Speeches & Presentations

Innovation: The Cure for What Ails Us


John Lechleiter John C. Lechleiter, Ph.D.

Chairman, President and Chief Executive Officer — Eli Lilly and Company

September 24, 2008

Speech to the Economic Club of Indiana — Indianapolis, Indiana

It’s been a full six months since I was given the honor … and the responsibility … of a lifetime, when I became the CEO of Eli Lilly and Company. Lilly is one of the state’s largest employers … and we all know that our company has a big impact on the economy, on local philanthropy and community support, and on the tax coffers.

Clearly, there’s a lot at stake, for us and for you, as leaders in this community. This afternoon, I want to give you a behind-the-scenes look at what we’re thinking and planning at Lilly. I want you to know Lilly’s strategy going forward … and its potential implications for our city and this region.

And I want you to know why yours truly remains an unfettered optimist about Lilly and our prospects – not despite it all ... but because of it all.

Since that’s my subject matter, I need to start by acknowledging three, 800-pound gorillas. I won’t pretend that they’re not in the room!

Help me welcome “Gorilla Number One.” He’s called “The Image of the Pharmaceutical Industry” … and he is one ugly dude! He can barely win a beauty contest against tobacco or Big Oil … and that’s saying something!

To see the daily news and to listen to the rhetoric of most politicians … regardless of party … you would think that our industry and our products are the main reason why health care is so expensive. You might get the impression that we’re cavalier about the safety and effectiveness of our products. And you would be led to believe that our major investments are television commercials, Washington lobbyists, and gifts for doctors. Ugly … just like I said!

Now let’s bring in “Gorilla Number Two.” He’s called “The Innovation Drought” … and he seems to give the lie to all of those wonderful stories we heard a few years ago – about the de-coding of the genome, disease cures on the horizon, and the promise of personalized medicine.

Last year, the U.S. Food and Drug Administration approved just 19 new medicines. To put that in perspective, it’s the lowest number of new approvals in any year since 1983 – a quarter-century ago – when aggregate R&D spending in our industry was one-tenth of what it is today! Not good.

And then there’s “Gorilla Number Three.” He’s been making the rounds locally in particular … souring the mood at kitchen tables, cocktail parties, and foundation board rooms alike. His name is … “The Lilly Stock Price.” Boy do I dislike this guy! And to think he used to be my best friend … back in the day!

In the middle of the year 2000, he was over $100 a share. Eight years later – as we gather here today – he’s in the mid-forties. He’s paid some nice dividends along the way … but what good is a gorilla that’s losing weight? What’s with this guy?

______

Now … I could give you a speech putting each of those three gorillas in its place … setting the record straight, offering explanations, and providing context.

In fact, I sketched out that speech … but it had a couple of problems. It was three hours long, for one thing … and I wasn’t sure you folks would cut me that much slack! But the bigger problem … was that it missed the real point of my talking with you.

You’ll see what I mean … even if I give you just a quick response to the gorillas.

First of all, it’s demonstrably true that prescription medicines account for only about 10 cents on the U.S. health-care dollar … while delivering large savings elsewhere in the health-care system. So it’s frankly absurd to lay the many dysfunctions of the U.S. health-care system … at the doorstep of pharma.

Also, there are very good reasons why branded prescription medicines cost so much – and it has next to nothing to do with TV commercials. It’s the astonishing cost and risk of R&D in our industry … with one in 5,000 odds of success, 10- to 15-year timelines, and price tags well in excess of a billion dollars on every new medicine that reaches a patient.

But you know what? I can declare our bad image to be false – providing facts and figures all day long – but in the end it won’t matter unless we can restore trust … and unless we deliver unambiguous benefit to as many people as possible. Those are the real challenges.

In the same way, I could give you some good reasons why the industry’s pipeline has been sluggish in recent years … but those rationales would not take away the imperative for us … to get innovation moving.

As for the Lilly stock price, well … the external political and regulatory environment in which our industry operates is certainly a factor. Skepticism towards the entire pharmaceuticals sector … means that even solid performance has gone unrewarded at times.

But a company leader railing against the unfairness of his stock price … it’s like a kid railing against the unfairness of his report card. It’s no fun to listen to … and it obscures the more interesting and important question.

And that question is: “Son, what are you going to do about it?”

______

So let me tell you what we’re doing about it at Lilly – beginning with our strategy.

Maybe it’s the scientist … the chemist in me … but I fully believe that most every problem contains the clues to its own solution. You need to analyze the problem deeply … develop a set of hypotheses … and then test those hypotheses rigorously.

Lilly’s business strategy – which has three major parts – reflects just that kind of approach to the challenges we face.

For example, in looking at the factors that contribute to our industry’s image problem … we noticed that something is strangely missing from the equation. There’s plenty of discussion of costs … and risks. That won’t go away … nor should it. What’s often missing, however, is the element of benefit.

We’ve got to change that. When our customers recognize clear economic benefit … we’ll get much less pushback on cost. And when our customers recognize clear therapeutic benefit … we’ll get much less pushback on risk. And we’ll have even greater success as a business.

And so the first element of Lilly’s new strategy is to assure that the benefits of our products are unmistakable. The core of our strategy – indeed, our vision for Lilly going forward – is to consistently deliver improved outcomes for individual patients.

Let me make this more tangible.

Patients … and even doctors … don’t usually define the benefits of treatment strictly in terms of laboratory measurements. For people with type 2 diabetes, for example … of course it’s important to track glucose levels and other disease markers through blood work. But most of these people don’t stand up and say, “Wow. That therapy is terrific. My HbA1c level is way down.”

Instead, they might say, “Wow. I haven’t had this much energy or felt so good in years. I was able to play catch with my grandkids yesterday. And this treatment is one that I can live with. It’s not complicated or painful.”

Getting to that kind of outcome takes a different mindset than we’ve had in the past. Pharmaceuticals and lab tests are still in the mix, for sure … but other things start to matter a whole lot more. Such as injection devices that are easy to use … or dosing regimens that make patients more likely to comply with doctors’ orders … as well as education and diet and exercise and careful attention to the other treatments that a patient is receiving.

It’s also still the case – too often – that a medicine capable of working a miracle in you … may have no impact whatsoever in me. That amounts to therapeutic failure … and a huge economic waste. And it diminishes the perceived benefit of the medicine.

When I say that Lilly now aims to deliver improved outcomes for individual patients, I’m not trying to suggest that we’ll custom-make medicines for every patient. I’ll leave it to a future Lilly CEO … to tell you about that!

Yet thanks to new science, it’s increasingly within our grasp to target R&D efforts on a subset of patients who have not been helped by earlier treatments. It’s also within our grasp to determine why a certain prescription therapy doesn’t work in certain patients … and to spread that knowledge to doctors … maybe in conjunction with a diagnostic tool that pinpoints the right patients for a particular medicine.

The result will be fewer treatments that are costly and futile … fewer patients with dashed hopes … and the flip-side: more unmistakable benefit.

The second key element of Lilly’s strategy going forward … is to speed up the process of developing new medicines with every insight and means at our disposal. We aim to reverse the innovation drought … good old Gorilla Number Two.

The current list of Lilly’s molecules in some stage of human testing … is larger than it has ever been – in the history of the company. Last year alone, we moved 16 new molecules into early clinical testing – nearly doubling the size of that portfolio – and we’re expecting to add up to 15 more this year.

Those are big numbers … but if these molecules were chickens, you could fairly accuse me of counting them before they hatch. What I can promise you, however, is that we’re putting our strategic emphasis squarely on the hatching. We’re flat out rejecting the conventional wisdom that says it must take 10 to 15 years … and a billion dollars plus … to bring a single new molecule to patients.

In a moment, I’ll share some specifics.

The final piece of Lilly’s strategy really ties the previous planks together. In the end, our goal is to significantly improve the value that our products represent in the health-care marketplace.

If we deliver unambiguous benefit to patients – confirmed by doctors using their therapeutic criteria and by payers using their economic criteria – then the value of what we deliver is bound to go up.

Similarly, if we develop new products more quickly, then the true value added by innovation will come to the fore sooner … rather than the costs added by delay.

To re-cap … and to be very clear … Lilly’s strategy is to create value for shareholders … by accelerating the flow of innovative new medicines … that provide improved outcomes for individual patients.

That’s it! That’s our target.

But I want to take you a bit deeper … through some of the key areas of focus that will enable this strategy – with concrete examples of the actions we’re taking.

One of my reasons for doing this … is to help you – as community leaders – to better understand the news that you’ve been hearing out of Lilly … and the news that you’ll continue to hear in the years ahead. Individually, in bits and pieces, the news stories might not seem to make sense. They might even provoke some anxiety. But taken together, it will continue to add up – I believe – to a very positive story about the transformation of our business.

______

I’m going to proceed quickly through five areas of activity that support our strategy.

First, there will be no part of Lilly left untouched by our commitment to being more patient centered … and customer focuse.

Being patient centered means changing the work of our laboratories in a big way. We call what we’re aiming for … “tailored therapies” … or “tailoring” for short.

Tailoring takes many forms. In the early stages of R&D, tailoring can mean customizing antibodies and proteins … to come up with new molecules.

For example, with the help of some amazing technology developed by a company that Lilly acquired in 2004 … called AME … our scientists have literally designed a molecule that may help treat the significant percentage of patients who do not respond well to Rituxan – which is used today to treat non-Hodgkin’s lymphoma.

Later in the development process, tailoring shapes our clinical trial work … more and more. That’s certainly been the case with prasugrel, a molecule we’ve developed … alongside Daiichi Sankyo … for acute coronary syndromes. It’s currently being reviewed by the FDA. Its Phase 3 trials told us quite a bit about the kinds of patients most likely to benefit from this prospective medicine – and those who won’t.

Today, there is hardly a molecule or an approved product anywhere in Lilly’s pipeline or portfolio … that is not the subject of tailoring. We want to give doctors the ability to say to patients, “Mrs. Smith, or Mr. Jones, this Lilly medicine is not for everyone, but it is for you.”

As I said earlier, when we’re able to do this, we’ll vastly increase the therapeutic value of our medicine and greatly reduce the economic toll exacted today by spending on medicines that don’t work.

Of course, if doctors are going to have more productive conversations with Mrs. Smith and Mr. Jones, then we’ll also need to change how we interact with doctors … so our sales force has an important role to play in tailoring as well.

Earlier this summer, we launched an entirely new sales model in two Midwestern states, which we hope to expand to the rest of the country.

Instead of those frantic, 30-second sales speeches and a slew of reminder items … we’re giving our sales representatives new tools and resources … to meet the needs of individual doctors and respond to what doctors tell us they’re really looking for – things like quick answers to specific questions … and more help for patients when their needs go beyond the medicine itself.

Tailoring takes us straight into a second set of changes that you’ll be hearing more and more about … and that’s Lilly’s more aggressive move into biotechnology.

Lilly is certainly no stranger to biotech. Today, if you pulled out the sales of bio-products in our existing portfolio – including our insulins – we’d already be the fifth largest biotech company in the world … with upwards of $6 billion in annual sales. And fully one-third of the molecules in our pipeline today are of biological origin.

Still … our ambition is to make biotech products an even more prominent part of Lilly’s total mix … building on some key advantages that we already have.

Today, Lilly is virtually unique among existing bio-pharma companies … in that we’ve been able to marry up deep therapeutic knowledge in targeted disease areas … with the capability of generating potential biotech solutions alongside more traditional, chemistry-based work.

A good example is in the high-stakes fight against Alzheimer’s disease. Lilly currently has both a chemical compound targeting Alzheimer’s … and a biotech molecule, an antibody … in or near Phase 3 trials.

Biotechnology harnesses the fundamental power of human biology to combat diseases. In fact, biotech compounds often lend themselves particularly well to tailoring. Sometimes, we can “dial in” desired properties … or target particular disease variations or patient groups – such as the example I just gave for non-Hodgkin’s. In other cases, we might “dial out” properties that are linked to less desirable outcomes or even harmful side-effects. We call this “protein engineering.”

This is why Lilly recently dedicated a $1 billion biotech development campus here in Indianapolis, at our Lilly Technology Center … and we broke ground last April for a new biotech manufacturing facility in Ireland.

Transforming Lilly, of course, means more than new technologies in our labs. It means the entire company operating in a faster, leaner, more efficient way than ever before.

We’re starting at the top. By the end of this year, we’ll have completed a company-wide effort to reduce the layers of management between me and the person on the shop floor … and to give our managers greater spans of control. It’s really all about giving Lilly people more autonomy … and speeding up decision-making.

At the same time and for many of the same reasons, we’re developing new forms of collaboration outside our own walls … which I’ll talk about in a moment.

We’re also paying close attention to our headcount. From roughly the 1960s to the 1990s, Lilly operated its business with between 25,000 and 30,000 employees. Obviously, we bought businesses and we sold businesses during that time. Sales went from about $1 billion to $10 billion. And our stock split two for one … four times.

Then, in the late nineties and into the first part of this decade, we expanded our employee population from roughly 30,000 to nearly 46,000. Much of this expansion took place in anticipation of the nine product launches that occurred earlier in this decade … and it assumed that market conditions prevalent in the mid-90s – the industry’s salad days – would continue.

Today, it’s clear that yesterday’s assumptions are no longer valid. That’s why, since 2004, we’ve reduced our global employment base from 46,000 to under 40,000 today. We’ve done this mainly through the careful management of attrition … in other words, by not always filling open positions.

Our recent voluntary exit programs in manufacturing, affecting sites in Indianapolis and elsewhere … are part and parcel of this effort, as we adjust to changes in our pipeline and changes in the marketplace.

You can expect that Lilly will continue to push down on our overall employment numbers … as we approach the U.S. patent expiration of our biggest-selling product, Zyprexa, in late 2011 … even as we continue to make selective additions of new staff in certain critical areas of the business … and in faster growing markets.

Meanwhile, about 400 of our employees worldwide are now working as Six Sigma Black Belts … and a couple thousand more Lilly people are Green Belt-trained. These folks are helping us to take out work and costs … to improve the quality of our products … and to speed up key processes throughout the business. In 2007 alone, the financial benefit of projects completed by our Six Sigma team totaled more than $600 million.

Our fourth area of focus is to expand further Lilly’s global scope and reach … in all dimensions.

My predecessor, Sidney Taurel – starting long before his tenure as CEO – quite literally put Lilly on the map for the first time, in many parts of the world … steadily increasing the share of Lilly’s sales accounted for by overseas markets. We aim to build on this important progress … by expanding our market presence in key growth countries … including Brazil, Russia, India, and China.

But when I talk about global scope and reach … I’m talking about more than market presence. Lilly’s productivity push … and our goal of casting a wider, global net … these efforts come together in a new organizational model. Of course we had to give it a name … so you’ll hear this model referred to as “FIPNet.”

Let me explain. For decades, Lilly was a “FIPCo” – a “fully integrated pharmaceutical company” … which owned everything from idea-generation to sales – spanning the whole development pipeline – along with all of the costs and risks that go along with it.

FIPNet still stresses the integration aspect … with Lilly assembling and orchestrating the network … but more and more of the pieces will be linked through partnerships, alliances, and other transactions … rather than always through outright ownership.

Lilly cannot succeed as an innovator in the 21st Century if we’re maintaining capacity that we no longer need … or undertaking tasks that others can perform better, or for less. Yet FIPNet is not a frenzied outsourcing effort. We will keep our truly critical core capabilities in house, to be sure, and it will be quite important for Lilly to hang its own shingles in today’s major hubs of biotech R&D.

Today, San Diego is arguably ground zero for biotech … and we’ve gained an important foothold there through the A-M-E acquisition that I mentioned earlier, as well as our recent acquisition of SGX – a biotech company with a unique technology for finding new molecules.

New forms of collaboration greatly increase the chances that we can tap the right bit of specialized knowledge or work … at the right time – regardless of where it’s located. And they give us much greater flexibility – a means of doing more things in more places … at the same time.

To begin with, Lilly today fosters a large concentration of partnerships right here in Indiana – building on the 3,000 supplier relationships we already have in this state. For example, we recently signed a ten-year contract with a Bloomington firm called “BioConvergence” – for materials management – and we’ve added a string of other Indiana businesses to FIPNet as well.

But the build-out of FIPNet is ultimately not constrained by borders.

Today, we’re testing new collaborations with life-sciences firms in China and India. Lilly scientists still design our compounds, for example, but a large number of our chemistry-based molecules are now synthesized by a firm in Shanghai, called ShangPharma. In India, meanwhile, we’ve handed off some molecules using new risk-sharing deals. We have the right to buy back these molecules … once our collaborators succeed in establishing “proof of concept” in the clinic.

FIPNet has other dimensions as well … such as tapping private investment funds to spread the risks of our late-stage R&D … and putting our own funds to work in biotech start-ups.

Operating a FIPNet with all of this activity creates what Dr. Rob Armstrong … one of Lilly’s R&D leaders … describes as a “mirror” pipeline. In addition to our traditional pipeline, which I’ve described, Lilly is now linked … through our partnerships, investments, and risk-sharing agreements … to yet another portfolio of scientific assets. Lilly has less direct control over these assets but also less risk and exposure. This “mirror” pipeline effectively expands our range of opportunities and significantly enhances our growth prospects in the years ahead.

My final stop … in this rundown of what Lilly is doing to implement its strategy … is diversification. That’s a loaded term, to be sure, so I want to explain what it means today at Lilly.

We do not plan to stray from our core business … anytime soon. So – rest assured that having generated more than $5 billion in operating cash flow last year … Lilly will not be buying back Elizabeth Arden!

Nor are we looking to undertake a large-scale acquisition or merger. We remain quite clear that these sorts of deals don’t make sense for us, and they wouldn’t make sense to investors.

Yet, it’s fair to ask – and many of you have asked – wouldn’t Lilly benefit from being more diversified than it is today? I think the answer to that question is “Yes,” with qualifications.

It’s true that some of our competitors – such as J&J or Abbott … companies that are, in fact, diversified beyond their core pharma businesses – today enjoy higher P/E multiples than Pfizer, Merck, or Lilly.

On the other hand, recall that in the late 1990s, many pharma companies … including Lilly … actively sought to shed so-called “non-core” assets. Fact is, the prescription medicine business … despite the challenges we face … remains a pretty good place to be in the health care space … when you consider everything from growth prospects to profit margins.

So, how do we walk this fine line?

First, and most obviously, we aim to make the most of our Elanco Animal Health business, currently Lilly’s only business outside our pharma core. We believe the opportunity for new innovation in this space is ripe … as global demand for protein grows, and as global food companies seek quality, safety, and greater economy in their supply chains.

Elanco is not the largest business in its category … but it’s well positioned for growth. It enjoys a Number One or Number Two ranking in the major food-animal markets in which it competes: beef cattle, swine, and poultry. Elanco’s recent acquisition of Monsanto’s Posilac product will strengthen our position in the dairy segment as well.

In 2007, we successfully launched a new “companion animal” business using the Lilly brand. We are literally talking “cats and dogs” here.

You should expect us to look for other selected acquisitions in the area of animal health in order to strengthen, deepen, or even expand our current product offerings and our geographic presence.

Likewise, with a very healthy balance sheet and a strong cash position, you should expect us to put our financial strength to work in the pharma space as well. We’re constantly on the look-out … to in-license promising molecules or even to make acquisitions that help move Lilly into new … or complementary therapeutic areas.

And of course, our tailoring efforts mean that we are certainly paying attention … from a business development perspective … to the convergence among pharmaceuticals, certain types of medical devices, and diagnostic medicine.

______

Keep all of this in mind in the coming months and years … as you interpret news about Lilly … and as you consider our role in this community.

We need to look at Lilly’s impact on the city and the state … in ways that reflect the real workings of today’s economy.

Today, whether we hire someone into Lilly itself – or support a local person’s livelihood through another kind of relationship – the story is similar in terms of overall employment and economic stability.

In fact, I submit to you that the flowering of new, small businesses … some of which may become old, large businesses … is an even better outcome for the long-term health of the regional economy.

I’ll give you an example.

As you know, a few weeks ago we sold our site in Greenfield … along with Lilly’s operations there … to Covance – a contract research organization with which we already had a “FIPNet-style” connection. We also announced that about 100 local positions in clinical-data management would in effect be transferred to i3, a subsidiary of United Health. And we transferred some of our monitoring of clinical trials to a company called “Quintiles.”

What you may not know is that, to date, about 85 percent of the nearly 600 employees affected by those decisions … have already accepted positions with the partner companies … or found new positions within Lilly.

Meanwhile, these transactions position Covance for continued growth from a new Greenfield base … and led i3 to establish a first-time presence here in the Indianapolis area. That’s good news on both counts.

I’d also draw your attention to the fact that Lilly has made more than four billion dollars in capital investments in Indiana in the last eight years … including the biotech campus I mentioned earlier. We’ve invested heavily in Indiana’s venture-capital funds … such as the Indiana Future Fund. And remember those 3,000 suppliers we work with in this state!

The growing concentration of the life sciences in central Indiana – spanning academia, private business, hospitals, and venture capital – makes this part of the world a very suitable base for the new Lilly. And it explains why we’re such strong backers of BioCrossroads.

Finally, I want to state clearly that Indianapolis will remain the corporate headquarters of Eli Lilly and Company … the home of our U.S. affiliate … our R&D nerve center … as well as a significant manufacturing location.

We’re still a proud, Indiana-based company … but this is not your grandfather’s Lilly. Can’t be anymore!

______

I’m confident that the strategy I’ve shared with you this afternoon will improve not only our company’s value to shareholders … but also our standing in the eyes of our customers.

Still … all these moves will amount to nothing … if Lilly and its peers cannot earn and preserve society’s trust. If we’re still talking about “Gorilla Number One” in 10 years … the less-than-desirable image of the pharmaceutical industry … then we will certainly have failed.

That’s why, at Lilly, we’re continuing to look for ways to be more open and transparent about our business. We’ve learned that letting people see for themselves what we’re doing … is the best way to build trust.

A few years ago, we created the industry’s first online listing of clinical trials that we sponsor … and the resulting data. Later, we put out the industry’s first online listing of our educational grants … and charitable contributions.

To carry that kind of openness even further, I’m pleased to announce to this audience for the first time that … as early as the second half of next year … Lilly will become the first pharmaceutical company to begin voluntarily disclosing our payments to doctors for the speaking and consulting services they provide.

We compensate doctors for their valuable time … mainly to help us plan and execute our clinical trials and to help educate other doctors about our medicines. But once again, showing will be better than just offering explanations. I’m convinced that when people see this information in black and white … their confidence in what we do … will go up.

This database will be a large undertaking … because the information is collected in so many different places. The data will be available on the Internet … searchable in a variety of ways … and we’ll specify the purpose of each payment.

Transparency and trust together are the oil that lubricates the complex “machine” that is 21st Century healthcare … and Lilly intends to remain a leader in this regard.

______

Ladies and Gentlemen, Eli Lilly and Company was quite literally created with a commitment to change. Colonel Eli told his son … when J.K. senior joined the company after pharmacy school: “Take what you find here … and make it better and better.”

That was 126 years ago. But it’s the same admonition that I’m trying to follow … in 2008.

Yes, we face challenges at Lilly … and we’re responding to those challenges with an exciting strategy … put into action every day by the very best people in the pharmaceutical industry.

Our strategy is aimed at improving outcomes for individual patients. That means clear patient focus … aggressive expansion in biotech … a leaner, faster company … a more global enterprise … and ultimately a more diversified business.

In doing these things, we will bring forth innovation … which IS the cure for what ails us – as a company … as an industry … and, frankly, as a society.

Among us today, too many people with diabetes are still suffering … too many people with serious mental illness still can’t hold a job … too many people are immobilized by osteoporosis … too many people with sepsis still die … and too many people with cancer won’t make it to their daughter’s wedding.

So we have much to do.

At Lilly, we’ve embarked on a transformation … the likes of which our company has never experienced. We’re doing this to strengthen our ability to innovate – so that we can deliver value to our shareholders … remain a vital part of Indiana’s economy … and contribute in a major way to human health in the 21st Century.

We’re confident … we’re fired up … and now – I hope you know why.