Lilly’s plan to outsource more work is good news, bad news

For central Indiana's life sciences sector, it's the best of times and the worst of times.

Eli Lilly and Co., which accounts for 60 percent of the 24,000 life sciences jobs in the Indianapolis area, will shrink itself
with "great intensity" over the next few years, in part by outsourcing everything from early-stage research to manufacturing
to sales, CEO Sidney Taurel said this month.

For the firms that account for the other 40 percent of life sciences work in Indianapolis, greater outsourcing on the part
of Lilly is a fat pitch for new business. The firms are also gearing up to vie for business from other major drugmakers, which
are slashing jobs and boosting outsourcing.

But it's not clear if non-Lilly firms can grow fast enough to offset the jobs and wages Indianapolis will lose from Lilly.
Since all major pharmaceutical companies have operations spanning the globe, a life sciences firm in Indianapolis must compete
for outsourcing contracts with companies in Europe, South America, and even China and India.

"The net effect, I've got to believe, is negative on central Indiana," said John Barnard, CEO of Barnard Associates,
a local life sciences consulting firm. Barnard used to manage Lilly's international finances.

Pharmaceutical companies have announced more than 32,000 layoffs this year alone. They are desperately trying to cut costs
as they approach the patent expirations on the mega-blockbuster drugs that have sustained the industry for years. Drugmakers
have largely failed to produce new blockbusters to take the place of old ones, such as Lilly's antipsychotic Zyprexa,
whose U.S. and European patents expire in 2011.

Lilly has moved swiftly the last two years to bulk up its research activities in China and India, using contract research
firms in those nations, where wages are far lower than in the United States. Taurel touted such moves as one of several ways
the company is reducing its costs for developing new drugs.

Lilly also has cut 5,000 jobs worldwide, including 2,200 at its Indianapolis headquarters, since mid-2004–mostly through
attrition–and will keep cutting more.

"A lot of this will leapfrog right over the companies in Indianapolis and go offshore," Barnard said. For any big
pharma company, he added, "It's a big decision to take it outside the walls of the company. If they're going
to make that decision, they're probably going to save as much [money] as they can."

But not everyone sees it that way.

Dr. Alfonso Alanis, CEO of local contract research firm Anaclim LLC, said his growth plans assume that Lilly and other big
drugmakers hire firms like his to do more and more of their clinical trials of experimental drugs.

"As they go down, companies like us will go up. We're counting on that," said Alanis, whose firm has grown
from eight employees to 20 in the last 20 months. It has a full load of contracts booked through the end of 2009. Alanis used
to be chief medical officer at Lilly, and said his firm would look to hire others who depart from Lilly in coming years.

Alanis said his firm and others couldn't take all of Lilly's clinical trial work right away. But Lilly is not planning
to slash jobs all at once, Taurel said. Rather, it will continue to slim down, mainly by not filling positions when they are
vacated by departures or retirements. That could give Anaclim and others time to ramp up.

David Johnson thinks Lilly's shrinkage plays exactly into the plans of his group, BioCrossroads, which works to grow
the life sciences sector in central Indiana.

This fall, BioCrossroads launched a new initiative called LINX. Part of its goal, Johnson said, is to connect big drugmakers
to firms like Anaclim and others that help drugmakers test, develop, produce and deliver new drugs.

"We don't have today nearly all that we would need to be the pre-eminent place in the nation for pharma and biosciences
contract work. But we've got a really good start," said Johnson, CEO of BioCrossroads. He added, "We believe
that we're in a real strong position to gain."

The Indianapolis area ranked as the ninth-largest hub for biosciences in a 2007 report from Battelle, a Columbus, Ohio, research
firm. The sector's 24,000 jobs put Indianapolis slightly behind the San Jose, Calif., area.

Life sciences clusters in Bloomington, West Lafayette and Warsaw pushed Indiana to No. 4 among all states, according to Battelle's
analysis. In all of Indiana, life sciences firms, not including hospitals, accounted for 48,000 jobs.

Battelle's Walt Plosila said Indiana's chance at keeping work outsourced by Lilly hinges heavily on what kinds of
work the company lets go.

"The more you go up the value chain, the more you need to be close at hand, the more you want to bring the research
and engineering folks together," said Plosila, who is vice president of the technology partnership practice at Battelle.
Other tasks, like information technology or basic administrative work, could be outsourced to India, he said.

Cook Pharmica LLC in Bloomington launched its contract biotech manufacturing plant in 2006 expecting to do work for small
biotech firms in San Diego. Instead, the first people to call were the big pharma firms, said Cook Pharmica President Jerry
Arthur.

Bioanalytical Systems Inc. in West Lafayette does early-stage research work for Lilly and other big pharma companies. Its
chief business officer, Ed Chait, said the company has the capacity to do more.

Lilly isn't getting specific yet as to how it will decide what to outsource and what to keep.

"Much of this collaborative work will focus on research-and-development activities, and in these instances we look around
the world for partners that may have functional expertise that is of value to us," wrote company spokesman Phil Belt
in an e-mail. He added, "That means we will look anywhere to identify collaborators, and central Indiana is certainly
one of the places we would look."

Taurel told investors that half of Lilly's research and development expenses will be "variable" by 2010, meaning
they will be done through contracts rather than full-time employees. Those expenses totaled $3.1 billion last year.

Already, 20 percent of Lilly's manufacturing and 40 percent of its information technology costs are outsourced.

"Today, we have already evolved to a more network structure," Taurel told investors, promising more progress in
that direction. "The goal is to have no [drug] molecules sitting idle because of lack of capacity."