UPDATE: Pipeline challenges force Lilly restructuring moves

Since John Lechleiter was named CEO 18 months ago, he’s bet that Eli Lilly and Co. could face down its looming patent
challenges by launching innovative new medicines.

Today’s announcement of 5,500 job cuts by the end of
2011 and a restructuring of the company’s business units ups the ante on that bet—while indicating that it isn’t
working yet.

In Lechleiter’s tenure, the Indianapolis-based drugmaker has abandoned three late-stage drugs
and waited an extra year to win U.S. approval for the one new drug it did launch, the blood thinner Effient.

In little more than two years, Lilly will lose most of the $4.7 billion in annual revenue from its bestselling drug Zyprexa,
as cheaper generic copies hit the market. And in the following three years, Lilly will lose patent protection on four more
drugs, representing another $7.2 billion in annual revenue.

Lilly had $20 billion in total revenue last year.
It hopes to shave $1 billion mainly by reducing its worldwide work force from 40,500 to 35,000.

“We came
to the conclusion that we need to make more significant changes,” Lechleiter said while discussing the review process
that led to today’s announced changes. He added, “The terms of engagement are changing. The bar is rising.”

Lilly officials broke the news of the changes to the company’s employees at 8:30 a.m. Lilly’s stock
price rose on the news, climbing as much as 1.6 percent, to $33.33 per share. The company’s shares are still down 17
percent for the year and have been treading water since March.

Lechleiter said he did not know how many of the
job cuts would occur in central Indiana or what types of jobs would be cut. But, with about 13,000 employees in the Indianapolis
area, he acknowledged the largest chunk of reductions would likely come here.

The cuts represent a 13.5-percent
reduction to Lilly’s total work force, which, if applied locally at the same percentage, would eliminate roughly 1,700
area jobs.

The job cuts will be made after Lilly restructures the company into five business units, with the
goal of bringing new medicines to market faster. The units will be in animal health, cancer, diabetes, emerging markets and
established markets, which will include the United States and Europe, as well as Lilly’s bestselling drugs. Lilly will
also launch a new drug-development initiative, called the Development Center of Excellence, to speed drug development in later
stages of testing.

Lechleiter said the changes would help Lilly get through its lean years and respond to the
increasing pressures it faces from health care reform and pricing demands from governments and insurers across the globe.

"We’re going to see better decision-making, much more opportunity seeking," Lechleiter said, adding
that Lilly would be "a company that is more focused and competitive than ever."

The restructuring and
job cuts are similar to things tried by other pharmaceutical firms. For example, New York-based Pfizer Inc. announced a year
ago it would restructure its research units to focus on five areas: Alzheimer’s, cancer, mental health, pain and diabetes.
It later said it would cut 800 scientists.

“Everybody’s sort of done these things in some form or
another. Nobody’s really found the magic bullet,” said Les Funtleyder, a health care stock analyst at Miller Tabak
& Co. in New York. He called Lilly’s moves “prudent,” but said it’s unclear if they will really
help bring medicines to market faster.

New products, he said, are the ultimate test of a company’s long-term
value.

“It’s sort of an acknowledgement on Lilly’s part—as it is with some of he other
pharmas—that they’re going to be losing revenue that’s not going to be replaced by their pipeline,”
Funtleyder said.

Lilly’s new business units will launch Jan. 1. Their leaders will be:

—
Cancer: John Johnson, CEO of ImClone Systems, which Lilly bought in 2008.

— Diabetes: Enrique Conterno,
president of Lilly USA.

— Animal health: Jeff Simmons, who already leads this unit, called Elanco.

— Emerging markets: Jacques Tapiero, president of Lilly’s intercontinental region.

— Established
markets: Bryce Carmine, Lilly’s executive vice president of global marketing and sales.

— Development
Center of Excellence: Dr. Tim Garnett, Lilly’s chief medical officer, and Thomas Verhoeven, Lilly’s senior vice
president for global product development.

Lilly now has more than 60 molecules in its development pipeline, but
has struggled recently to actually bring them to market. Just this year, Lilly abandoned drugs designed to treat multiple
sclerosis and osteoporosis.

In 2008, Lilly canceled work on an inhaled version of insulin for diabetes. In July,
the U.S. Food and Drug Administration approved Effient. Lilly launched the drug last month. But because bleeding risks led
the FDA to put a black box warning on Effient’s label, analysts no longer expect Effient to rack up huge sales. Many
expect it to bring Lilly less than $1 billion a year by 2013.

“I just don’t see it taking the world
by storm,” Funtleyder said.