Lilly bucks the cost-cutting trend & bets big on innovation.

10 07 2011

Will short-termism kill the pharma industry?
Innovation is a risky way of gaining competitive advantage. And it’s a risk that pharmaceutical companies have been pouring money into since medicine began. But in recent years, regulations have tightened and the “lower hanging fruits” have all been taken and treated.

What’s left are diseases that affect… millions of people around the world, that have so far proved very difficult to understand and drug.

This has led to fewer and fewer drugs being approved by the regulators – just 21 were approved by the FDA last year and this trend is unlikely to change. This is pushing the cost to develop a successful “hit” well above the $1 billion mark and to make matters worse, healthcare providers are becoming increasingly reluctant to pay vast sums of money for drugs that may only postpone the inevitable.

As if this wasn’t a perfect storm by itself, the pharmaceutical industry will see some $63 billion of revenues washed away due to patent expiries and generic competition by 2014.

In order to placate shareholders, many pharmaceutical companies have been downsizing their R&D operations and focussing efforts on in-licensing technologies they feel are more likely to work. However, this approach may lead to pharma companies losing their competitive advantages and simply becoming distribution houses that support manufacturing, clinical trials and regulatory affairs.

Not so for Eli Lilly. While others in the industry have been retrenching, Lilly has been focussing on developing its own drugs and currently has 70 drugs in development – 33 of which are in Phase II or III development.

“At Lilly, our future relies upon our ability to successfully discover and develop innovative medicines that address unmet patient needs,” said John Lechleiter, Lilly’s chairman, president and chief executive officer. “We’re pursuing an R&D-based strategy in full knowledge that the bar for innovative medicines has never been higher and that our industry faces many challenges”

And that is despite the fact that Lilly’s earnings are set to tumble over the next three years due to patent expiries.

“I never thought I’d live to see this, but investors are actually thinking to cut R&D — that’s the hot topic of the day. This is kind of nuts, but this is what’s being talked about,” Lechleiter said in an interview with Reuters.

“It would be a mistake for us to disinvest in any significant way in R&D. As a company that is focused on innovation and seeking new treatments and cures, it’s important that we maintain a steady approach and a consistent approach in investing in R&D, and I’m confident it will pay off.”

It’s a bold play, especially when so many of your peers have opted to follow the cost-cutting path and the company itself has had a few Phase III disappointments of late. Yet with Lilly being in the top 5 for nearly all the disease areas it focuses on – diabetes, oncology, neuroscience, autoimmune diseases and animal health – and with those being some of the fastest growing categories of medicines, it would take a brave person to bet against a pipeline that is the envy of many of its peers.

By Matt Wilkinson PhD,
Cranfield FT-MBA student and author of http://www.thezoud.blogspot.com

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2 responses

18 07 2011
conrad wilson

Great post

Makes a lot of sense. Whilst others retrench. Eli Lilly continues to invest. Reminds me of what successful organisations do in a recession. Whilst competitors cut back on marketing, the savvy company actually invests more into promotions, advertising, product development to mop up market share and emerge stronger from the downturn. No doubt Eli Lilly will enjoy commercial success for years to come.

21 07 2011
cranovation

Agreed – great post Matt. Many thanks indeed.

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