Group 1

Anto Abraham Arpit Rastogi Ritesh Jain Sandeep Tripathy

073 077 112 114

Shalina Bhatia Arun Ravindran Suman Kumar Saha

119 138 245

Shikha Gupta Suja Barua Suseendran Vishal Gagrai

300 306 308 316

Case facts Environmental analysis Competitive landscape New Product development process Resistance to new technology human factors Evaluation of options Recommendations

Worlds largest and most profitable industry with a revenue of around 250 billion US$ Capital intensive industry around 15-20% of sales spent on R&D Long time to market : 14.8 years 3 out of 10 drugs Profitable , Price slashed after expiry of patent Shortening lead time became priority

Acquisitions of innovative and cost effective firms

Importance of genetic engineering, combinatorial chemistry and high-

throughput screening

Founded in 1876 by Colonel Eli Lilly and leader in industry for 120 years Offices in 150 countries, Revenue of $5.7 billion From Antibiotics to genetically engineered products Dwindling pipeline of products, hence a fall in market value 1993 Tobias, CEO, sold medical device and diagnostic unit to focus on core business More Research focus Acquired Sphinx Pharmaceuticals

Increase the synthesizing capability by 50 times

Would increase capacity to screen compounds by 8 times

Synthetic chemistry
More powerful than the naturally occurring compounds Cumbersome process

Combinatorial chemistry
A library of related molecules was created with base remaining the same Various combination of compounds tried clinically

High-throughput screening
Testing by Robots The fit was defined through a color change or any other receptor

Around 10% of the lifetime years lost are due to CNS Lilly was spending around 1billion US$ on research for diseases like insomnia, migraine, clinical depression etcetera CNS market was around 11.1 billion US$ 80 % from G7 nations Success of serotonin based Prozac Focus on Serotonin based drug for Migraine Imitrex for Migraine

Time to market
Delay causes loss in revenue and also Strategic loss

Diversity of Leads
The best compounds should be taken forward

Traditional or combinatorial chemistry

Quicker but problematic Delay Vs Passing rate

Regulatory factors Technological factors Demographical factors

Pass the 3 phases of US FDA

Combinatorial chemistry

Aging US population and its diseases Prices of drugs were exorbitant Cost effective techniques and related acquisitions Strong early mover advantage

Pricing/Cost pressures
Early entrant

Regulatory Technological factors Demographic factors Pricing / Cost pressures

Eli Lilly abided by the regulatory rules

Combinatorial chemistry Acquisition of Sphinx

Focus on depression, hypertension, cholesterol , CNS disorders

Focus to develop drug quickly at a lower cost Concentrated on its core competency Focus on the side effects and drawback Imitrex Combichem to quicken process

Early Entrant

Comparison of balance sheet summaries

R & D R &D as NI as a Sales in in $ % of Net % of RoE in RoA in Company $ Mn Mn Sales EBIT Income Sales % % Bayer 28023 2050 7.32 2430 1271 4.54 11.9 4.7 Ciba-Geigy 16171 1578 9.76 2232 1403 8.68 12 6.1 J&J 15734 1278 8.12 2867 2006 12.75 28.2 12.8 Merck & Co 14970 1231 8.22 4633 2997 20.02 26.9 13.7 Bristol-Myers Squibb 11984 1108 9.25 2638 1842 15.37 32.3 14.3 Sandoz 11639 1199 10.30 NA 1272 10.93 20.7 8.9 Hoffman-La Roche 10816 1710 15.81 3110 2098 19.40 17 8.6 SmithKlime Beecham 9933 976 9.83 1213 110 1.11 12.4 0.9 Abbott Lab 9156 964 10.53 2228 1517 16.57 37.5 17.8

Average

11.23

13.32 22.96

9.87

For large companies, R & D expense as a proportion of sales is less Having high R & D expense ( both absolute and relative ) does not assure superior returns

Company American Home Products Glaxo Pfizer Hoechst Celanese Tekeda Chemical Eli Lilly Sankyo CO Schering Plough Rhone-Poulenc Rorer Wellcome Plc-ADS Maion Merrell Dow

R & D R &D as Sales in in $ % of $ Mn Mn Sales EBIT 8966 817 8484 1287 8281 1139 7794 313 7778 677 5712 897 5575 477 4657 620 4175 3096 3060 611 542 462 9.11 15.17 13.75 4.02 8.70 15.70 8.56 13.31 14.63 17.51 15.10 2145 2826 2003 -55 1124 1828 887 1281 547 1098 632

Net Income 1528 1955 1298 186 518 1286 395 922 341 632 438

NI as a % of RoE in RoA in Sales % % 17.04 23.04 15.67 2.39 6.66 22.51 7.09 19.80 8.17 20.41 14.31 35.9 25.2 30 5.9 7.7 22.1 11.3 58.6 21 22.1 20.5 7.1 16.1 11.7 2.3 4.5 8.2 5.8 21.3 7.6 14.4 10.6

Average

11.23

13.32 22.96

9.87

Eli Lilly : High R & D to Sales ratio as well as Net Profit Margin, Average RoE and less than average RoA

1994 1993 Rank Rank Product 1 2 3 4 5 6 7 8 1 Zantac 2 Vasotec 4 Prilosec 10 Zovirax 6 Prozac

Marketer
Glaxo-Wellcome Merck Astra & Merck

Glaxo-Wellcome Eli Lilly Bristol-Myers 3 Capoten Squibb 5 Mevacor Merck Adalat 8 Line Bayer

Marketer's RoE Wellcome : Glaxo : 25.2% 22.1% 26.90% Astra : NA Merck : 26.9% Wellcome : Glaxo : 25.2% 22.1% 22.10%
32.30% 26.90% 11.90%

Average RoE = 22.96%

No direct correlation between R & D expense and superior returns or Profit Margins Many Large firms dont have products at the top Past and current investments may result in future Hits Why low RoE and RoA for many large firms ?

Iterative Processes and serendipity Probability of success : 30% Long duration before product launch

Few extremely successful products

A critique

Basic Research

Basic Research for 2 years Iterative process for Lead compound

Preclinical Screening

3 years Animal testing to ensure drug safety

6 years Most stringent and time consuming : 3 phases 2-3 years 10% of drugs entering clinical trials reach market

Human Clinical Trials

FDA Review

Only phase that can be quickened

Variations in molecular structures to create a large pool of compounds

High throughput screening : Biologically test compounds from all family of derivatives by Robots

Quick LEAD

Iterative process in Traditional Chemistry

ADVANTAGES

DISADVANTAGES

Multiple derivatives at one go, so less time-to-market Less expensive First mover advantage

Chosen compound may not be the best one Highly risky Not widely used, unproven Not 100% pure compounds as compared to conventional methods Employee resistance : can be mitigated

ADVENT

ELI LILLY

Latent/unarticulated needs : Need Seekers Combine off-the-shelf products : Collaborative innovation Non-iterative, parallel process Minimal R & D and time to market Kloss had unlimited power More collaboration across teams

Unmet Needs : Need seeker Build/Acquire capabilities : Internal innovation

Iterative innovation process Extensive R & D and time to market ( Industry specific ) PTAC had power, not individuals Less collaboration ( nonparallel processes )

Human Factors Influences

Honest disbelief in the dramatic but substantiated claims of the new process

Maintenance of the existing society with which people identify themselves

Protection of existing devices and instruments with which they identified themselves

Skepticism : Voodoo Science

Combichem generated compounds that were only 80-90 % pure Unproved Technology: a distraction Technology not trustworthy with many unresolved problems

Threat to Jobs
Robots Vs Traditional Chemists

Identification with Process as opposed to the Product

Generating a library of millions of compounds could outstrip the capacity of a screen capable of processing only a thousand compounds

Prob NPV(Billion $) Worst Normal Launch as per industry sales Normal launch with increcase mkt Year delay Two Year delay Second Mover As per computaion in the case $3.89 $12.04 $3.74 $3.54 8.88 8.88 10.40 12.12 Best 11.12 11.12 13.60 17.88

Cost ER -0.23 -0.23 -0.23 -0.23 -0.23 -0.23 0.13595 0.859659 0.182918 0.226318 0.012162 -0.14085

$1.77 12.1194 17.8806 $0.77 8.88 11.12

Should wait for optimal compound

Negative expected return with current strategy Increased probability of success with delay
Late release (no completion) Late release (second mover)

Combinatorial Chemistry
No Visible effect for launch of Migraine Drug Learning will be useful for future products Cost optimization
http://www.nytimes.com/1999/03/20/business/lilly-to-stop-developing-migraine-drug.html http://en.wikipedia.org/wiki/LY-334,370