Eli Lilly and Co said on Monday it plans to cut 5,500 jobs, or 13.5 percent of its workforce, as it girds for generic competition by 2011 on its Zyprexa schizophrenia drug and Gemzar cancer treatment.

The Indianapolis-based drugmaker, whose revenue outlook has also been dimmed by competition for its Byetta diabetes drug and safety concerns for its recently approved Effient blood clot preventer, said it aims to cut annual costs by $1 billion by the end of 2011.

The company aims to streamline its structure and shrink its workforce to 35,000, from its current strength of 40,500, by the end of 2011. But the new headcount does not include any sales force additions in fast-growing emerging markets and Japan. Lilly, which reached its peak employee count of 46,000 in mid-2004, has cut jobs in recent years, but not with the ferocity of some rival drugmakers.

Lilly's biggest challenges are the U.S. patent expirations on Gemzar, Zyprexa and anti-depressant Cymbalta, set for late 2010, late 2011 and 2014, respectively. Cheaper generics are expected to wrest away the majority of their U.S. sales.

That is a huge concern, given the fact that the trio are among Lilly's biggest products, with combined global annual revenue of more than $9 billion -- or about 43 percent of Lilly's total current annual sales.

We will soon enter the most challenging period in our company's history, Chief Executive John Lechleiter said. This calls for strong measures to speed our output of new medicines, better meet the changing needs of our customers and reduce our costs.

Lilly, which reaffirmed its 2009 profit forecast of $4.20 to $4.30 per share, previously said it expects double-digit compound annual earnings-per-share growth from 2007 to 2011.

In an interview, Lechleiter said the cost-cutting and restructuring measures announced on Monday will undoubtedly help us pull ahead largely by speeding up drug launches.

Chris Armbruster, an analyst with Al Frank Asset Management, said the cost cuts may improve earnings growth over the next three to five years. Over that time, he expects Lilly to post low-single-digit profit gains on generally flat sales.

If they're able to control the cost side, we think there's plenty that could go right for Lilly over the next couple of years that could lead to a meaningfully higher stock price, said Armbruster.

JP Morgan analyst Chris Schott was less enthusiastic. He said Lilly's planned cost cuts represent about 7 percent of the company's cost base and are coming sooner than expected. Even so, Schott stuck to his anemic long-term profit view for Lilly of an average 5 percent annual decline between 2009 and 2015.

Lilly's streamlining program is similar to one recently implemented by Pfizer Inc
, which is battening down the hatches for the patent expiration -- also in 2011 -- on its Lipitor cholesterol fighter.

Lilly said it will create a new organizational structure by January 1, 2010, with five global business units: oncology, diabetes, emerging markets, established markets and animal health.

The company has a long-standing focus on diabetes and cancer, and both are hot areas because of the aging population and the hefty price tags of those drugs.

Although they will not have their own business units, Lechleiter said neuroscience, cardiovascular, bone and autoimmune drugs remain important, and Lilly may seize opportunities to license or buy drugs in those and other areas.

We may sharpen up or reshape our focus to meet our needs and opportunities, he said, although diabetes and cancer drugs are being given priority status under the restructuring.

Lechleiter said Lilly was not interested in moving into the generics business, an area that Pfizer and some other large drugmakers are beefing up largely to tap demand in emerging markets.

Lilly's shares were up 0.9 percent, or 30 cents, at $33.12 in afternoon trading on the New York Stock Exchange.

(Reporting by Ransdell Pierson and Lewis Krauskopf, editing by Dave Zimmerman and Maureen Bavdek)