Eli Lilly – Assignment

Eli Lilly – Assignment Words: 2796

This case outlines the difficulty faced by Eli Lilly, a pharmaceutical company’s decision as to whether they should develop a lead migraine compound. This decision is faced by the Project Manager Bianca Sharma and she has to make recommendations in the PTAC meeting. A number of things have to be considered like- time to market, diversity of leads, traditional or combinatorial chemistry etc. which is unique to the pharmaceutical industry. Other factors which might not be unique to this industry but still has to be considered in this analysis are- intellectual property (IP), funding for linical trials, reliability of the product and process, alternatives to the product, firm’s short term and long term strategy, market conditions etc. Eli Lilly’s success depends on their ability to strategize their next move regarding the development of this lead compound and exploiting the opportunities by careful considerations and then choosing the best option among the following: Scenario 1: Take the lead compound into clinical without further research and race it to the market. Scenario 2: Take some additional time to refine the current lead (using combichem) and then release to clinicals.

Scenario 3: Spend significantly more time to discover new migraine drug platforms (using combichem) that may result in other promising leads. MARKET ANALYSIS: The US pharmaceutical market share for CNS diseases are expected to increase significantly as shown in the figure. Eli Lilly already has a billion dollar anti-depressant drug Prozac which was hugely successful and which used targeted serotonin levels. This serotonin was associated with migraine as well; therefore, Lilly once again conducted research in this area hoping to find a drug that specifically targeted migraine.

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At present the only drug for migraine was Glaxo’s Imitrex, which was only mildly effective and had an adverse effect on heart’s vessels thereby limiting its use. This drug affected the serotonin 1d receptor, however, Lilly researchers found another serotonin subtype, the 1f receptor, which was involved in migraine. Using traditional methods, Lilly held a very promising lead LY329511, against which all other compounds have to be tested and they have already found a better one LY334370 using combinatorial chemistry.

In the market analysis done by Anne Thieu (Exhibit 9), if Lilly’s product is more effective than the 1d compounds, they can bring the drug to the market in 2001 and it will build up to its peak in 2005 and hold a dominating market share for another 3 years till competitors erode away profits after which its patent will expire. According to her market research almost 40% of non- consulters could be motivated to seek treatment increasing the market for new serotonin based drugs by 3-4 times.

Based on this, there is great potential since Glaxo’s Imitrex is enjoying considerable amount of sales growth each year (Exhibit 9), which is remarkable considering only 10% of migraineurs are treated by Imitrex due to its limitations. INDUSTRY ANALYSIS Time to Market: The average time to market for a drug is approximately 14. 8 years. In the pharmaceutical industry, being the first to market a new class of therapeutic agent is crucial to its success. The different stages of drug development are outlined below (Exhibit 2): * Basic Research (about 2 years) Preclinical (Biological) Screening (about 3 years) * Human Clinical trials (about 6 years) Each drug then had to pass the following three phases of clinical trials under the U. S. Food and Drug Administration: * Phase I Safety Trials (1 year) * Phase II Efficacy Trials (2 years) * Phase III Long- term Efficacy Trials (3 years) The last part is a FDA review which takes about 2-3 years. Regimes of appropriability: Appropriability plays a critical role especially in the pharmaceutical industry, in which it is particularly tight once you have patent protection.

However, since it takes a long time for a drug to be approved by the FDA, the effective term of the patent protection (which is currently 20 years) is around 5 years, as it takes 14. 8 years for the drug to hit the market. Eli Lilly already has a promising lead LY334370 (which was already an improvement over LY329511), and according to Teece, since the industry has a tight appropriability regime, this will provide the researchers additional time to develop the product.

In this case, Eli Lilly should either patent the lead compound as well as rest of the compounds to prevent imitation and continue research through combinatorial chemistry. Teece also mentions that usually the best initial leads turn out to be wrong (LY329511), but if correctly patented, it will provide more time to develop the product further and market the best option before imitators flood in. Cost/ Profit Structure: Pharmaceutical companies usually have high failure rates of new drug discoveries. There is a high cost of developing a drug that passes clinical rials and therefore there are substantial sunk costs involved. However, once approved, the returns are very high in the short amount of time the drug is patented. This is the blockbuster revenue model for pharmaceutical industries which is the dependence on the sales of a relatively small number of ‘blockbuster’ drugs. According to Exhibit 2, only one out of 10 drugs reaching clinical trials make it to the market, which is a 10% chance. “In summary then the cost structure of the pharmaceutical firm is characterised by economies of scale and scope, high sunk costs and relatively low marginal costs of production.

High sunk costs arise from the combination of high R&D costs and high failure rates. Economies of scale and scope favour larger firms with diversified development projects. Returns from approved drugs are highly skewed but sufficient given favourable demand conditions (eg relatively inelastic prices) to provide pharmaceutical companies with at least above average profitability. ” To cope with this huge cost and to decrease time to market, mergers and acquisitions are a common trend in order to increase economies of scale.

A lot of firms are also incorporating technologies like genetic engineering, combinatorial chemistry and high throughput screening in their processes. Lilly acquired biotech firm Sphinx Pharmaceuticals which specializes in combinatorial chemistry and high throughput screening. Therefore, since Eli Lilly is a large reputable company in this industry with strong and improving financials as shown in Exhibit 4 and 5A, they are in a good position to develop a new drug and solidify their position if they are successful in determining their next blockbuster drug.

PRODUCT AND PROCESS ANALYSIS Combinatorial chemistry or Synthetic chemistry: Synthetic chemistry develops compounds never before seen in nature, which made it possible to derive more effective medicine. Due to developments in genetic engineering and such, scientists explored deeply how this method works. However, the entire process was very time consuming and not accurate enough and most of it still depended on serendipity, where molecular sized keys had to fit receptors (locks). Combinatorial chemistry (Combichem) was a new drug developing process using a basic molecular skeleton.

Scientists generate various types of compounds which made the process faster by allowing them to test several candidates at the same time. After a while developing and screening capabilities of compounds increased dramatically in Eli Lilly. The capacity to screen compounds increased around eight- fold. Lilly, after a debate decided to take on combichem for its future R;D studies like the Migraine Project, initiated by J. Schauss, PhD, and S. Kaldor, PhD, and they decided to use the traditional method at critical points.

However, they faced considerable amount of scrutiny and criticism regarding moving in this direction with this new technology. This method was relatively untested and holds considerable risks since it had never before been used to get a compound to clinical trials and also there were concerns regarding its purity of results. Combichem produced compounds which were only 80-90% pure as opposed to traditional method which was 100% pure. Some traditional chemists saw this as a threat to their jobs as well.

In regards to these criticisms, Schaus was able to demonstrate comparisons of study of the same compound synthesized with both methods, but still they were not satisfied. Lilly’s expertise in combinatorial chemistry still lagged behind that of other biotech firms, thus their strategy was to take over Sphinx Pharmaceuticals, which provided them with stronger potential to tackle the migraine project. This was also a complementary asset for Eli Lilly since they specialize in combinatorial chemistry. However, they could not exploit the benefits of the acquisition till a year later.

Since time to market is extremely important in this industry, Bianca Sharma has to make a recommendation that follows a clear strategy and combines minimum risks regarding losing market share. Reliability of Product and Technology: In this case, reliability of product depends on reliability of the technology used in developing the product. As mentioned earlier, combichem is a fairly new type of technology and therefore some researchers are skeptic towards its potential to find the correct receptor since other might be even better.

The risks involved is that once they patent the best option, some other competitor might be able to come up with a better receptor, and they might eventually overtake their market share in the industry. Reliability of product and technology is important because Eli Lilly might soon be in a vulnerable position when the patent for their blockbuster drug Prozac ends and they need to have other potential blockbuster drugs in their pipeline which will provide them with a steady stream of revenue for a few years ince this is the industry model and revenue depends on a few successful drugs which has almost the same duration as the patent after which competitors erode away profits. It is also important to keep up with improvements in current technologies since other competitors can capitalize on this by using this technology and creating a stronger position for themselves by developing and screening more compounds and finding better receptors and thereby gaining more market share while Eli Lilly lags behind.

COMPANY STRATEGY Minimum Winning Game (MWG): Minimum Winning Game defines an opportunity which is limited enough in the short to medium term for technology and product development but sufficiently large so that it provides a foundation for long- term corporate development. Burgelman talks about how a MWG originates from a visionary entrepreneur, in this case Schaus and Kaldor. Often entrepreneurs lack the foresight to building corporate strategies and it also lacks disciplined analysis. This is where MWG comes into play. This strategy is important when the management has to set out a clear path for success to achieve the first set of goals.

In this case, Eli Lilly has to figure out a strategy that allows them to use combinatorial chemistry (breakthrough technology) and use it to develop their product at least in the short to medium term. They should demonstrate the effectiveness and feasibility of the new technology by conducting studies and research, which Schaus already provided by demonstrating that combichem can be used as a substitute for traditional chemistry. It is important for the top management to develop a MWG, so that entrepreneurs do not over or under emphasize need and technical linking.

If they fail to define the MWG, the company will move from one vague and unsuccessful idea to another which will confuse investors and they will lose confidence in the company’s stock which is vital for a pharmaceutical company since they need the investment capital from those investors as research and drug development is capital- intensive. Interaction of the drivers: If Eli Lilly’s corporate strategy entails technology as the main driver, this can provide them with sufficient competitive advantage, however, this involves a lot of risks, since they are dependent on new technologies only.

On the other hand, if they are dependent on product development as the main driver, it limits continuity of new developments and concentrates on developing that one product . If business strategy is the main driver for Eli Lilly, then entrepreneurs will not be motivated to think and innovate since they will only follow a set strategy implemented by the management. Therefore, in order to have a successful corporate strategy, Eli Lilly should manage a balanced interplay between the drivers and should use their judgment as to when each driver should operate.

Environment for Innovators: One of the most valuable resources Eli Lilly has are innovators like Schaus. They take initiative to think outside the box to collaborate with other researchers and develop drugs. Lilly should value them and provide them with the support necessary which might instigate other innovators to take initiative as well. Lilly has done a good job is providing such a platform and support to its researchers and innovators by supporting Schaus and Kaldor in their endeavor.

RECCOMENDATIONS After analyzing all the available options, the one that provides Eli Lilly the most flexibility is Scenario 2: Take some additional time to refine the current lead (using combichem) and then release to clinicals. The following points should suffice as reasons for my recommendation: * Analyzing Exhibit 9- Migraine Marketing Analysis: Anh Thieu’s research shows a clear market need for the product and if the extra time is used to find a better leading compound that the current one, it is worth a try.

Her research shows that 40% of non- consulters can be motivated to seek treatment and this can create a billion dollar market. From the data of annual sales growth for Sumatriptan (Glaxo’s Imitrex) and Lilly’s competitor, it can be seen that their sales growth is increasing every year but at a decreasing rate which might be due to the cardiovascular adverse effects. Therefore, the market was becoming larger for a substitute product. Anh also found out that 70% felt cardiovascular adverse effects were important and only 28% felt reduction in cost was important.

Therefore, if Lilly is successful in finding a better leading compound in these 9 months, they can charge a higher price for the drug, when it is launch. * Analyzing Exhibit 10, Expert Estimates for Migraine Project: It can be seen that Scenario 2 has the least amount of standard deviation for both Months delay (2. 4) and Chance of passing clinical (2. 0). On the other hand, the opinion for Scenario 3 has a higher standard deviation for both at 6. 2 and 3. 6 respectively.

On average, only one- tenth (10%) of all drugs which enter the clinical trials ultimately reach the market (Exhibit 2). In this case, according to the estimates by the experts scenario 2 gives a better chance of passing trials (12%) than the industry average or scenario 1 which are both at 10%. Another concern for scenario 1 are the differing estimates for passing clinical trials. The combinatorial chemists are forecasting an even lower probability of passing the clinical than the CNS group (11% and 12%)or the industry average (10%).

A reason for this maybe that since the CNS scientists are pessimistic about the combichem and see it as a threat to their jobs as well, it is likely that they are projecting higher rate of passing so that the product fails in the clinical trials and the entire migraine project is unsuccessful. The consequence of this will be Eli Lilly turning to traditional chemists again and stopping the support already given for combichem. * Analyzing Exhibit 11- Timeline: If scenario 2 is chosen, there will be a 9 month delay, but they can still get the product launched in the market before the patent of Prozac expires in 2003.

The projected launch for Lilly’s migraine product is in 2001, which gives them around two years to delay the project before the patent ends for Prozac. On the other hand, Sphinx was acquired in September 1994, and it will take another year to fully integrate their leading- edge technology in combichem and high thoroughput screening, therefore, the 9 month delay will mean that they can use this technology by September, 1995 and launch the product instead of launching it now without using the technology. CONCLUSION Maintaining Product Pipeline is extremely important in the Pharmaceutical Industry and requires continued research and development.

If there are new products in the pipeline, this gives investors more reason to buy the company’s stock, which is good for financing for the company. On the other hand, Eli Lilly needs a blockbuster drug soon since the patent for Prozac is expiring soon. This puts a lot of pressure on them to launch a successful drug and to pass the clinical trials. Therefore more time is needed to develop the lead compound further and find a better compound if that’s a possibility. The costs due to delay of nine months can be covered since Lilly’s financial statements are strong.

They can also issue additional shares to finance this project. Since Schaus already showed that it is possible to use combichem to correctly synthesize compounds, there is a good possibility for the product to be successful and provide revenues for Eli Lilly till 2012, when the patent expires and they need to develop another blockbuster drug and the cycle goes on. THE END ——————————————– [ 1 ]. Rasmussen, Bruce. “Response of Pharmaceutical Companies to Biotechnology: Structure and Business Models. ” Working Paper no. 33. Aug 2007. 10 Feb 2012 [ 2 ]. ibid

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