Patent Problem

The press release headline reads "Lilly Unveils Blueprint for Speeding Innovative Medicines to Patients." Translation: With four blockbusters about to lose patent protection, it's time to start firing people.

Eli Lilly & Co. announced today that it's cutting 5,500 jobs—the latest example of a major drug company forced to take drastic action as top-selling medicines inch closer to patent expiration. The problem for Lilly—and the rest of the industry—is there just aren't enough promising drugs in development to immediately take the place of these big sellers.

“The major emphasis is to prepare us to enter what’s going to be a challenging period for the company, as we see patent expirations, and to speed up new products as we enter that period,” CEO John Lechleiter told Bloomberg News.

In announcing a 14 percent staff reduction, Indianapolis-based Lilly hopes to save $1 billion over the next two years.

"It is good to preserve capital to buy time for R&D to produce new drugs," Miller Tabak analyst Les Funtleyder says. "Everyone is still looking for the optimal structure to encourage innovation."

Patents are the biggest issue for major drug companies, which once thrived on multibillion-dollar sales for a single product. And for Lilly, the situation is particularly bad: Four top-selling drugs, including antipsychotic Zyprexa, will see patents expire by 2013. The four drugs make up more than 40 percent of Lilly's sales. That's the biggest hit to sales for any of the major pharmaceutical companies facing patent sunsets.