prices and repealed corporate tax breaks might come to fruition, decreasing their profit margins.
Lilly’s stock continued to hit a 52-week low as October drew to a close, down as low as $50.44 a share from a high of $76.95 in June.
The drop in stock price occurred after the release of a third quarter earnings report for the drug-maker showing $3.28 billion in net sales, a meager 4 percent increase over the $3.1 billion in sales for the same period in 2003.
A 22 percent drop in U.S. sales of the schizophrenia drug Zyprexa receives the bulk of the blame for the unsatisfactory earnings.
Anticipating both the disappointing sales report and adverse reactions by investors, Lilly implemented drastic cost-cutting measures expected to generate an estimated net savings of $150 million in 2005.
Several months prior to the earnings report, a minimum one-year hiring freeze was instituted, as well as the elimination and significant reduction of the use of temporary workers, consultants and outsourced jobs.
More significant cuts were announced at the end of the third quarter, however, including plans to close all regional sales offices, a research facility in North Carolina and production facilities in Indianapolis and Clinton.
A research program in inflammation drugs has also been cancelled.
In all, these actions will eliminate 1,000 jobs by March of 2005, including 225 in Indianapolis.
Lilly has offered employees affected by the job cuts the choice to relocate in other open positions or accept a voluntary severance package.
In 2003, Lilly employees numbered just over 46,000 with over 24,000 of those jobs inside the U.S., including 14,000 in Indianapolis — nearly one-third the company’s total workforce.
Current job losses, however, indicate that Lilly may not be able to honor its agreement with the state to create 7,500 new jobs in Indianapolis by 2009.
The agreement provides Lilly in excess of $200 million in state and local tax abatements in exchange for the new jobs and, to date, less than half of those jobs have been created.
Thus far, none of the cost-cutting measures include reducing the salaries or benefits of Lilly’s executives — the top five of whom earn a combined $30 million in compensation annually and hold an additional $200 million in unexercised stock options.
In addition to cutting jobs and dropping selected research programs, Lilly also announced plans to significantly reduce the cost of bringing new drugs to market from the industry average $1 billion a year to between $500-$700 million.
Several weeks before the earnings report was released and the cost-reduction measures taken, Congress approved one of the largest corporate tax cuts in 20 years that will reduce Lilly’s federal and state tax liability by billions of dollars.
Included in this package is a “tax holiday” spear-headed by Lilly lobbyists that will allow multinational companies to bring profits from overseas accounts back to the U.S. at a tax rate of 5 percent instead of the federally mandated 35 percent.
For Lilly, the “holiday” means they can transfer a reported $8 billion into U.S. accounts and pay $400 million in taxes instead of $2.4 billion.
This tax windfall comes less than a month after the release of a report by the non-partisan groups Citizens for Tax Justice and the Institute on Taxation and Economic Policy exposing the disparity between corporate profits and corporate taxes.
According to the study, America’s largest and most successful businesses have paid significantly fewer taxes in recent years, despite significantly higher profits.
The report named Eli Lilly and Company as one of the most successful at using corporate tax breaks to reduce its tax burden, paying an average of 12.2 percent from 2001-2003 instead of the 35 percent maximum.
Lilly disputes the figures, claiming they averaged a 21 percent tax rate during these years.
The company also insists that all the money saved as a result of tax savings goes toward job creation and research programs, the same areas they are now cutting.