Eli Lilly & Company 2011

Forest David

A.

Case Abstract
Eli Lilly is a comprehensive strategic management case that includes the companys year -end 2010 financial statements, organizational chart, competitor information and more. The case time setting is the year 2011. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Indianapolis, Indiana, Eli Lillys common stock is publicly traded under the ticker symbol LLY. Headquartered in Indianapolis, Indiana, Eli Lilly is well known for its popular antidepressant drug, Prozac. Eli Lilly produces and markets scores of other medicines for a wide variety of ailments, including its topselling drug Zyprexa, a neurological therapy for treating schizophrenia and bipolar disorder. Zyprexa however lost patent exclusivity in major markets in October 2011 and generic options quickly dominated that market. Eli Lilly has other top drugs that include Cymbalta (depression), cancer treatments Gemzar and Alimta, and endocrinology (hormone-related) products such as Humalog insulin and osteoporosis medication Evista. Eli Lilly also makes cardiovascular therapies and anti-infective agents, as well as animal health products. The company sells its products in about 140 countries.

B.

Vision Statement (proposed)

To be the leading drug company in the world for the creation of new drugs.

C.

Mission Statement (proposed)

Eli Lilly prides ourselves on research and development (7) in creating the best drugs to treat and cure many diseases in society (5, 8) for our customers (1). In pursuit of our mission, we operate globally (3) to research finding of cures for serious ailments. We use the most advanced equipment (4) and people to ensure the most promising product development. At Eli Lilly, we believe good ethics is good business and strive to exceed all government regulations in every phase of drug development (6). We believe with power comes great responsibility and we are focused on educating in health concerns and promoting awareness among our customers to help them prevent illnesses before they occur. We embrace a diverse workforce (9) with a inclusive culture in which the health, professional development, safety, work-life balance, and respectful treatment of our employees (8) are among our highest priorities. 1. 2. 3. 4. 5. 6. 7. Customers Products or services Markets Technology Concern for survival, growth, and profitability Philosophy Self-concept

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8. 9.

Concern for public image Concern for employees

D.

External Audit
Opportunities 1. 2. 3. 4. 5. 6. 7. Global pharmaceutical sales are expected to expand up to 7 percent over 2011. Pfizers Lipitor and Bristol-Meyers Plavix patents expire in 2011. Specialty drugs have accounted for close to 2/3 of all new drugs launched. The industry has some of the highest barriers to entry of any US industry. Generic drugs are only slightly less expensive than branded ones in Japan and Europe. FDA will often allow drugs to become OTC drugs as their patent ends. By 2020, McKinsey & Co. predicts that consumer spending in Africa to double to nearly $1.8 trillion, up from about $860 million in 2008.

Threats 1. 2. 3. 4. 5. 6. 7. 8. The two provisions of the US health care over haul: 1) an annual fee on pharmaceutical companies, and 2) new discounts for Medicare patients who hit the prescription coverage gap. For every 5,000 compounds discovered only one reaches the pharmacists shelf. Less than 1/3 of all marketed drugs achieve enough commercial success to recoup their R&D investments. With regulations it can take 12 to 15 years from discovery to market for a drug. Many competitors in the market with Pfizer being the largest yet only having 8% of the market. Patent infringement in developing countries not honoring patents from other nations. FDA requires 3 phases of expensive human testing before a drug can be approved. Drug discovery and development often takes years to complete and may cost more than $500 million with no guarantee of eventual approval for the market.

Competitive Profile Matrix

Eli Lilly Critical Success Factors Advertising Market Penetration Sales Product Quality R&D Products Offered Financial Profit Market Share Totals Weight 0.05 0.12 0.15 0.15 0.12 0.10 0.16 0.15 1.00 Rating 2 2 2 2 2 2 2 2 Score 0.10 0.24 0.30 0.30 0.24 0.20 0.32 0.30 2.00 Pfizer Rating 4 4 4 4 4 4 4 4 Score 0.20 0.48 0.60 0.60 0.48 0.40 0.64 0.60 4.00 Merck Rating 3 3 3 3 3 3 3 3 Score 0.15 0.36 0.45 0.45 0.36 0.30 0.48 0.45 3.00

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EFE Matrix
Weight Rating Weighted Score Opportunities 1. Global pharmaceutical sales are expected to expand up to 7 0.08 4 0.32 percent over 2011. 2. Pfizers Lipitor and Bristol-Meyers Plavix patents expire in 2011. 0.08 2 0.16 3. Specialty drugs have accounted for close to 2/3 of all new drugs launched. 4. The industry has some of the highest barriers to entry of any US industry. 5. Generic drugs are only slightly less expensive than branded ones in Japan and Europe. 6. FDA will often allow drugs to become OTC drugs as their patent ends. 7. By 2020, McKinsey & Co. predicts that consumer spending in Africa to double to nearly $1.8 trillion, up from about $860 million in 2008. 0.08 0.07 0.06 0.05 0.05 2 3 3 3 2 0.16 0.21 0.18 0.15 0.10

Weight Rating Weighted Score Threats 1. The two provisions of the US health care over haul: 1) an annual fee on pharmaceutical companies, and 2) new discounts for 0.05 3 0.15 Medicare patients who hit the prescription coverage gap. 2. For every 5,000 compounds discovered only one reaches the 0.06 4 0.24 pharmacists shelf. 3. Less than 1/3 of all marketed drugs achieve enough commercial 0.08 4 0.32 success to recoup their R&D investments. 4. With regulations it can take 12 to 15 years from discovery to 0.07 4 0.28 market for a drug. 5. Many competitors in the market with Pfizer being the largest yet 0.08 3 0.24 only having 8% of the market. 6. Patent infringement in developing countries not honoring 0.07 4 0.28 patents from other nations. 7. FDA requires 3 phases of expensive human testing before a drug 0.06 3 0.18 can be approved. 8. Drug discovery and development often takes years to complete and may cost more than $500 million with no guarantee of 0.06 3 0.18 eventual approval for the market. TOTALS 1.00 3.15

E.

Internal Audit
Strengths 1. 2. 3. 4. 10th largest pharmaceutical company in the world. Currently have 70 potential new drugs in human testing phase. In June 2011, the European Commission granted marketing authorization for Bydureon the first once weekly treatment for type 2 diabetes. In July 2011, Eli Lilly acquired the animal health business of Janseen Pharmaceutica from Johnson & Johnson.

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5. 6. 7.

Blood thinning drug Efferent, similar to Plavix, was approved in 2011. No goodwill on balance sheet. Debt to equity ratio of 0.47 versus 1.03 industry average.

Weaknesses 1. 2. 3. 4. 5. 6. 7. Between 2010 and 2012, Eli Lilly lost US patent protection on drugs that accounted for 46% of its 2010 revenues. EPS for the 2nd quarter 2011 decreased 11% from 2nd quarter 2010. Weak mission and vision statements. More sales in the US than the rest of the world combined. No clear chain of command on organization chart. Stock price is down over 60% since 2000. Inventory turnover of 1.9 versus 2.7 industry average.

Financial Ratio Analysis Growth Rate Percent Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Profit Margin Percent Gross Margin Pre-Tax Margin Net Profit Margin 5Yr Gross Margin (5-Year Avg.) Liquidity Ratios Debt/Equity Ratio Current Ratio Quick Ratio Profitability Ratios Return On Equity Return On Assets Return On Capital Return On Equity (5-Year Avg.) Return On Assets (5-Year Avg.) Return On Capital (5-Year Avg.) Efficiency Ratios Income/Employee Revenue/Employee Receivable Turnover Inventory Turnover Eli Lilly 8.70 NA -5.10 9.52 20.43 4.94 Industry 6.00 NA 64.80 7.59 2.49 9.90 S&P 500 14.50 NA 47.20 8.31 8.76 5.70

79.6 23.4 19.1 79.1

69.7 -28.9 15.6 71.2

39.8 18.2 13.2 39.8

0.47 1.8 1.5

1.03 0.8 0.7

1.00 1.3 0.9

33.9 14.8 19.2 24.8 9.7 13.4

30.0 8.8 11.4 22.9 10.3 13.8

26.0 8.9 11.8 23.8 8.0 10.8

121,489 636,947 7.1 1.9

90,604 652,532 5.6 2.7

126,905 1 Mil 15.4 12.5

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Net Worth Analysis (in millions)

Stockholders Equity Net Income x 5 (Share Price/EPS) x Net Income Number of Shares Outstanding x Share Price Method Average $12,420 $25,345 $45,040 $43,187 $31,498

IFE Matrix
Strengths 10th largest pharmaceutical company in the world. Currently have 70 potential new drugs in human testing phase. In June 2011, the European Commission granted marketing authorization for Bydureon the first once weekly treatment for type 2 diabetes. In July 2011, Eli Lilly acquired the animal health business of Janseen Pharmaceutica from Johnson & Johnson. Blood thinning drug Efferent, similar to Plavix, was approved in 2011. No goodwill on balance sheet. Debt to equity ratio of 0.47 versus 1.03 industry average.
Weaknesses Between 2010 and 2012, Eli Lilly lost US patent protection on drugs that accounted for 46% of its 2010 revenues. EPS for the 2nd quarter 2011 decreased 11% from 2nd quarter 2010. Weak mission and vision statements. More sales in the US than the rest of the world combined. No clear chain of command on organization chart. Stock price is down over 60% since 2000. Inventory turnover of 1.9 versus 2.7 industry average. TOTALS

1. 2. 3.

Weight Rating Weighted Score 0.12 4 0.48 0.10 4 0.40 0.10 0.05 0.08 0.08 0.08 4 4 3 4 4 0.40 0.20 0.24 0.32 0.32

4. 5. 6. 7.

Weight Rating Weighted Score 0.12 0.05 0.03 0.05 0.05 0.06 0.03 1.00 1 1 2 2 2 1 2 0.12 0.05 0.06 0.10 0.10 0.06 0.06 2.91

1. 2. 3. 4. 5. 6. 7.

F.

SWOT
SO Strategies 1. Increase R&D by $300M (S1, O1). 2. Start marketing Efferent to replace Plavix (S5, O2). WO Strategies 1. Work with FDA to get approval of OTC for expiring patented drugs (W1, O6). 2. Develop a SBU structure to better take advantage of world markets including Africa (W5, O7). ST Strategies 1. Increase market research by $100M to better determine how to market OTC drugs (S1, T4). 2. Develop marketing strategies for the 5 drugs nearest FDA approval (S2, O7).

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WT Strategies 1. Work with developing markets to have drugs approved that are still under FDA testing (W4, T4).

G.

SPACE Matrix
FP 7 6 5 4 3 2 1

Conservative

Aggressive

CP

-7

-6

-5

-4

-3

-2

-1 -1 -2 -3 -4 -5 -6 -7

IP

Defensive

SP

Competitive

Internal Analysis: Financial Position (FP) Gross Margin Sales Debt/Equity Ratio ROE ROA Financial Position (FP) Average

4 4 6 4 5 4.6

External Analysis: Stability Position (SP) Rate of Inflation Technological Changes Regulations Competitive Pressure R&D Expenses Stability Position (SP) Average

-2 -6 -7 -5 -7 -5.4

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Internal Analysis: Competitive Position (CP) Market Share Product Quality Customer Loyalty Technological know-how Control over Suppliers and Distributors Competitive Position (CP) Average

-4 -3 -3 -4 -2 -3.2

External Analysis: Industry Position (IP) Growth Potential Financial Stability Ease of Entry into Market Resource Utilization Profit Potential Industry Position (IP) Average

5 5 6 5 5 5.2

H.

Grand Strategy Matrix

Rapid Market Growth Quadrant II Quadrant I

Eli Lilly

Weak Competitive Position

Strong Competitive Position

Quadrant III Slow Market Growth

Quadrant IV

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I.

The Internal-External (IE) Matrix

The Total IFE Weighted Scores
Strong 4.0 to 3.0 4.0 I Average 2.99 to 2.0 II Weak 1.99 to 1.0 III

High

3.0

IV

VI

The EFE Total Medium Weighted Scores

Eli Lilly

2.0

VII

VIII

IX

Low

1.0

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J.

QSPM
Inrease market research to market OTC drugs

Increase R&D
AS 4 2 4 2 0 2 3 TAS 0.32 0.16 0.32 0.14 0.00 0.10 0.15

Weight Opportunities 1. Global pharmaceutical sales are expected to expand up to 7 0.08 percent over 2011. 2. Pfizers Lipitor and Bristol-Meyers Plavix patents expire in 2011. 0.08 3. Specialty drugs have accounted for close to 2/3 of all new drugs 0.08 launched. 4. The industry has some of the highest barriers to entry of any US 0.07 industry. 5. Generic drugs are only slightly less expensive than branded 0.06 ones in Japan and Europe. 6. FDA will often allow drugs to become OTC drugs as their patent 0.05 ends. 7. By 2020, McKinsey & Co. predicts that consumer spending in Africa to double to nearly $1.8 trillion, up from about $860 million 0.05 in 2008.
Weight Threats 1. The two provisions of the US health care over haul: 1) an annual fee on pharmaceutical companies, and 2) new discounts for 0.05 Medicare patients who hit the prescription coverage gap. 2. For every 5,000 compounds discovered only one reaches the 0.06 pharmacists shelf. 3. Less than 1/3 of all marketed drugs achieve enough commercial 0.08 success to recoup their R&D investments. 4. With regulations it can take 12 to 15 years from discovery to 0.07 market for a drug. 5. Many competitors in the market with Pfizer being the largest yet 0.08 only having 8% of the market. 6. Patent infringement in developing countries not honoring 0.07 patents from other nations. 7. FDA requires 3 phases of expensive human testing before a drug 0.06 can be approved. 8. Drug discovery and development often takes years to complete and may cost more than $500 million with no guarantee of 0.06 eventual approval for the market.

AS 3 4 1 4 0 4 2

TAS 0.24 0.32 0.08 0.28 0.00 0.20 0.10

AS 0 4 4 3 0 0 4 4

TAS 0.00 0.24 0.32 0.21 0.00 0.00 0.24 0.24

AS 0 2 3 1 0 0 2 2

TAS 0.00 0.12 0.24 0.07 0.00 0.00 0.12 0.12

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Inrease market research to market OTC drugs

1. 2. 3. Strengths 10th largest pharmaceutical company in the world. Currently have 70 potential new drugs in human testing phase. In June 2011, the European Commission granted marketing authorization for Bydureon the first once weekly treatment for type 2 diabetes. In July 2011, Eli Lilly acquired the animal health business of Janseen Pharmaceutica from Johnson & Johnson. Blood thinning drug Efferent, similar to Plavix, was approved in 2011. No goodwill on balance sheet. Debt to equity ratio of 0.47 versus 1.03 industry average.
Weaknesses Between 2010 and 2012, Eli Lilly lost US patent protection on drugs that accounted for 46% of its 2010 revenues. EPS for the 2nd quarter 2011 decreased 11% from 2nd quarter 2010. Weak mission and vision statements. More sales in the US than the rest of the world combined. No clear chain of command on organization chart. Stock price is down over 60% since 2000. Inventory turnover of 1.9 versus 2.7 industry average.

Increase R&D
AS 2 4 4 0 2 0 0
AS 3 0 0 2 0 0 0

Weight 0.12 0.10 0.10 0.05 0.08 0.08 0.08

Weight 0.12 0.05 0.03 0.05 0.05 0.06 0.03

AS 3 2 2 0 3 0 0
AS 2 0 0 3 0 0 0

TAS 0.36 0.20 0.20 0.00 0.24 0.00 0.00

TAS 0.24 0.00 0.00 0.15 0.00 0.00 0.00

TAS 0.24 0.40 0.40 0.00 0.16 0.00 0.00

TAS 0.36 0.00 0.00 0.10 0.00 0.00 0.00

4. 5. 6. 7.

1. 2. 3. 4. 5. 6. 7.

TOTALS

3.86

3.52

K.

Recommendations
1. 2. 3. 4. 5. Increase R&D by $300M Start marketing Efferent to replace Plavix at $400M. Work with FDA to get approval of OTC for expiring patented drugs. Develop a SBU structure to better take advantage of world markets including Africa for $100M. Increase market research by $100M to better determine how to market OTC drugs.

L.

EPS/EBIT Analysis (in millions)

Amount Needed: $900M Stock Price: $37.37 Shares Outstanding: 1,160 Interest Rate: 5% Tax Rate: 22%

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EBIT Interest EBT Taxes EAT # Shares EPS

Common Stock Financing Recession Normal $5,000 $7,000 0 0 5,000 7,000 1,100 1,540 3,900 5,460 1,184 1,184 3.29 4.61

Boom $9,000 0 9,000 1,980 7,020 1,184 5.93

Recession $5,000 45 4,955 1,090 3,865 1,160 3.33

Debt Financing Normal $7,000 45 6,955 1,530 5,425 1,160 4.68

Boom $9,000 45 8,955 1,970 6,985 1,160 6.02

EBIT Interest EBT Taxes EAT # Shares EPS

Recession $5,000 36 4,964 1,092 3,872 1,165 3.32

20 Percent Stock Normal $7,000 36 6,964 1,532 5,432 1,165 4.66

Boom $9,000 36 8,964 1,972 6,992 1,165 6.00

Recession $5,000 9 4,991 1,098 3,893 1,179 3.30

80 Percent Stock Normal $7,000 9 6,991 1,538 5,453 1,179 4.62

Boom $9,000 9 8,991 1,978 7,013 1,179 5.95

M.

Epilogue
In Q3 of 2011, Eli Lilly's earnings fell 5 percent, partly because their top selling drug, Zyprexa, generated $1.18 billion in sales in Q3 of 2011, or 19 percent of total revenue, and now there is "rapid and severe erosion" of Zyprexa sales due to generic alternatives. Eli Lilly is today relying heavily on its animal health business, emerging markets like China, sales in Japan and its pipeline of drugs under development. The company has 10 potential drugs in late-stage testing, the last phase before seeking regulatory approval, including treatments for Alzheimer's disease and depression. Lilly today is collaborating with German drugmaker Boehringer Ingelheim to develop diabetes drugs. High R&D expenditures for that drug is another key factor behind the companys 10 percent rise in operating expenses to about $3.2 billion in Q3 and the Q3 earnings decline. In Q3 of 2011, Lillys net income was $1.24 billion, or $1.11 per share, down from $1.3 billion, or $1.18 per share, in last year's Q3. Revenue for Q3 climbed 9 percent to a better-than-expected $6.15 billion. Lilly at the end of Q3 said the U.S. health care overhaul, which aims to eventually cover millions of uninsured people, lowered their Q3 revenues by $465 million. Rebates for Medicare prescription drug coverage alone reduced Lillys revenue by $330 million, and a drugmaker's fee increased expense s by $135 million. Also in Q3, revenue from Lilly's second-best seller, the antidepressant drug Cymbalta, rose 29 percent to $1.07 billion, while revenue from the companys animal health business jumped 28 percent to $451 million. However in Q3, Lillys cancer drug Gemzar's revenue plunged 72 percent to $91 million since that drug lost patent protection in 2010. Lilly also loses U.S. patent protection for Cymbalta in 2013. Lilly today faces one of the steepest so-called patent cliffs in the pharmaceutical industry. Consequently, analysts expect Lilly earnings to drop through about 2014 before possibly rebounding with newer revenue sources. Some analysts have questioned Lilly's ability to maintain its dividend, which currently stands at a quarterly rate of 49 cents per share.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall.