J.K. Wall, The IBJ
jwall@ibj.com
Any armchair quarterback could recognize the problem Eli Lilly and Co. is having. It's struggling in the Red Zone.
The Indianapolis-based drugmaker has successfully moved experimental drugs into position to win approval by regulators. But only once in the last four years has a new drug actually made it to market-the drug industry's equivalent of a touchdown.
"I'd like to score more touchdowns," Lilly CEO John Lechleiter said.
The company restructuring announced Sept. 14 is Lechleiter's new playbook for doing just that.
Lechleiter will break Lilly into five business units-diabetes, cancer, animal health, emerging markets and established products-so each can focus on the scoring opportunities unique to those businesses.
He'll also launch a Development Center of Excellence that will work to cut out time Lilly now wastes trying to figure out which drugs to further develop and money it burns conducting the expensive clinical trials necessary to win market approval.
In the meantime, however, Lilly needs to reduce costs fast because patent expirations on its existing drugs could sap half its revenue by 2014. That's why the company also announced that it will cut 5,500 jobs, or 13.5 percent of its work force, by the end of 2011 and shave $1 billion, or about 6.5 percent, off its projected 2011 costs.
Lilly is struggling with a problem plaguing the entire pharmaceutical industry. The number of new drugs approved has stalled while the costs of developing them have continued to climb.
The average new drug cost $982 million to develop, according to research by the Tufts Center for the Study of Drug Development at Tufts University, up 16 percent in the last five years.
Lilly's internal research-which factored in all the drugs abandoned by it and its 12 largest peers-concluded the industry is spending $1.8 billion for each new drug that makes it to market.
"The costs are getting unsustainable," said Dr. Steve Paul, president of Lilly's research-and-development arm, called Lilly Research Laboratories.
'Stark picture'
Lilly's restructuring lines up with recommendations made recently by pharmaceutical analysts and consultants.
Terri Cooper, a life sciences consultant at Deloitte in New York, predicted earlier this year that if pharmaceutical companies didn't drastically restructure themselves in five years, they'd be out of business.
"It's a really stark picture right now," she said, adding, "They have to do something radical."
In a 2008 report, Cooper predicted that pharmaceutical companies will form themselves around specific diseases and tailor medicines to smaller groups of patients that respond to medicines in common ways because they share genetic traits. Lilly's plans incorporate both ideas.
And Lilly isn't the only company trying to restructure its business. In fact, Lilly's plans resemble those of New York-based Pfizer Inc., which is organizing itself into business units focused on primary care, specialty care and emerging markets.
Pfizer also initiated a wave of consolidation among pharmaceutical companies this year, agreeing in January to buy New Jersey-based Wyeth.
Lechleiter has steadfastly refused to do a similar mega-merger, saying the best value for Lilly's shareholders will come from innovation, not integration. However, he did buy New York-based ImClone Systems Inc. last year for $6.5 billion and has said he's interested in similar-size deals.
Goldman Sachs pharmaceutical analyst Jami Rubin recommended late last year that Lilly break itself into smaller companies to focus on products with the highest growth potential.
Rubin called Lilly's Sept. 14 announcement "a step in the right direction," writing to investors, "Smaller, more focused organizations with managers responsible for their own bottom lines should lead to enhanced R&D efficiencies."
Lilly never seriously considered breaking itself into multiple businesses, Lechleiter said, because it would cost too much money to duplicate the company's shared technology systems and manufacturing facilities.
But the company did see merit in focusing itself around therapeutic areas that have the best potential for growth.
Lechleiter said a team of business analysts and scientists focused only on diabetes, for example, could better understand the idiosyncratic demands of patients, doctors and insurance plans in that market segment and more quickly match up Lilly's late-stage research with those opportunities.
"The pharmaceutical business is too large to run at $20 billion," he said, referring to Lilly's total revenue last year. "The kinds of strategic thinking that need to be applied in areas as diverse as oncology and diabetes I think tax our current structure."
Racing to market
At the heart of Lilly's new Development Center of Excellence is a project-management philosophy called Critical Chain, which in the past decade has picked up followers throughout the corporate world.
If you think of Lilly's research-and-development staff as one huge track team running a relay race, it needs to have top-notch scientists, physicians, engineers and business analysts who can run the pharmaceutical equivalent of fast split times. But the key to winning any relay race is the baton pass from one runner to the next.
Critical Chain focuses on making the baton passes from one team to another smoother-with fewer drops and delays. Lilly will also use Critical Chain to help prioritize the 64 experimental drugs it now has in human testing-a record number, the juggling of which could lead to dropped batons.
"If we can improve the way that these groups of experts interact with each other, we've got a competitive advantage," said Tom Verhoeven, Lilly's senior vice president for global product development.
Verhoeven, along with Dr. Tim Garnett, Lilly's chief medical officer, will lead the Development Center of Excellence. It will work with all five of Lilly's new business units.
Tailoring treatment
Garnett and Verhoeven, along with their boss, Paul, see three main ways the Development Center will speed up drug development. All three are things the company has been doing before, but now they will be conducted across most, if not all, of Lilly's experimental drug pipeline.
First, Lilly will tailor experimental medicines to small groups of patients-and do this much earlier in the testing process.
Tailoring has become an industry buzzword because scientists have discovered that diseases, such as breast cancer, are actually a myriad of different diseases, based on the presence and activity of a woman's genes.
A particularly aggressive form of breast cancer occurs when a woman's genes produce too much of a protein called HER2. No more than 30 percent of breast cancer patients produce extra amounts of this protein.
In 1998, Genentech launched Herceptin, which works effectively for most of those 30 percent of women, by stopping their genes from making the HER2 protein. Herceptin has been a perennial blockbuster, raking in $1.4 billion a year.
Lilly has tailored medicines, too, like its drug Alimta, which is highly effective against one strain of lung cancer, called non-small-cell with non-squamous histology. For other kinds of lung cancer, Alimta has no meaningful effect.
The problem, Garnett said, is that Lilly figured out Alimta should be tailored to a small group of patients only late in its clinical testing. That means Lilly spent huge amounts of time and money finding and studying lung cancer patients for which the drug had no effect.
Now Lilly's Development Center will have a "tailored therapeutics hub" that will try to determine much earlier in human testing the subgroup of patients most likely to benefit from an experimental drug. Then Lilly will sign up much smaller groups of patients for its clinical trials-saving significant time and money.
"We've known we've needed to do this for a long time," Garnett said. "We're now dragging this forward in the [development] process."
Second, Lilly will conduct more clinical trials that adapt and change course as results from patients come in. Traditionally, pharmaceutical companies conducted a Phase 1 trial to make sure a drug was safe, then conducted a Phase 2 trial to figure out which dose was best, then conducted a Phase 3 trial to show that a drug had a significantly larger effect than placebo pills.
The down time between each phase could run up to a year.
But in early 2008, Lilly tried a different approach. It started a combined Phase 2 and 3 trial of an experimental diabetes drug, GLP-F-c. The trial began by giving patients various doses of the drug. Then, as results came back on which were working best, Lilly immediately started enrolling patients to do the Phase 3 portion of the study.
"You're sort of hitting the ground running," Garnett said.
Third, the Development Center will make wider use of predictive modeling to figure out which doses of a drug it should test.
Drug companies can do this modeling based on data they obtain in early-stage testing about how long it takes for a drug to break down in human fluids and tissue and the different effects produced by varying concentrations of a drug.
Paul said Lilly probably lost 10 years while developing blockbuster antidepressant Cymbalta because it did not have these predictive modeling methods.
Lilly shelved Cymbalta in the early 1990s when it didn't show an effect in patients. Later, Lilly scientists realized they had given patients too small a dose. When they increased the dose, the drug showed large effects. The drug hit the market in 2004 and had sales last year of $2.7 billion.
By changing those three things, and by improving its handoffs, Paul thinks Lilly can save hundreds of millions of dollars on each drug it develops. He also thinks the company can score a few more touchdowns.
"We're coming down to the Red Zone with a different team, with new plays," Paul said. "And we think we have a better chance of getting some into the end zone."