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Eli Lilly Navigates The Realities Of Innovation

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By Wayne Koberstein, Executive Editor

You have seen the headlines, reading like obituaries for the about-to-be departed. You know the drill: repeated failures in Phase 3, nothing to replace the big earners with vanishing patents, mental images of a ship lost at sea. So why is Eli Lilly & Company still here — sailing the same course, undiverted, undiluted, and seemingly undeterred as the uniquely independent Midwestern-based company it has always been?

Right now Lilly is navigating through the most instructive and interesting period a company can traverse, and it appears to be showing remarkable patience and perseverance against a headwind of skepticism from the industry’s Monday-morning quarterbacks. There could be no better time than right now to explore its strategic thinking from the viewpoint of the company’s chairman, president, and CEO, John Lechleiter.

We catch up with Lechleiter at the latest PhRMA meeting, where he sits and speaks with us about Lilly’s scientific strategies, investment and partnering, internal and external research, cost and effectiveness of clinical development, precommercial collaborations, regulation and reimbursement, patient-centered products, and other factors that affect the company’s odds of success as an innovator. He tells Lilly’s tale of trial and tenacity from the CEO’s perspective — executive thought process and leadership, decision-making, and adaptation to changing circumstances — in the context of the corporation, its management team, and its organizational assets.

Later events in the following weeks heighten the drama but do not diminish the relevance of Lechleiter’s talk with us. I never get the feeling he is merely parroting the same speech for every occasion, though he makes sure to include his talking points. In conversation, Lechleiter also shares his thoughts as well as facts. As one example, when asked about Lilly’s animal-health business, Elanco, he elaborates on the unit’s role in a way that seems completely consistent with the company’s purchase of the animal-health business of Novartis two weeks later. As the conversation moves through the many areas of Lechleiter’s responsibility, we learn not just what the company does, but why.

THE DARKEST HOUR: AN IP LOSING STREAK
Lilly was already in trouble when Lechleiter took the CEO job in 2008. So, when asked what were his most difficult days in office, he unhesitatingly cites the first ones. “When I came into this job, we were looking ahead in three years’ time to losing a series of patents that probably represents the biggest sort of bolus of patent losses that any company, particularly adjusted for size, has sustained,” he says. Patent losses included the antipsychotic Zyprexa (olanzapine) in 2011, depression drug Cymbalta (duloxetine) in 2013, and Evista for osteoporosis (raloxifene hydrochloride) in March 2014.

“At the same time, we looked at our pipeline, and as recently as 2005, we had only seven molecules combined in Phases 2 and 3.” Nowadays, he adds, the latestage pipeline contains 38 candidates, with three potential launches in the near future.

“We knew it was unlikely our new launches would come in time to soften the impact of the patent expirations. They were going to come, as they are now, toward the end of that period,” says Lechleiter. “How do you manage the company, finance your business, pay the dividend, and keep investing in R&D when your sales are plummeting, as they tend to do when a small molecule comes off patent, until you can start launching the new products? That is what has consumed me for the last six years.”

In December 2009, Lechleiter and his team laid out a plan for investors: “We said, in no single year, from 2011 to 2014, would our revenue fall below $20 billion, our net income below $3 billion, or our operating cash flow below $4 billion, and we would maintain the dividend at least at its current level. I’m not sure there were a lot of believers that day, but we’ve stuck to those promises.”

"We felt confident that we had the pipeline strength to avoid a large M&A."

John Lechleiter
Chairman, President, And CEO, Eli Lilly & Company

With one minor caveat — the revenue guidance this year is $19.4 billion to $20.0 billion, though net income would be at least $2.9 billion — Lilly made all targets set in 2009. Although he says, “We’re not ready to declare victory yet,” Lilly’s stock price hit a multi-year high the day before our interview.

“I believe investors are starting to see that we’re coming through the worst of it, that we’re a better, stronger company now than we were going in. Obviously, we’ve had to downsize. We’ve had to make lots of changes and some adjustments to our business. But we are beginning to launch products, and investor confidence is coming back because of those aspects.”

Many, if not most, Big Pharma companies faced with a similar crisis, would have turned to a simple solution: merger or acquisition. But that was one road Lilly was not willing to go down, as Lechleiter explains. “We’ve studied the whole question of megamergers, or large-scale combinations, going back to the 1990s prior to the loss of the Prozac patent in 2001. We believed then and we believe now that size offers no particular advantage beyond the point where we are today.”

In other words, he asserts, megamergers are a short-term solution at best, wringing cost synergies from tens of thousands of job losses, but at the price of lingering integration challenges wellknown in the industry. “We felt confident that we had the pipeline strength to avoid a large M&A. If we didn’t have the source of innovation through our pipeline, we may have had to make a different choice, but we believed we did possess the needed substrate and that was the best path for Lilly.”

Megamergers aside, however, Lilly was not averse to acquisitions that it saw as consistent with the path it was on. Lechleiter began his tenure with the 2008 purchase of ImClone — back then, to boost Lilly’s cancer franchise. Similarly, he has overseen numerous other deals to bolster its main business units, as exemplified by the Elanco- Novartis arrangement.

FOCUS — IN HAND WITH EXPANSION
Lechleiter didn’t just make promises in 2009; he and his team invested much of their time examining every aspect of the company’s strategy, as well as considering alternative approaches to help the company weather the hard times ahead. As a result, they conceived a plan to reorganize the company into five main business units: Bio-Medicines, Diabetes, Emerging Markets, and Oncology, in addition to Elanco.

“The main concern for me was focus,” he says. “At that time, we had revenues of close to $25 billion, most of it in human health, and most of that in pharmaceuticals, yet we found ourselves in some of these key therapeutic categories competing against very focused competitors — Roche in oncology, Novo-Nordisk in diabetes, and so on. So we formed a Diabetes business unit and an Oncology business unit. The third unit was our Emerging Markets business. We didn’t have enough focus on emerging markets in their own right, but that business now has a seat at the table.

“Bio-Medicines is essentially everything else; it’s actually our largest portfolio, including the men’s health products and the neuroscience products such as Cialis, Cymbalta, and Strattera [atomoxetine]. It’s also responsible for the ‘care and feeding’ of all of our local operations. Our entire global infrastructure of operations went into the Bio-Medicines unit.”

“I’ve got five people running the five businesses,” says Lechleiter. “They are all very capable individuals who are not only able to work through a common infrastructure, our global services group, but also tailor their approach to their businesses in ways that best serve their customers’ needs. And that’s proving out — we’re a more competitive company today in diabetes and oncology, and we are better positioned to make faster and higher-quality decisions.” Each of the business units now runs its own Phase 3 development, he says, creating a stronger connection between medical development and commercialization.

Although Lilly’s human pharmaceutical business attracted most of the headlines during the past few years, the company was rapidly expanding Elanco before the Novartis deal. Historically, Elanco brought in about 6 percent of Lilly’s revenue, but its share has now grown to the low double-digits.

“We’ve grown Elanco at industry-leading rates through a combination of internal, pipeline-driven growth and external acquisitions,” says Lechleiter. “We’ve done at least one small- to medium-sized acquisition a year for Elanco for the last six or seven years. We like the business because it is synergistic with pharma, both on the pipeline and the manufacturing sides, where we’re able to take advantage of a deep knowledge base and a global manufacturing infrastructure that also helps Elanco on the supply side.” Lilly/Elanco counts on two factors in the growth of animal health: increasing demand for meat protein in emerging markets, and expansion of the companion- animal space in the developed world.

DOING MORE THAN ENDURING
Having restructured the company and developed a long-term strategy for overcoming the patent losses, Lechleiter and his management team took some significant steps to prepare for the long haul, which can be described as simple imperatives:

  • Stick with the strategy.
  • Keep up morale and confidence.
  • Improve and focus clinical trials.
  • Globalize research.
  • Raise R&D productivity.

Resolution in the face of adversity is not always rewarded. Merely remaining steely faced and bullishly pushing on are unlikely to win much support, of course. Lechleiter sensed he had to do more, to communicate and explain — to his company, and to the outside world — what Lilly was doing, and why it had taken the course it was on. His patient yet insistent style was likely the best antidote for the toxic skepticism that inundated the company every time bad news washed in. (See “On the Chairman’s Watch.”)

Many of Lilly’s challenges came in clinical development, where the effective but perhaps unspoken watchword became, “Learn from failure.” As Lechleiter says, “You never plan for something to fail, but you have to accept, after the fact, that not everything that goes into Phase 3 is going to make it. We are going to be better, stronger players as a result of lessons we learned in those cases, and focusing in certain therapeutic areas has probably helped as well.”

Learning and focusing work hand-in- hand, it would seem. “When you focus on trials in cancer, diabetes, or neuroscience, you gain a lot of tacit knowledge that would be difficult for others to replicate. Since the early days of developing Prozac, Lilly and a few other companies have really rewritten the book on how to study drugs in this space. So being focused on key areas helps us make better decisions as we take molecules forward into Phase 2 and Phase 3.”

Lilly will also likely enjoy some successes in the clinic, according to Lechleiter. “As our data plays out, we’re seeing positive results on the lead ImClone molecules, and from several drugs in our diabetes portfolio. This is a big year for us in terms of data readouts, and we will get more readouts throughout the year.”

Those readouts will come from data collected all over the world, reflecting what Lechleiter describes as the globalization of Lilly’s R&D — which also reflects a great broadening of the company’s culture. Moving beyond its old image in the industry as a lonely battleship on the vast ocean of the U.S. Midwest, Lilly now spans the continent, and far beyond, as he relates. Besides establishing U.S. sites such as ImClone in New York and an R&D center in San Diego, CA, the company has expanded its presence worldwide, especially in the U.K., Italy, China, and Japan, where Lechleiter says it has been one of the fastest-growing pharma companies for the past five years.

While globalizing R&D, Lechleiter says Lilly also made productivity improvements that have lowered its R&D costs and at the same time created the biggest pipeline in its history. Most of the gains so far have come in the research part of R&D, he says.

“We certainly did not exempt our research laboratories from the improvements. We have been challenging our researchers to consider and to take measures that would make everything we do along our value chain more productive. Identifying hits and leads to new targets, which used to take us months and years, we can do now in only weeks and months. We have leveraged technologies, such as X-ray diffraction to image structures of targets and ligands in drug discovery. This hasn’t played out yet all the way through the cycle, but there’s no question we’re much more productive in the early stages.”

ENCOURAGING MANAGEMENT
Lechleiter’s style of managing people, and the company, shows up clearly in his handling of R&D. Rather than riding herd on the group and second-guessing its decisions as might be expected given his science background, his approach is broadly nurturing. His relationship to the R&D leadership relies largely on trust:

“It’s important for our company to have not only good scientists but also excellent managers and leaders in that R&D endeavor. You can have the best scientists in the world, but unless they are capably led, inspired, motivated, and cared for, you’re not likely to get the best result. I let the leaders do their jobs. I’m particularly careful at Lilly that people don’t mistake me for the head of R&D. Dr. Jan Lundberg is our head of R&D, and he knows I’m very supportive of R&D, as the CEO.”

With the past long gone, and the present quickly becoming past, a doubly seasoned Lechleiter faces a future with light on the horizon. Is the light dusk or dawn? His answer is down to earth.

“I see us remaining a major player in diabetes and in oncology. We are hopeful that we will begin to see some positive data with our Alzheimer’s portfolio in the latter half of this decade, and we believe we can establish a presence in the autoimmune space by virtue of three different molecules that we currently have in development for psoriasis, lupus, and rheumatoid arthritis. I see a future where Elanco Animal Health is a more prominent part of Lilly. And I see a company that I believe is well-positioned for growth. The experience we’ve gone through with the patent expirations has made us stronger and more resilient, and I believe we are a more competitive company having experienced some of the challenges we’ve faced.”

Characteristically, and reliably down to earth, are closer to the truth.


In The First Person — Lechleiter At Lilly

To trace John Lechleiter’s career is to travel an unusually straight line even by pharmaceutical executive standards. He has held 12 previous positions at Lilly since joining the company in 1979. But his course took a sharp turn early on; beginning as a chemist in the company’s process chemistry group, he would soon step onto the management path. When his boss left in 1982, Lechleiter accepted the opportunity to lead the group, changing his direction from hands-on science to research management.

“It was a difficult decision,” he says. “I wrestled with it for months, because I liked doing science and yet I also knew that I would enjoy essentially helping other people get results and contributing in a different way. I also knew it was a one-way path — once I left the laboratory, it would be the beginning of a new career. But I really never looked back.”

After moving up in R&D management for the next 12 years, mainly in drug development, Lechleiter assumed the regulatory affairs leadership, beginning in 1994, and was on the corporate ladder from then on. In some ways, his career-long ties to Lilly belie a considerable diversity of work experiences, including a stint heading product development for the Lilly Research Centre in Windlesham, England, and a unique, decade-long tutorship as a direct report to legendary ex-chairman Sidney Taurel.

Lechleiter credits Taurel with helping bring out the best of his natural bent for management. “He was a great mentor and I had an opportunity to learn firsthand what a CEO does, what the thought process is, and what kinds of decisions one has to deal with in that role,” he says. “I come at the job a bit differently from others. I enjoy working with people. I enjoy seeing others getting results, in essence, through people. I may have discovered along the way I have a talent for certain things in that vein. I didn’t have an MBA and didn’t know too much about matters of business, marketing, accounting — all the sorts of things that a CEO has to worry about. But I was able to learn a lot about it along the way.”

Since Lechleiter completed his chairmanship of PhRMA in April 2013, he not only continued to face some tough times at Lilly, but underwent surgery for a dilated aorta in May. After only two months, however, he had made a positive recovery and was back on the job, looking fitter and, if anything, even more perseverant in the face of adversity than before.

How can you praise someone for being modest? All you can do, really, is to observe that part of the person’s strength that comes from not wasting energy on personal conceit. For other CEOs, it must be highly distracting to act the haughty and vaguely celestial corporate king, a style of unfortunate currency in our time. Maybe it’s Lechleiter’s Kentucky roots, or a general Midwestern calm, that accounts for his equanimity, but whatever it is, it is genuine and completely unaffected, and at the same time powered by a steely determination. Logically, those are the same qualities that explain how he could plow through the past months and years — perhaps the most difficult time ever for Lilly and for Lechleiter personally.


On The Chairman’s Watch

Imagine a big pie chart of the chairman, president, and CEO’s responsibilities, including the R&D, commercial, financial, strategic, and organizational areas. Do some areas take more of the leader’s time, attention, and resources than others? John Lechleiter’s answer, bemused but sanguine, carries a lot of lessons for people at all levels of responsibility in the industry. In the following, he shares some of his management philosophy and how he has dealt with Lilly’s patent losses and other setbacks in recent years:

“You have to have an overall grasp of the business as the CEO, but if there’s one thing I worry about, and I believe it’s a healthy paranoia, it’s that my knowledge of what’s really going on in the organization is too imperfect. People are predisposed, I think, to telling you good news, but I’d rather hear the bad news — and I’d rather hear it quickly.

“Still, you can’t be into every detail, and you’ve got to be very careful if and when you decide to put your finger in the pie and intervene somewhere. You always have to work through people, and that’s why I spent so much time and effort selecting a team of great leaders. Only I and our CFO, Derica Rice, were in the top 14 executive positions in the company in 2008. I sometimes hear people say, ‘These are the three areas the CEO should focus on,’ and I think, ‘Really. Okay.’ Things come along and you get surprised. You can organize your life so there’s a certain routine, and that’s important, because it puts discipline in the organization. But then you’ve got to be ready for the unexpected — and not just the things that knock you for a punch, but also the unforeseen opportunities that open up.

“The most enjoyable part for me is spending time with Lilly people at our sites around the world, and in our labs. I do that to get a sense of what’s going on. All this change that I think is happening in the company — is it filtering down, do people get it? Do people understand where we’re going? Are they excited about that? You can take surveys and can talk to your team, but you’ve got to get involved at the ground level sometimes or you get very insulated and isolated.

“Expectations of large companies have changed and grown in recent years. There’s a political dynamic to contend with every day, in the United States and globally. Healthcare is much more on the forefront now than it was 30 years ago, because we’re all getting older, we’re demanding more healthcare, and we’re trying to figure out who’s going to pay for it and how it will be delivered. I’m happy to be in the middle of that, but we’ve got to be thoughtful and constructive in how we approach those things. So I spend a lot of time speaking externally, meeting with different interest groups and investors to make sure that I’m in the thick of many of those currents that will impact our business ultimately.

“A personal touch can be even more important when things aren’t going right. In August 2010, we had a couple of negative patent rulings and lost our oral gamma secretase inhibitor for Alzheimer’s, semagacestat. It was on a Wednesday or Thursday; that Saturday I was home and a little bit down about it, and I said to my wife, ‘I thought our employees were probably a bit discouraged.’ She said, ‘Why don’t you take out a newspaper ad?’ because we have so many employees concentrated in central Indiana. So we put together a one-page ad for the Indianapolis Star, with the headline, ‘The Path We Have Chosen.’ I just looked at it again, after four years, and it’s great. It basically said: Look, we’ve had some setbacks and this is tough for us, but our mission is unchanged. What we do is discover and develop life-saving medicines. There are some huge medical needs, and we have a very good chance of making a difference, and that’s what we’re going to keep on doing.

“We had a strategy: Invest in innovation, cut our costs and improve productivity, make the most of the products on the market, expand Elanco, and so on. We stuck to that, but it seemed everybody out there at one point or another was saying we should do something else. We should merge, we should spin Elanco off, slash R&D, break up the business, everything under the sun. As CEO, you can’t be blind, you’ve got to listen, but you’ve also got to have the courage of your convictions. We weren’t rolling the dice; we really believed in what we were doing. We just knew it would take time. We were trying to be patient with ourselves and asking others to be patient with us. And I believe that strategy is going to prove out.”


Emerging Growth

Lilly’s John Lechleiter shares some additional insights into the company’s thinking regarding emerging markets:

“We lump the emerging markets together at some peril, because there is a great deal of variation among them. In many of these countries, you see a few very wealthy people on one hand and very destitute people on the other. Realistically, in those countries, our products reach a certain stratum of people who have access to good-quality medical care through private insurance, out-of-pocket, or in some cases, government programs. As their economies grow, we expect millions of people to enter the middle class in this decade, which will enable access to our products and sustain the growing middle class with better opportunities for good healthcare.”

Among other reasons for giving emerging markets their own business unit was a longterm strategy: “We want people 20 or 30 years from now to look back and say Lilly was here in the early days, investing appropriately at a point when the market was not as robust as it will be down the road. Lilly has great opportunity in emerging markets because Type 2 diabetes is so prevalent everywhere. The treatment of Type 2 diabetes becomes a de facto point of entry for us because we will have an even more complete portfolio of products in Type 2 in the next few years.”