Eli Lilly CEO David Ricks, September 2017. Image via https://lillypad.lilly.com.
Eli Lilly, the pharmaceutical giant, had a starring role in a 2011 Senate report on exactly the issue Congress is grappling with this week: tax cuts and jobs. The report found that Eli Lilly repatriated $8 billion in profits after successfully lobbying for a 2004 tax holiday—and then laid off more than 1,800 people in the aftermath. Now, Eli Lilly has done it again. Here’s how.
In 2003, dozens of corporations banded together to push for a tax holiday on earnings they had racked up overseas. Those earnings had sat overseas—sometimes after profit-recording had been shifted there—to avoid the statutory U.S. corporate tax rate of 35 percent.
Eli Lilly was one of those companies pushing for that tax holiday. A report from J.P. Morgan at the time estimated that the resulting wave of tax windfalls for corporate America would spur the creation of more than 400,000 private-sector jobs.
As TYT previously reported, Bush Administration insiders were privately skeptical. Even Eli Lilly itself didn’t exactly promise the moon. The company’s chief tax executive, David Lewis, reportedly said in June of 2004 that Eli Lilly was “generally considering a variety of uses” for the repatriated profits, including research and development, or investing in other firms doing R&D.
No mention of hiring people.
President Bush signed the tax holiday into law in late 2004. For one year, U.S. corporations could tap their reservoirs of foreign earnings at a tax rate of just 5.25 percent.
Five years later, a Senate committee surveyed job creation among the companies that repatriated the most money. The resulting report concluded that the Bush skeptics were right.
Eli Lilly ranked eighth out of the top ten U.S. corporations repatriating funds. Those ten companies alone accounted for 42 percent of all the nation’s repatriated corporate earnings.
Despite the tax windfall, Eli Lilly’s 2005 Annual Report reads like a free-market police blotter:
- “We discontinued our plans to produce the bulk active ingredient . . . at our Indianapolis operations.”
- “ . . . mission of our Clinton, Indiana, manufacturing site has been narrowed . . .”
- “ . . . discontinued our efforts in inflammation.”
- “ . . . closed our RTP Laboratory site in Research Triangle Park, North Carolina.”
- “ . . . closed all district and regional sales offices throughout the United States . . .”
- “ . . . streamlined some sales and marketing . . .”
- “ . . . lease termination payments . . .”
- “ . . . nearly 1,400 positions globally were eliminated . . .”
As its $8 billion poured in, Eli Lilly spent hundreds of millions to buy back shares of its own stock. Its U.S. headcount, meanwhile, fell from 22,751 in 2004 to 20,924 in just three years. Of the top ten repatriating companies, only two expanded their payroll. The other eight—mostly pharmaceutical companies—laid off thousands, far more than the other two hired.
Last Wednesday, on a conference call with Wall Street analysts, the new generation of Eli Lilly leadership was asked what the company plans to do with its tax windfall from repatriating overseas profits thanks to the new tax bill.
This time, however, Eli Lilly’s chief executive officer isn’t a scientist. Or even a former scientist. When David Ricks was named as the new CEO in July of 2016, Wall Street cheered; the company was handing the reins to a business guy.
Wall Street Cheers
One analyst said at the time that Wall Street had wanted the previous CEO, John Lechleiter, to “shred the organization,” meaning lay people off to reduce its bottom line. The announcement of Lechleiter’s handoff to Ricks was greeted with a bounce in Eli Lilly’s stock price. Lechleiter reportedly said Wall Street was, “probably glad that I’m leaving.”
The other possibility is that Wall Street was glad that Ricks was coming. Unlike Lechleiter, a chemist, the new CEO’s advanced degree was an MBA.
But Ricks didn’t shred the company when he took over. Assuming office just a few weeks before President Trump did, Ricks proclaimed great things were ahead for Eli Lilly . . . if only Trump could pass his agenda.
The two men met on the last day of January 2017. Ricks emerged from the meeting painting a sunny scenario for the economy under Trump.
“What we did say,” Ricks recalled the day after their conversation, “is that with the right policy environment, in particular the corporate tax rate . . . along with other pro-business policies, could allow us to expand operations in the U.S.” Ricks described the meeting as “welcome” and “a change from where we were” with the previous administration.
Asked flat-out, however, whether he told Trump he would commit to creating new jobs, Ricks said, “No, Lilly didn’t do that.”
But Ricks kept hope alive.
The following month, Ricks and other members of the American Made Coalition released a letter telling Congress that the nonpartisan Tax Foundation estimated a corporate tax cut would create about 1.7 million new jobs.
One month later, Eli Lilly announced an $850 million investment in U.S. manufacturing and research, promising that, “more investments can be expected, particularly if the U.S. adopts a more favorable tax environment.”
The first blossoms from those hopeful seeds sprouted in June, as Eli Lilly revealed it had completed a $90 million expansion—part of its big capital investment—of its San Diego Biotechnology Center. The facility grew by 145 percent, leading Rep. Scott Peters (D-Calif.) to praise the company for the coming creation of “high quality jobs.” Democrats and Republicans were happy. Everything seemed great.
But Jami Rubin just couldn’t leave it alone.
Rubin is an analyst for Goldman Sachs. It’s her job to find out which companies are going to pay off for investors. And if Jami Rubin—and therefore Goldman Sachs—tell the rest of Wall Street that your company won’t pay off for investors—and soon—then God save your immortal soul.
So, four times a year, Ricks and every other CEO of a publicly held company has to get on the phone with the Jami Rubins of the world and explain how their company will make Goldman Sachs and other investors more money in the next quarter—for sure this time.
On January 31—the day Ricks met the president of the United States—Rubin was on Ricks’ very first earnings call as CEO. Ricks had been in charge for all of one month before getting tossed to the pack of ravening analysts.
“A question for you, Dave,” Rubin began, getting right to it. “Do you see the opportunity to improve the company’s operating margin goals?”
“Operating margin goals” refers to the company’s attempts to increase the gap between money it’s spending—usually, decreasing spending is done most expediently by decreasing headcount—and the money it makes. Companies can improve those margins by making more money, or paying less money to fewer workers. Rubin wanted both.
“The reason I bring it up is, yes, you had a real high-quality quarter this quarter,” Rubin said. “But you could have massively beat [expectations] if expenses came in line.”
Ricks knew Wall Street ached for him to “shred” the company. But he didn’t give Rubin the satisfaction. “We have multiple ways to improve the operating margins of the company,” Ricks teased. “And as we launch new brands and grow the top line, that’s clearly one.” And that’s where he left it. No mention of the bottom line.
But on April 25, the next earnings call, Rubin struck again.
“Yes,” Rubin conceded, “we acknowledge this quarter we did see good operating margin improvement. But going out and looking at where Lilly’s margins are today relative to the industry average, you’ve got a long way to go to reach parity. So, just wondering if you could share your thoughts on that and at what point you actually start to get more aggressive on the margin side.”
That’s Wall Street-ese for, “Fire people, already.” Ricks’ response might as well have translated it into English.
“I think, Jami, your question is, if I heard it right, is would we undertake some very large cost restructuring programs . . .” Apparently bent on tormenting Rubin, Ricks plunged into great detail on his expectations for the company’s top line—its revenues—instead of targeting its bottom line—humans.
Rubin gave it one last shot. “Just to be clear, Dave . . .”
But “Dave” wasn’t having it. No getting “aggressive on the margin side.” No “very large restructuring programs.” There would be none of that for Eli Lilly in the welcome, new, pro-growth economic environment.
Not until September 7, anyway. When Jami Rubin won.
Wall Street Wins
On that date—despite Eli Lilly’s profits of $1 billion, despite its $3 billion in cash on hand—Ricks finally gave Wall Street what they had already cheered him for. He announced that Eli Lilly would close several facilities and eliminate 3,500 positions all over the world (where taxes apparently are also too high).
Ricks, however, insisted he wasn’t shredding the organization. Eli Lilly would use $500 million in savings to fund much-needed research and development. No one asked how laying off scientists and closing research facilities would facilitate research and development.
But Eli Lilly already knew the answer. Wall Street knew, too. The entire pharmaceutical industry had known the answer for more than a decade.
The answer was—is—to abandon their sprawling, costly, middle-class-sustaining, suburban and rural research complexes teeming with happy, gainfully employed operating margins and replace them with something else. Specifically, to slough the cost and risks of research onto others. Onto you.
Ground Zero for this seismic transformation of the industry is not Eli Lilly, but a little-known company in Pasadena named Alexandria Real Estate Equities. Their specialty is luring big pharma away from the neat, rural, research complexes and sweeping them into new, disruptive, buzzing hives of urban R&D. Alexandria’s other specialty—when those hives don’t exist to compete with the suburbs—is creating them.
Alexandria populates these hives with long-term, stable tenants from the Fortune 500 by dangling the best bait available: Your money.
“In 1994,” Alexandria tells us, “Alexandria was founded on the belief that life science companies are most successful when located in the epicenter of the world’s top life science clusters, immediately adjacent to world-renowned academic and medical institutions, cutting-edge scientific and managerial talent, and sophisticated capital.”
Why? Because “locations proximate to leading research and academic institutions . . . are key to accessing external innovation.”
And it worked. In 2011, Alexandria SVP, CFO and Treasurer Dean Shigenaga told investors, “A lot of big pharmas are . . . exiting or substantially flaming down their core research function on the remote locations and suburban locations. . . . You see big pharma moving pretty dramatically along those lines.”
Six years later, Alexandria is putting Eli Lilly and other pharmaceutical companies next to taxpayer-subsidized research. So when the butterfly startup emerges from its academic chrysalis, shucks off its dessicated, taxpayer-funded cocoon, and soars—free of obligation to the public—up into the bracing air of the free market, Eli Lilly can eat them.
Eli Lilly no longer has to pay for research that fails—such as Lechleiter’s quixotic quest for an Alzheimer’s drug (for no apparent reason other than to, well, treat Alzheimer’s). Now the company—the industry—can cherry-pick the winners from the taxpayer-funded orchard of academic research.
In San Diego, for instance, Lilly’s landlord is Alexandria Real Estate. Other Alexandria tenants at the same compound include UC San Diego.
Why San Diego? Because no one wants to be in Indiana. Eli Lilly’s home state has thrown half a million dollars in tax breaks at the company, but Indiana’s love is unrequited. Last year, a month before he took over, Ricks told the Financial Times it’s not “easy to get people to Indianapolis.”
Alexandria CEO Joel Marcus in a 2009 earnings call referred to Indianapolis as “salt of the earth kind of people,” and then explained how his company is salting the earth there and beyond. Because San Diego wasn’t the first decadent, coastal city Alexandria lured Eli Lilly to. The first time it happened, as Marcus revealed in that call, it was a future economic adviser to Donald Trump who made it happen.
His name was Carl Icahn.
Back in 2005, after Eli Lilly rolled up its sleeve and injected itself with an almost-tax-free $8 billion booster shot of overseas profits, the company began looking for ways to spend that money that didn’t involve hiring people.
As luck would have it, on Valentine’s Day, 2006, Icahn—already an infamous corporate raider—filed a love letter with the SEC, declaring himself an ardent suitor (aka, activist investor) of ImClone, the troubled pharmaceutical company that, you may recall, broke Martha Stewart’s heart. Icahn’s M.O. was to transform companies like ImClone into juicy targets for acquisition by bigger fish.
Early 2006, another SEC filing later revealed, was also exactly when Eli Lilly first became interested in buying ImClone, which it ultimately did in 2008, after Icahn had had his way with the company. ImClone gave Eli Lilly a foothold in the greater New York area—with offices in the city and an old-school suburban research campus in New Jersey, filled with paycheck-cashing operating margins.
ImClone was looking to expand. Suburban New Jersey was the obvious option But Alexandria had plans for an urban research campus in New York City. So Marcus pursued ImClone’s new parent, Eli Lilly, to be his New York anchor tenant.
The way Marcus told the story in 2009, “ImClone was scheduled go to Branchburg, New Jersey. They have a manufacturing campus there for Erbitux and they have plenty of land on which to build.”
“That was the game plan,” Marcus said. “Before Carl Icahn got involved.”
The new game plan, Marcus said, was that Eli Lilly was going to set up “a rather large investment arm” in New York to invest in R&D. Other people’s R&D.
Suburban New Jersey lost out to urban New York. A year later, ImClone shut down the Branchburg facility and sent 140 workers walking. In its September 7 announcement, Eli Lilly said it would shut down another facility in Bridgewater, New Jersey.
How big a trend is the pharmaceutical industry’s abandonment of classic, well-staffed compounds of decently paid career scientists? According to Marcus, a decade ago one third of approved drugs were developed outside the companies that had the rights to them. Last year it was half. Seventy-five percent for experimental drugs. Those numbers are for the entire pharmaceutical industry. This October, Marcus said that 46 percent of drugs approved so far this year come just from Alexandria tenants.
And the industry isn’t just cherry-picking academia’s winners. They’re now deciding which seeds to plant. In San Diego, a hard-partying (and allegedly criminal-fraternizing) dean at the University of Southern California was accused of poaching scientists from other schools—including a prominent UC San Diego researcher—to get the grant money that would follow. (University of California President Janet Napolitano—the former Homeland Security secretary—personally lobbied Eli Lilly not to yank UC San Diego’s grant money. They did anyway.)
So you’d be naive to think there’s no tension between the needs of Wall Street and the imperatives of academic research. We know this because ten-year Eli Lilly veteran Thomas Verhoeven said, “You’d be naïve to think [that].”
You’d also be naïve to think proximity to academia is big pharma’s only investment in R&D that doesn’t involve hiring people. To understand why, just take a tour through the resume of Mitch Daniels.
Wall Street Accelerates
Daniels was a top Eli Lilly executive in the ‘90s. Then he served a couple years as President Bush’s director of the Office of Management and Budget, skipping town just in time to avoid getting blamed for the jobs Eli Lilly didn’t create from Bush’s 2004 tax holiday.
Daniels left the White House to run for governor of Indiana, which then handed Eli Lilly that half million in tax breaks. (He relinquished the post to Mike Pence, who then turned around and swore in Eli Lilly lobbyist Ted McKinney as Indiana’s agriculture secretary, and this year turned around again and swore McKinney in as America’s agriculture undersecretary).
These days, Daniels is president of Indiana’s Purdue University, the alma mater, it so happens, of Eli Lilly CEO Dave Ricks.
Last May, Purdue was one of seven schools announced as a “partner” of a new investment firm called AgTech Accelerator. “AgTech” meaning agricultural technology—an umbrella that includes animal pharmaceuticals. AgTech Accelerator would connect big investment with promising startups that arose from academia. Sound familiar?
Two months after AgTech Accelerator launched, Purdue President Daniels hired a new President’s Fellow for Pharmaceutical Development and Partnerships. President Daniels’ fellow for this president’s fellow position overseeing partnerships with big pharma was Thomas Verhoeven, the Eli Lilly veteran who considers it naive to think there isn’t tension between academia and Wall Street.
It took four months for Eli Lilly to join the party. Eli Lilly’s animal-health subsidiary was the lead investor in the next round of AgTech Accelerator funding. Alexandria, the landlord, had finally wrangled together the drug company, the private investors who would profit, and the taxpayer money that would shoulder the risk.
This summer, Ricks went to the Purdue campus, met with Daniels, and handed the school $52 million to fund future research. Led, of course, by underpaid post-grads who then won’t be able to find work at places like Eli Lilly, because that work is now done by underpaid post-grads.
AgTech Accelerator CEO John Dombrosky said his company will “keep tabs,” as Xconomy.com put it, on university research and “look for the commercial opportunities that university researchers might not see.”
Commercial opportunities, however, don’t necessarily mean employment opportunities. Not any more. And never mind the startups that fail; these days, researchers and scientists who make a startup succeed can still get shafted if they don’t own a piece of it. Because when Eli Lilly buys a company, it’s for the intellectual property more than the intellects.
In Ricks’ first month as CEO, Eli Lilly paid $885 million to buy the US animal-vaccine portfolio of Boehringer Ingelheim Vetmedica. Not the people, the portfolio. The same month, Ricks dropped $960 million to purchase CoLucid. The company had five employees.
So, despite all its acquisitions, Eli Lilly’s U.S. headcount was down to 18,860 even before September’s layoff announcement. The company’s annual reports show that today it owns 200,000 fewer square feet dedicated to R&D in the U.S. than it did before its previous tax holiday. This is what R&D investment looks like.
Where the company does have a bigger footprint is in Alexandria Real Estate’s real estate. In 2009, as Eli Lilly set up shop as a New York anchor tenant, it was leasing a total of 100,000 square feet from Alexandria. Fast forward to 2016, and Alexandria’s annual report says Eli Lilly’s rentals from the urban-compound landlord now amount to 595,465 square feet. That’s a six-fold increase in R&D real estate dedicated to other people’s R&D.
Still, rented or owned, increasing square footage adds up to a corresponding increase in employees, right? Well, you’d be naive to think that.
Remember how Eli Lilly expanded its Alexandria space in San Diego by 145 percent? FierceBiotech reported that the staffing levels there shot up from “nearly 200” in 2009 to “more than 200” today. Now we don’t know that the facility went from 199 people to 201. But we don’t know it didn’t.
The minimal impact expansion has on hiring stems from the fact that a key function of the San Diego space—like other new Eli Lilly facilities—is to tap “the power of automation” to let researchers “across the globe” do the work, operating equipment here from offices in other countries. That’s according to Eli Lilly’s own press release.
So, for all the industry buzz around urban campuses like Alexandria’s, not much has really changed. The upshot for the whole private sector is what it’s been for years: Big companies eat small companies; workers swallow their pride and file for unemployment.
Even the awe-inspiring prospects of a Trumpian economy turn out not to have driven the degree of change initially advertised.
Eli Lilly’s huge capital investment earlier this year, for instance, was pretty much in line with its past spending. But almost $250 million of it is earmarked for existing urban campuses. And the San Diego expansion at the forefront of that $850 million? “Lilly unveiled that President Donald Trump–appeasing number in March,” FierceBioTech reported. “But work on the expansion—and the associated expenditure—started long before this year.”
In fact, it was finished in late 2016. Under President Whatshisname.
Even at a granular level, not much has changed at Eli Lilly since its last tax holiday. In 2007, the Indianapolis Star reported the company was intent on shrinking. They had already outsourced 40 percent of information technology, 20 percent of manufacturing, almost 20 percent of U.S. sales, and most support functions such as security and food services.
“More significantly,” the Star reported, “Lilly is pushing to shift up to half of the cost of its research and development, long considered a core mission, onto outside partners by 2010.”
Even the lobbyists Eli Lilly paid to make this new tax cut happen fought the last tax battle, too. The only difference: Back then lobbyist Kyle Simmons won tax cuts as the chief of staff to Sen. Mitch McConnell (R-Ky).
David Lewis, the Eli Lilly chief tax executive who said in 2004 they would use that tax windfall for investments, is still there today, still pushing for tax cuts, still not saying the company will hire anyone new. The only difference now is that Lewis got promoted and also serves as chairman of the Tax Foundation, the nonpartisan group that Ricks, Speaker Paul Ryan (R-Wis.), and others cited to claim that tax cuts will create new jobs.
You have to go all the way back before 1993 to find an Eli Lilly you wouldn’t recognize. That was the year Mitch Daniels became the company’s president of North American pharmaceutical operations. At the time, President Bill Clinton was talking about raising taxes. The company warned it would have to lay people off then, or risk Wall Street’s wrath.
Eli Lilly had never done that before. Before 1993—through tax hikes and economic downturns alike—the company had prided itself on its “no firing” policy. For 117 years.
But this is 2017. And on that Eli Lilly call last week Ricks let new CFO Josh Smiley explain what 2017 Eli Lilly does with tax windfalls.
“We’ve got about $10 billion of cash outside the U.S. and we would have access to that,” Smiley said. After paying no more than 14.5 percent in taxes on any of it, Eli Lilly would “bring the cash back and it would give us more flexibility from a capital structure perspective. But, we would stick with our current priorities in terms of capital allocation.”
Eli Lilly’s biggest current capital-allocation priority is Wall Street. The entire pharmaceutical industry spends less on R&D than it does on stock buybacks, which drive up share prices (and executive bonuses). Eli Lilly is in the middle of a multiyear $5 billion buyback. The company bought $540 million worth last year—more than the entire savings it stands to gain from those 3500 job cuts. In the most recent quarter, the same one in which those job cuts were announced, the company paid investors $500 million in dividends.
Are jobs on Eli Lilly’s list of uses for the Trump tax windfall? Smiley went on: “We’d make sure we are making the investments in the business itself that will give us long-term sustainability. We will look to put our capital to work for external innovation [other people’s R&D] when we can find assets that upgrade and enhance our portfolio. We will use capital for that and we will look to return the capital to shareholders we won’t need. We won’t look to sit on excess cash.”
Last year, returning capital “we won’t need” to Eli Lilly shareholders meant $2.2 billion in dividend payments.
Next year’s “excess cash” won’t be any different. Dividend payments may increase thanks to the windfall. The buyback plan will continue. And Eli Lilly won’t be hiring people.
Click here for TYT Investigates’ series on Fed Ex & UPS’ push for tax cuts as job-creation tools.
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