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It was early May 2004, and Peter Johnson found himself looking forward to the Senior Management
Forum that he was scheduled to moderate at the end of the month. As the Executive Director of
Corporate Strategic Planning at Eli Lilly and Company (Lilly), it was his job to support the
companys senior team in the kinds of in depth strategic discussions that were fundamental to
maintaining Lillys leadership position in the rapidly evolving pharmaceutical industry. Nearly
twelve months before, in response to the widespread perception that the industry was facing an
unprecedented set of challenges, Peter had been asked to undertake a comprehensive review of how
the industry was likely to evolve and whether Lilly should consider making significant changes in
core strategy and/or its business model as a result.
In response, Peter had pulled together a cross functional team of high profile people from across the
company to look at the key environmental uncertainties facing the industry, and to answer the
question, What might Lilly need to do to compete in the future? The team calling itself Project
Resilience after Gary Hamels article The Quest for Resilience had divided its work into three
interrelated phases: scenario planning, business model evaluation, and core capabilities assessment.
How might the future evolve?
Scenarios
Capabilities
Required
Competitive
Dynamics
Alternatives
for Lilly
Recommendations
The first two phases had taken months of work, but were now largely complete. Peter was fairly
confident that the team had a good sense of the different directions in which the industry was likely to
This case was prepared by Rebecca M. Henderson.
Professor of Management.
Copyright 2007, Rebecca M. Henderson. This work is licensed under the Creative Commons Attribution-Noncommercial-No
Derivative Works 3.0 Unported License. To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/3.0/
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ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
Rebecca M. Henderson
evolve, and of the ways in which Lilly and its competitors might be able to compete under the
different scenarios that the team had described. Now, however, the team was grappling with the last,
and toughest phase what should Lilly do? They needed to come up with some concrete
recommendations for Lillys senior management as to which business models the firm should explore
and how Lilly should develop new capabilities to position the firm for the future. Peter sighed as he
turned back to his desk. It was going to be a long night.
Turmoil in the Pharmaceutical Industry?
On the surface, the global pharmaceutical industry appeared to be in robust health. Global sales for
the industry were approximately $550 billion in 2004 (Table A). About 42% of this total could be
attributed to members of PhRMA, the Pharmaceutical Research and Manufacturers of America, a
group that included the majority of all U.S. firms. Net incomes were also very robust, and in general
pharmaceutical stocks had performed well since the stock market crash of 2000.
Table A
Region
Total Worldwide Market
North America (U.S. & Canada)
European Union
Japan
China
All Other
Sales (US$
billions)
$550.0
$248.0
$144.0
$5.8
$9.5
$90.5
% Share
100.0%
45.1%
26.2%
1.7%
1.7%
16.5%
At the same time the industry was coming under significant pressure on a variety of fronts. Most
noticeably, there was some evidence that the research productivity of the industry was declining.
Measuring pharmaceutical research productivity is notoriously difficult, since it can take as long as
10-12 years to bring a new drug to market and the number of drugs released in any given year reflects
investments and actions made over many years. Nevertheless it appeared that while real research
spending in the industry was accelerating dramatically, outputat least as crudely measured by the
number of new drugs introduced every yearwas falling (Exhibit 1). For example, the cost of
discovering, developing and launching a drug which was roughly $318 million in 1990 1 topped $1.7
billion in 2003. 2 Meanwhile, one in 13 drugs in the preclinical development stage reached the market
Bruce Rasmussen, Implications of the Business Strategies of Pharmaceutical Companies for Industry Developments in Australia, Working Paper No. 1,
Center for Strategic Economic Studies, Victoria University of Technology, March. 2002.
2
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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compared to one in eight from 1995-2000. 3 In turn, the industry was witnessing the emergence of
smaller, more nimble companies which specialized in particular therapeutic areas and which, due to
limited financial resources, built their pipelines by relying on products and molecules that were
already available in the marketplace. 4 Simultaneously, advances in tools such as genetics and
genomics had led to waves of entry by small, specialized biotech firms. While these firms had yet
to yield significant returns to their investors according to some observers, aggregate returns to the
venture capital that had been invested in the industry were barely positiveaccording to the Boston
Consulting Group, while they represented only 3% of the drug industrys total R&D spending, 67%
of the drugs in clinical trials in 2003 were from small biotech companies. 5
Industry growth was also under attack. In 2004, the global pharmaceutical market grew only 7%,
marking the first time the industry had not reached double digit growth since 1995, 6 and over the next
five years $40 billion of branded pharmaceuticals were expected to lose patent protection. 7 These
trends were placing significant financial pressures on large pharmaceutical companies like Lilly.
Average pharmaceutical revenues for a large firm were on the order of $10 billion/year, and their
valuations implied that the equity markets were expecting them to grow on the order of 10% a year.
Since the typical successful new product yielded revenues of around $300-$400 million a year, each
company required roughly two to three new launches annually to meet expectations. Unfortunately,
while success rates varied dramatically across companies, on average the large firms were introducing
major products at a rate of roughly one every two years.
At the same time, the conventional technologies of drug discovery were being challenged by an
explosion of new science. Advances in genomics and genetics, imaging technology and fields such as
protein chemistry, molecular biology and cellular mechanics were opening up promising new areas of
enquiry. Some scientists were calling for an entirely new field of systems biology. In January 2003,
for example, MITs Computational and Systems Biology Initiative held its first conference, attracting
300 participants.
There was also some evidence that scientific advances and the pressure on the industry were causing
a move away from large, primary care blockbuster products. The heart of the Fully Integrated
Pharmaceutical Company (FIPCO) model in which each company had its own discovery,
development, manufacturing, sales and marketing functions for the majority of products in its
pipeline, the blockbuster model relied on the development and distribution of a small number of drugs
that could achieve global sales in excess of $1 billion annually by focusing on very large markets.
Celia M. Henry, Morphing the Model, Chemical and Engineering News, March 7, 2005.
Catherine Arnst, The Waning of the Blockbuster Drug, BusinessWeek, October 18, 2004.
Michael Rosen, Though Pharma Growth Slides, Blockbusters Reach New Records, Wisconsin Technology Network, June 6, 2005.
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
Rebecca M. Henderson
(See Exhibit 2 for a list of some blockbuster drugs.) In 2001, 35 blockbuster drugs accounted for on
average 46% of the top 10 pharmaceutical companies sales. 8 (Exhibit 3.)
The success of the blockbuster model depended on achieving large returns from a small number of
drugs in order to pay for the high cost of drug discovery and development. An aggressive sales and
marketing strategy was paramount. The larger pharmaceutical companies relied on their 10,000 to
15,000 person sales forces to get products into the hands of doctors. At the same time, since the Food
and Drug Administration (FDA) had eased direct-to-consumer (DTC) regulations in 1997,
pharmaceutical companies were attempting to reach consumers through television and Internet
advertising. Mercks VIOXX and Pfizers Celebrex, a new class of prescription strength pain killers,
were the first to ride this wave. In 2000, Mercks DTC budget for VIOXX reached $161 million, $40
million more than PepsiCo spent marketing its Pepsi product. 9 Within a year of being launched,
VIOXX and Celebrex together had captured 40% of the market from traditional anti-inflammatories
like ibuprofen. 10
Financially, the blockbuster model made pharmaceutical companies share price particularly
vulnerable. In 2001, Mercks announcement that sales of several of its blockbuster drugs would not
meet expectations and that there was a 12-month gap in the blockbuster pipeline was met with a 15%
reduction in the companys share price. 11 Revenue for VIOXX, however, topped $2.6 billion that
same year, a 44% increase over 2000. When Merck withdrew VIOXX from the market in September
2004, because of concerns about patient safety, Mercks stock lost nearly 25% of its value.
As in other industries, there was also a new and growing trend towards developing more
personalized products and services. The success of Genentechs drug Herceptin had made this
approach particularly salient. Herceptin was approved in 1998 for the treatment of metastatic breast
cancer. For patients with the appropriate genotype (something that could be determined with the aid
of an appropriate diagnostic test known as the HercepTest), Herceptin appeared to perform
significantly better than common alternative treatments; for other women the drug performed no
better than the standard treatment. The drug, therefore, served a smaller market than a more
conventional therapy, by some estimates 15% to 20% of breast cancer patients. 12 Herceptin, which
would not have reached the market without an accompanying diagnostic test enabling doctors to
identify patients whose gene type made them eligible for the therapy, was one example of the
synergies that could be created between a therapeutic and a diagnostic. 13
8
Bruce Rasmussen, Implications of the Business Strategies of Pharmaceutical Companies for Industry Developments in Australia, Working Paper No. 1,
Center for Strategic Economic Studies, Victoria University of Technology, March. 2002.
9
Stephen P. Bradley and James Weber, The Pharmaceutical Industry: Challenges in the Next Century, Harvard Business School Case No. 703-489.
10
Barry Meier, Medicine Fueled by Marketing Intensified Trouble for Pain Pills, The New York Times, December 19, 2004.
11
Bruce Rasmussen, Implications of the Business Strategies of Pharmaceutical Companies for Industry Developments in Australia, Working Paper No. 1,
Center for Strategic Economic Studies, Victoria University of Technology, March. 2002.
12
13
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While Herceptin appeared to have been quite financially successful for its developer, Genentech (a
full course of treatment is currently priced at about $70,000, and in 2006 total revenues from
Herceptin were $1.2 billion), many industry observers were concerned that many personalized
drugs were likely to be much less financially attractive than conventional blockbuster drugs. The
trend of using biomarkers and diagnostics to better segment patient populations would inevitably
result in fewer patients for a given therapy. Furthermore, many researchers were beginning to realize
that complex illnesses such as cancer and cardiovascular diseases, required drugs that hit more than
one target simultaneously. 14
There were also concerns that the conventional blockbuster FIPCO model was at risk due to further
changes in the pharmaceutical marketplace. Here, two trends in particular were key. The first was
the impact of patent expirations, as generic competition was continuing to raise the competitive
hurdle for branded prescription (or Rx) products, especially in large and crowded primary care
markets. The $40 billion of branded pharmaceuticals that were expected to lose patent protection in
the next five years would, for example, create significant competition for new drugs. The second was
the increasing saturation of the main selling channel for the blockbuster FIPCO modelthe sales
representative detailing individual physiciansresulting in declining returns on investments in this
channel. Both physicians and payers were objecting with increasing volubility to the promotional
practices required by the blockbuster FIPCO model.
The industry was also coming under increasing political pressure. Health care expenditures as a
percentage of GDP were rising dramatically, and pharmaceutical costs which were sometimes not
fully reimbursed by either federal or private health plans were becoming increasingly visible. (See
Exhibit 4.) At the same time, some of the practices of the industry were coming under scrutiny. For
example, in The Truth about Drug Companies Marcia Angell who had been Editor in Chief at the
New England Journal of Medicine made the following claims:
14
The pharmaceutical industry claims to be innovative, but only a small fraction of its drugs
are truly new: most are simply variations on older drugs.
Contrary to popular belief, big drug companies spend far less on research and development
than on marketing.
The pharmaceutical industry has an iron grip on Congress and the White House. It has the
largest lobby in Washington and contributes heavily to political campaigns.
Drug companies promote diseases to match their drugs. Millions of normal Americans have
to come to believe that they have dubious or exaggerated ailments like generalized anxiety
disorder.
Drug companies have enormous influence over what doctors are taught about drugs and
what they prescribe.
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
Rebecca M. Henderson
Drug companies have substantial control over clinical trials of their drugs. There is good
reason to believe that much of the company supported research on prescription drugs is
biased as a result.
These kinds of claims were hotly contested by the pharmaceutical companies themselves, but they
nonetheless signaled a potentially troubling erosion of public support for the industry.
Yet another threat on the horizon was the possibility of aggressive entry from India and China.
Companies such as Ranbaxy Laboratories had set their sights on becoming International researchbased pharmaceutical companies and by some estimates, Chinese pharmaceutical firms sold over
$19 billion worth of product in 2002.
Eli Lilly: More than 125 years of history
Eli Lilly and Company was founded in May 1876 by Colonel Eli Lilly in Indianapolis, Indiana. A 38year-old pharmaceutical chemist and a veteran of the U.S. Civil War, Colonel Lilly was frustrated by
the poorly prepared, often ineffective medicines of his day. Consequently, he made these
commitments to himself and to society:
His company would develop only medicines that would be dispensed at the suggestion of
physicians rather than by eloquent sideshow hucksters.
Eventually, Colonel Lillys son, Josiah K. Lilly Sr., and two grandsons, Eli Lilly and Josiah K. Lilly
Jr., each served as president of the company. Each contributed a distinctive approach to management,
and together, these management styles established a corporate culture in which Lilly employees were
viewed as the companys most valuable assets, a belief that the company claimed was still the
cornerstone of its corporate philosophy. While some analysts had speculated that Lillys location in
Indianapolis put it at something of a disadvantage, the company believed that its strong Midwestern
roots and deep history gave it a unique competitive advantage. The company described its values as:
Respect for people, which includes our concern for the interests of all people worldwide who touch
or are touched by our company: customers, employees, shareholders, partners, suppliers, and
communities;
Integrity that embraces the very highest standards of honesty, ethical behavior and exemplary moral
character;
15
Margaret L. Eaton, Developing and Marketing a Blockbuster Drug: Lessons from Eli Lillys Experience with Prozac, Stanford Graduate School of
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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Excellence that is reflected in our continuous search for new ways to improve the performance of our
business to become the best at what we do.
With 2004 revenues of $13.9 billion, 42,000 employees worldwide and medicines marketed in 142
countries, Lilly was one of the worlds 20 largest pharmaceutical companies. (Exhibit 5 gives key
financial information for the firm.) The company, which prided itself on its strong record of sciencebased research productivity, spent more on R&D as a percentage of sales (21%) than any other major
pharmaceutical company. (GSK spent 15% and Merck 14%. 16 ) It had major research and
development facilities in nine countries and conducted clinical trials in more than 60 countries.
Lillys four therapeutic areas included neurosciences (44% of revenue), endocrinology (31%),
oncology (10%) and cardiovascular (5%). 17 Zyprexa, a treatment for schizophrenia, bipolar mania
and bipolar maintenance, accounted for 32% of Lillys revenue topping $4.4 billion. Several lawsuits
brought during 2004 contesting the validity of Zyprexas patent and some of Lillys marketing and
sales efforts surrounding the drug caused the companys stock price to fall 19% during the year.
Lilly was one of the only major pharmaceutical companies not caught up in the merger and
acquisition activity of the late 1980s and 1990s. (See Exhibit 6.) The company was able to safeguard
its independence by looking internally for core capabilities it could develop and exploit including
improving speed to market, leveraging existing products, narrowing its R&D focus from eight to five
therapeutic areas, spinning off its non-core medical device and diagnostic businesses, and creating
multi-functional, product-focused teams (known internally as heavyweight product development
teams) which focused exclusively on the development of a single compound. This included all
activities related to drug discovery, manufacturing, sales, marketing and distribution. 18
Meanwhile, sales of the companys blockbuster anti-depressant Prozac, which topped $2.8 billion in
1996 (43% of revenue) despite bad press and lawsuits, enabled the company to heavily invest in new
product development, further safeguarding its independence. These efforts appeared to pay off. In
2002, two years after Prozacs patent expiration, Lilly was immersed in the most productive new drug
launch in its 127-year history and in 2004 Lilly launched five new products, of which three were
first in class or the first drugs to reach the market exploiting a particular mechanism of action.
First-in-class drugs tended to be more difficult to manage than already established therapeutic classes
due to the fact that knowledge about the disease, drug and market was far less certain. 19 (Exhibit 7
shows major introductions by year for the period 1983-2004.)
16
Jeff Swiatek, Eli Lilly Looking for Forumula to Cut Drug Costs, The Indianapolis Star, October 18, 2004.
17
18
Matthew C. Verlinden, Eli Lilly: The Evista Project, Harvard Business School, Case No. 699-016.
19
Margaret L. Eaton, Developing and Marketing a Blockbuster Drug: Lessons from Eli Lillys Experience with Prozac, Stanford Graduate School of
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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20
For more on scenario planning, see, fro example, Peter Schwartzs book The Art of the Long View (Currency: 1996).
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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Figure 1
R&D Output
Rationing Innovation
Breakthrough innovation
Payers Rule
Rx prices regulated by govt (price ceilings)
Very tight formularies and utilization controls
Even with price regulation, companies must offer big
discounts to play on formularies
Restrictions on promotional spending and programs
FDA focus on safety increases cost of clinical trials
Massive pharma industry consolidation
Incremental Innovation
Incremental Innovation:
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
Rebecca M. Henderson
Putting the two axes together defined four future worlds: Haves and Have-nots, Price Sensitive
Patients, Payers Rule and Rationing Innovation. The team then spent a considerable amount of
time thinking through what each of these worlds was likely to look like. Abbreviated versions of
their descriptions follow below:
Scenario 1: Have and Have-Nots
In this scenario, consumers are paying out-of-pocket for most of the cost of their prescription (Rx)
drugs, either because their insurance plans have limited or capped coverage of Rx drugs, or because
they have switched to Health Savings Accounts (HSAs) that give them pre-tax dollars to spend
directly on healthcare products and services. Many fewer people are uninsured, as HSAs and limitedcontribution plans are more affordable for small business owners, although they are often not able to
be as generous in their HSA contributions as larger employers. Since patients are paying more out of
pocket, they are more sensitive to the costs of Rx drugs. They also aggressively search out
information sources to help them understand the range of therapeutic choices open to them to discuss
with their doctors.
After many years of false starts, the pharmaceutical industry is using advances in genomics,
proteomics, IT and other technologies to both increase R&D output (40-50 new NMEs annually), and
to produce a range of new products that represent clear and significant improvements over currently
available therapies. Deeper knowledge of the genetics of disease, and the development of
sophisticated and relatively cheap diagnostic tools, has led to the creation of more customized
therapeutic alternatives in some key therapeutic categories.
The new products are more expensive than existing therapies, as companies seek to recoup the evergrowing costs of R&D, even though pharmaceutical companies realize that patients are paying out-ofpocket for a substantial portion of these costs. These new products are available globally at prices
roughly equivalent to those charged in the U.S. The increased efficacy of the products, and the
ability to focus their use on patient segments most likely to benefit from them, means that government
payers in many countries are willing to pay the premium demanded by manufacturers.
April 30, 2007
10
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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In the U.S., patients with more generous insurance plans, or with personal resources to supplement
employer contributions to HSAs, willingly purchase the new products to improve their health
outcomes. But patients with fewer resources are often unwilling or unable to buy such products. As
more blockbuster products become generic, these patients have wider treatment options, but there is
still a rancorous political debate about access to new therapies.
Scenario 2: Price Sensitive Patients
In this scenario, employers respond to continuing increases in healthcare and pharmaceutical costs by
pushing an ever-greater share of these costs onto employees. Thus, employees are paying out-ofpocket for more than half of their Rx drug costs. As a result, they are much more sensitive to the price
of Rx drugs than had previously been the case. Outside the U.S., the industrys relative lack of
productivity means that it continues to face severe pricing pressures and access restrictions in
countries with government-financed healthcare systems.
The pharmaceutical industry has been largely unable to translate advances in genomics, proteomics,
and other technologies into new products that represent clear and significant improvements over
currently available therapies. The industry is generating only about 10-15 NMEs annually, and most
of these new products generally rely on the same targets as existing therapies and produce only
modest or incremental improvements in safety and efficacy. Customized therapies are generally
limited to oncology and a few other specialized disease states. Although experts continue to debate
whether the industrys R&D productivity decline is a cyclical or structural problem, there is no clear
evidence that the promise of the new technologies is going to be fulfilled anytime soon.
Scenario 3: Payers Rule
In this scenario, the Center for Medicaid and Medicare Services (CMS) sets the price of Rx drugs for
both Medicare and Medicaid, and establishes tight utilization controls to control growth in Rx
demand. In the private sector, health insurers continue to consolidate to achieve growth, having lost
the possibility of expanding business by gaining access to the Medicare population. The government
expands Medicaid eligibility in order to enable many more low-income Americans to afford health
insurance. Four national Pharmacy Benefit Management firms (PBMs) dominate the private Rx
benefit market and use their market clout (as well as the governments price precedents) to drive
down Rx drugs and strictly control Rx utilization.
The pharmaceutical industry has been largely unable to translate advances in genomics, proteomics,
and other technologies into new products that represent clear and significant improvements over
currently available therapies. The industry is generating only about 10-15 NMEs annually, and most
of these new products generally rely on the same targets as existing therapies and produce only
modest or incremental improvements in safety and efficacy.
11
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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Since the industry is producing relatively little important innovation, the focus of the FDA is on
safety, so new products must establish that they are at least as safe as current therapies before they
receive marketing approval. Clinical trials are generally larger and longer, unless a product can be
shown to be responsive to an important unmet medical need.
Outside the U.S., the industrys relative lack of productivity means that it continues to face severe
pricing pressures and access restrictions in countries with government-financed healthcare systems.
Scenario 4: Rationing Innovation
In this scenario, pharmaceutical benefits are provided to both working age employees and the
Medicare population by a small group of consolidated private health insurance plans. Pharmaceutical
prices are not directly regulated, but the payers use market dominance both to strictly control the Rx
utilization decisions of prescribers and to leverage this control to obtain large discounts and rebates
from manufacturers seeking access to the patients managed by these payers. Although CMS (the
Center for Medicaid and Medicare Services) does not directly provide the Medicare Rx benefit, it
does control benefit design and utilization policy through its regulatory authority.
After many years of false starts, the pharmaceutical industry is using advances in genomics,
proteomics, IT and other technologies to both increase R&D output (40-50 new NMEs annually), and
to produce a range of new products that represent clear and significant improvements over currently
available therapies. Deeper knowledge of the genetics of disease, and the development of
sophisticated and relatively cheap diagnostic tools, has led to the creation of more customized
therapeutic alternatives in some key therapeutic categories.
These new products are available globally only at prices roughly equivalent to those charged in the
U.S. The increased efficacy of the products, and the ability to focus their use on patient segments
most likely to benefit from them, means that government payers in many countries are willing to pay
the premium demanded by manufacturers.
Alternative Business Models
The team then turned its attention to exploring the alternative business models that Lilly might
consider adopting in order to compete in these quite different worlds. Business models can be defined
on several different dimensions of strategic choice, including: 1. Lines of business in which the
company operates; 2. Elements of the value chain the company owns and their configuration; 3.
Focus/scope of the business. 4. Role of size/scale in competition; and, 5. Key capabilities necessary
to create a competitive advantage. Exhibit 8 lists six archetypal pharmaceutical industry models the
team considered, each of which differs on several dimensions from Lillys current blockbuster
model:
12
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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Exhibit 1
60
35000
50
25000
40
20000
30
15000
20
NDAs approved
30000
10000
10
5000
0
1965
1970
1975
1980
1985
1990
1995
2000
0
2005
Time
Source: NIH, FDA, PHRMA
16
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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Exhibit 2
Drug/Company
Disease
Lipitor (Pfizer)
Cholesterol
$10.86
Zocor (Merck)
Cholesterol
$5.20
Advair/Seretide (GlaxoKlineSmith)
Asthma
$4.50
Norvasc (Pfizer)
Hypertension
$4.46
Schizophrenia
$4.42
Nexium (AstraZeneca)
Gastrointestinal disorders
$3.88
Anemia
$3.59
Zoloft (Pfizer)
Depression
$3.36
Effexor (Wyeth)
Depression
$3.35
Thrombosis
$3.33
Celebrex (Pfizer)
Arthritis
$3.30
Fosamax (Merck)
Osteoporosis
$3.16
Diovan/Co-Diovan (Novartis)
Hypertension
$3.09
Schizophrenia
$3.05
Cozaar/Hyzaar (Merck)
Hypertension
$2.82
$2.72
Neurontin (Pfizer)
Seizures
Cholesterol
$2.64
Singulair (Merck)
Asthma
$2.62
Epogen (Amgen)
Anemia
$2.60
Gastrointestinal disorders
$2.59
Aranesp (Amgen)
Anemia
$2.47
Lovenox/Clexane (Sanofi-Aventis)
Deep-vein Thrombosis
$2.37
Arthritis
$2.15
Plavix/Iscover (Sanofi-Aventis)
Thrombosis
$2.11
Pain
$2.08
Avandia/Avandament (GlaxoSmithKline)
$2.04
Seroquel (AstraZeneca)
Schizophrenia
$2.08
Total
$88.29
Source: Michael Rosen, Though Pharma Growth Slides, Blockbusters Reach New Record, Wisconsin Technology Network,
June 6, 2005; Abby Christopher, Blockbuster Patent Expirations Bring a Shift in Business Models, Pharmacy Times, October
2006.
17
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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Exhibit 3
Company
Pharma Sales
Blockbuster Sales
Blockbuster Ratio
$ billions
Pfizer
$26.8
GlaxoSmithKline
Merck
Bristol-Myer Squibb
Number of
Blockbuster Drugs
$18.2
68.20%
$24.8
$9.4
37.80%
$21.4
$16.6
77.60%
$17.1
$4.6
26.70%
AstraZeneca
$16.5
$9.2
55.90%
$14.9
$5.5
37.30%
Aventis
$13.5
$2.9
21.20%
Novartis
$12.0
$2.2
18.40%
Pharmacia
$11.9
$3.1
26.00%
$11.5
$6.1
52.50%
$170.4
$77.7
45.60%
35
Eli Lilly
Total Top 10
Source: Bruce Rasmussen, Implications of the Business Strategies of Pharmaceutical Companies for Industry Developments in Australia, Working Paper No.
1, Center for Strategic Economic Studies, Victoria University of Technology, March. 2002.
Exhibit 4
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ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
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Exhibit 5
Net sales
$13,857.9
$12,582.5
$11,077.5
Cost of sales
3,223.9
2,675.1
2,176.5
2,691.1
2,350.2
2,149.3
4,284.2
4,055.4
3,424.0
392.2
--
84.0
603.0
382.2
--
Interest expense
51.6
61.0
79.7
Other income-net
(330.0)_______(203.1)_____
10,916.0
9,320.8____
(293.7)
7,619.8_
2,941.9
3,261.7
3,457.7
1,131.8_____
700.9_______ 748.8
Net income
$1,810.1_____ $2,560.8___
$1.67____
$2.38_______ $2.51
$1.66_____
$2.37_______ $2.50
$2,707.9
19
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
Rebecca M. Henderson
December 31
2004
2003
Assets
Current Assets
Cash and cash equivalents
Short-term equivalents
$ 5,365.3
$ 2,756.3
2,099.1
957.0
2,058.7
1,864.9
494.3
477.6
2,291.6
1,963.0
255.3
500.6
___271.5_____ __
249.5
12,835.8
8,768.9
2,253.8
1,613.3
561.4
3,374.6
Other Assets
Prepaid pension (Note 12)
Investments (Note 5)
Sundry (Note 8)
1,665.1____ _
1,392.5
4,480.3
6,380.4
_7,550.9__ _ __
$24,867.0_
__
6,539.0
$21,688.3
$ 2,020.6
$ 196.5
Accounts payable
648.6
875.9
Employee compensation
471.6
387.4
475.3
488.9
Dividends payable
414.4
398.3
1,703.9
1,749.8
_ 1,859.3
______ 1,464.0
7,593.7
5,560.8
4,491.9
4,687.8
620.4
386.1
_ 1,241.1_
6,353.4
__1,288.8
6,362.7
20
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
Rebecca M. Henderson
--
--
702.3
3,119.4
2,610.0
Retained earnings
9,724.6
9,470.4
(2,635.0)
(2,635.0)
(111.9)
(118.6)
Deferred costs-ESOP
Accumulated other comprehensive income (loss) (Note 14)
__
218.6______
11,023.7
(160.1)
9,869.0
__ 103.8_______ 104.2
10,919.9______9,764.8
$24,867.0___ $21,688.3
Exhibit 6
Year
1989
1995
1996
1999
2000
2001
2003
Acquirer
Beecham Group PLC
Bristol-Myers Co.
Glaxo Holdings PLC
Sandoz AG
ZENECA Group PLC
Pfizer
Glaxo Wellcome
Johnson & Johnson
Bristol-Myers Squibb
Co.
Pfizer Inc.
Target
SmithKline Beckman Corp.
Squibb Corp.
Wellcome PLC
Ciba-Giegy AG
Astra AB
Warner-Lambert Co.
SmithKline Beecham
ALZA Corp.
Dupont Pharmaceuticals Co.
Pharmacia Corp.
Transaction Value
(US$ billions)
$7.9
$12.1
$14.3
$30.1
$34.6
$89.2
$75.0
$11.1
$7.8
$59.5
21
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
Rebecca M. Henderson
Source: The Pharmaceutical Industry: Challenges in the New Century, HBS Case No. 703-489; Securities Data Company;
Thomson Financial.
Exhibit 7
2004
2003
2002
2001
1999
1998
1996
1995
Cymbalta
22
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
Rebecca M. Henderson
1987
1983
New Drug Applications Under Review by the U.S. Food and Drug Administration
Exenatide
for type 2 diabetes
(co-developing with Amylin Pharmaceuticals, Inc.)
Drug Candidates in Late-Stage Investigation
Arxxant
(ruboxistaurin)
Prasugrel
Arzoxifene
23
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
Rebecca M. Henderson
Exhibit 8
Technical
Blockbuster
Model
Low Cost
Model
Servicebusiness
Model
Conglomerate
Model
Disintegrated
Model
Proliferation
of Products
Model
Develop products
for large patient
populations using
revenue potential as
main criteria
Develop innovative
products using cost
as a primary
decision-making
criteria
Maximize value by
leveraging
economies of scope
and reducing risk via
diversification
Focus business on
the highest value,
part of the value
chain and dominate
the competition
Develop many
products targeted at
specific patients that
are highly effective
and valued
Business Lines
Human
pharmaceuticals
Human
pharmaceuticals
Human
healthcare
Multiple business
lines
Human
pharmaceuticals
Human
pharmaceuticals
Value Chain
Fully Integrated
Fully Integrated
Services-based
Sales &
Marketing
Fully Integrated
R&D or S&M
(not both)
Fully Integrated
Scope
Broad TAs
PC customers
Focused TAs
Specialty
customers
Focused areas of
human health
Broad
Broad TAs
PC customers
Focused TAs
Specialty
customers
Scale
Important up to
critical mass pt
Important up to
critical mass pt
Important to
manage large pt
populations
Scale is important
Important up to
critical mass pt
(for S&M)
Scale is not
critical
Constant flow of
potential products
in R&D
Quality
manufacturing
Defining
customer value in
marketplace
Partnering to
access external
innovation
Constant flow of
low cost products
Low cost
manufacturing
Defining
customer value
Out-licensing
high cost
products
Portfolio
management
based on low cost
attributes
Key Capabilities
Designing
programs that
generate healthcare
savings
Negotiating
contracts with
insurers
Decisive company
buying/ selling
decisions
Formula to
evaluate companies
for buying-selling
Decentralized
management of
business units
Large flow of
potential products
(R&D model)
External focus on
disruptive
technologies
(R&D)
Defining and
acquiring customer
value (S&M
model)
In-licensing
(S&M) or outlicensing (R&D)
products
Large flow of
potential products
Flexible
manufacturing
Targeting and
marketing to
specific patient
populations
Partnering to
develop
blockbuster
compounds
24