Borderless Innovation: Evidence and Implications of a Global R&D Network
Chairman - Eli Lilly and Company December 12, 2008
November 19 , 2008
Phoenix Committee on Foreign Relations - Phoenix, Arizona
It is truly a pleasure to be here this evening. And I am grateful to all of you for indulging me as something of an “unconventional” speaker in your series on foreign relations.
I am not a geo-strategist, a diplomat, a military officer, or an academic. I will not dazzle you with an assessment of the global balance of power or add to your knowledge of the Middle East, the Caucasus, or other hot spots.
Instead, I am a businessperson, completing a long career with a global pharmaceutical company. I have had the privilege of meeting presidents, prime ministers … and even a king … but the international “players” that I will speak with you about this evening are scientists, investors, entrepreneurs – and a new breed of corporate managers.
My goal is to share with you how the progress of innovation in the life sciences increasingly depends on cross-border relationships … and how the very nature of the global research and development enterprise is changing as a result.
I will begin by noting that the issues involved in global business decisions today are very different from those that would have applied in the not-so-distant past. Perhaps I call it the “not-so-distant past” so that I can avoid confronting the fact that I was part of four decades of this evolution in thinking at Eli Lilly and Company!.
When I arrived at Lilly fresh out of business school, it was not a “global company” in any sense of the term today. Yes, Lilly had overseas affiliates – a fair number by the standards of the day. It derived about a third of its sales from outside the U.S. – a significant share. And it had manufacturing operations in several overseas locations as well.
However, three major aspects of what we would now consider a “global company” were missing. Let me suggest to you that these are global learning … true integration … and leverage.
The best proxy for evaluating the extent of global learning in a company is the make-up of its leadership. Are people with formative experiences outside the firm’s home culture actually rising to the top ranks of the business – and therefore applying what they’ve learned … their diverse ways of thinking … to high-level decision making? At Lilly and at many other large U.S. companies as recently as the 1970s and 1980s … that simply was not the case. Today, it is the case at Lilly. Among the top 40 executives at our Indianapolis-based company, more than 30 were born outside the U.S. or have significant international experience.
The second aspect of today’s global company that’s still quite new … is true integration. But that I mean not simply making products in diverse locations to supply local markets, but rather operating a supply chain that links widely dispersed operations into a seamless whole. That is now the situation not only in pharmaceutical manufacturing but also in R&D. Today, scientific teams at Lilly – whether they are exploring a particular molecule or targeting a certain disease state – often consist of individuals who physically work in labs on three different continents.
And finally … leverage … a term that’s overused in business jargon but is truly meaningful in this case. Truly global companies look at strengths and opportunities in one country or region, and figure out how these might help to mitigate problems in another part of the business. Such companies use their international experience as levers – quite literally – to ease their heavy lifting on otherwise vexing challenges. Again, this is quite new.
This third aspect of global strategy takes us into the heart of what I want to share with you this evening.
A fundamental transformation is underway in how the pharmaceutical industry operates. This transformation is driven by several major factors:
- Increasingly, R&D productivity across the industry has fallen. Last year, for example, the regulatory body that governs our industry in the U.S. – the Food and Drug Administration – approved 17 new molecular entities and two license applications for biologics. That is the lowest number of approvals since 1983.
- Meanwhile, R&D costs have continued their steady rise – now surpassing $1.2 billion per molecule approved for sale.
- Further, a wave of patent expirations for top-selling drugs is beginning to crest … across the entire industry. During 2011 and 2012 alone, the pharmaceutical industry will suffer about $40 billion in projected revenue losses. And it’s already clear that new products will not be ready to replace all of those revenues.
- Finally, governments and other payers throughout the world have been feeling great pressure from rising health-care costs … and they have been trying to relieve that pressure by reducing access and limiting prices for pharmaceuticals.
Albert Einstein is credited with defining “insanity” as – I quote – “doing the same thing over and over again … and expecting different results.” Einstein makes a good point. When you consider the environment that I have just described, it becomes clear that pharmaceutical companies would be foolish to the point of insanity to continue doing things in the same way that we have always done them. We need different results than we have been achieving in the last decade!
Specifically, the pharmaceutical industry needs to achieve two things. We need to improve our productivity quite significantly, which means reducing costs throughout the value chain while accelerating our development of viable new molecules. Second, we need to find ways to mitigate the financial risks of new-product development.
I want to share with you one of the most important ways in which we are transforming our business in order to achieve these needed improvements. Simply stated, Lilly will no longer try to do everything itself.
For most of Lilly’s history, we applied the model of the “Fully Integrated Pharmaceutical Company” … or “FIPCO.” Under the FIPCO model, which all of Big Pharma adhered to, we believed that individual companies needed to own nearly every part of development, manufacturing, and marketing … in order to bring innovative products to patients efficiently … and at a high level of quality.
At Lilly, we created a new term describe the structural model for the future that is now taking shape. We call it a Fully Integrated Pharmaceutical Network, or FIPNet. Our goal is still to be “fully integrated,” but not within one company. Instead, we seek to create a fully integrated global network that includes Lilly … but also other companies, organizations, and even individuals in some cases. These collaborators will not be owned or employed by Lilly but nevertheless assembled, led, and managed by us.
We are not alone in seeking this new model. Many of our competitors are starting to build new kinds of relationships outside their own walls. However, I believe that Lilly has been a pioneer. For example:
- As recently as five years ago, virtually all of Lilly’s synthetic chemistry took place inside our company – at Lilly laboratories, involving Lilly scientists. Today, while all of Lilly’s drug discovery compounds are designed internally by Lilly scientists, a high percentage of the compounds are now synthesized outside our company. Today, such work on Lilly’s behalf is mostly concentrated in a Chinese firm called ShangPharma – which has achieved a high degree of productivity.
- Also just a few years ago, virtually all of the people engaged in achieving “Proof of Concept” for Lilly’s discoveries were Lilly employees, working at Lilly-owned facilities, with Lilly-owned tools. “Proof of Concept,” as you may know, is the point at which clear evidence has been obtained that a drug compound works in humans. It is not unusual for a pharmaceutical company to spend three years and $30 million or more – while engaging hundreds of its own scientists – to achieve “Proof of Concept” for a single compound.
Today, a Lilly program known as Chorus has demonstrated that “Proof of Concept” can be achieved using a global network of scientists and other partners who are mostly outside the company, reducing costs by several million dollars per molecule while also reducing the time required for development.
Even more recently, pharmaceutical and biotechnology companies faced one of two choices with regard to discoveries in their pipelines. Either they could accept the large financial risks of further developing their discoveries, with no assurance of ultimate success or they could abandon or sell off their discoveries. Today, decisions about our pipeline are still very difficult, but at Lilly we have a third option. We are working with several firms in China and India that have been willing to share our financial risk in development. In exchange for payments when important milestones are achieved – and royalties if the molecules make it to market – these firms are investing their own talent, ideas, and resources to develop assets that Lilly still owns.
This “third way,” we believe, will allow Lilly to move more molecules in our pipeline simultaneously, more quickly and at less cost, to the point at which their viability in the marketplace can be assessed with greater confidence.
It is significant, I believe, that one of the most mature examples of FIPNet at Lilly involves one of our most important molecules … prasugrel, which is currently being considered for approval by the FDA.
Prasugrel is an oral, anti-platelet agent that we are investigating as a potential treatment for patients with acute coronary syndrome. It originated in the labs of a Japanese partner, Daiichi Sankyo. Beyond our two companies, a third party manufactures the active ingredient for prasugrel. As we develop the drug in the clinic, both a clinical research organization and an academic research organization have been involved in our major trials. And on the commercial side, it is quite possible that a contract sales organization will be involved – in addition to the sales forces of Lilly and Daiichi Sankyo – if prasugrel is approved for sale. This is a comprehensive example of a networked relationship requiring extensive, global integration.
At its heart … this is my strong, personal belief … the pursuit of innovation is about harnessing human talent in all its forms: skills, certainly … but also new ideas, intense dedication and hard work, and passion. FIPNet … at its heart … is about harnessing all these forms of human talent on a global scale, more flexibly and efficiently than has ever been possible in the life sciences.
So … the most basic factor enabling FIPNet is simply the availability of talent. The success of higher education in places such as China and India – combined with the enormous populations in these countries – has created talent pools the likes of which have never been seen in human history.
What had been missing in the pharmaceutical and biotechnology fields in these countries … until recently … was the element of experience. Familiarity with the complex R&D and manufacturing systems in our industries, not to mention the stringent quality requirements and the highly specific expectations of regulators, is not something that can be learned at university. It comes only from years of experience.
Beginning in the early part of this decade and accelerating now with each passing year, the phenomenon of the “returnees” has injected experience into the talent pools of China and India in particular. Native-born people who have spent a decade or more working in the global pharmaceutical industry are now going home in some cases – to seize opportunities for entrepreneurship, enjoy a higher level of professional challenge, or simply re-connect with their families and old friends. Both within Lilly, and among our partners, the returnees have been crucial to the spread of FIPNet.
Just as crucial has been the progress in these countries towards greater respect for intellectual property. Innovators will shy away from even the most attractive talent pools, if the knowledge they share or the discoveries they might make with this talent is not reasonably secure. Legal regimes to protect patents still have far to go in China and India – particularly with regard to enforcement – but we are seeing much greater commitment to the core principles.
Other factors have been essential to making FIPNet possible as well. It is no coincidence that Lilly was the first U.S. pharmaceutical company to create a venture capital fund dedicated to China. The growth of venture funding … combined with the entrepreneurship of the returnees … is creating hothouses for new business development in places such as Shanghai, Guangzhou, and Beijing.
And so the impediments to making the fullest and best use of the world’s largest talent pools are falling away. That is the essence of FIPNet.
To take full advantage of FIPNet, however, we must address several concerns about the networked model of operation in the pharmaceutical and biotechnology industries.
Some people argue that this model is nothing more than a means of disguising the pursuit of cheap labor at the expense of the existing life-sciences workforce in Europe, the U.S., and Japan. If that were true, then the benefits of FIPNet would be short-lived indeed. In fact, to the extent that FIPNet is successful as a means of obtaining high-quality work and sharing financial risk, then it is almost certain that the labor involved will get steadily more expensive. That is the nature of free markets.
It is more accurate to acknowledge that if we do not transform the industry – and especially if we do not find more efficient and far-reaching ways to engage talent in the service of human health – then existing jobs truly will be in jeopardy.
Some people also point out that FIPNet exposes companies to the potential erosion of their product quality and of their core capabilities – as they rely more and more on the work of outsiders. This concern should not be dismissed lightly. In particular, experienced companies at the center of new collaboration models must assure that their safety and quality requirements are understood and applied by all partners. This may well serve to accelerate a global proliferation of the highest standards – in ways that regulatory bodies alone could never achieve.
At the same time, we must not neglect the “FIP” part of “FIPNet.” This model is not about the frantic outsourcing of all work. Instead, it emphasizes the integration of external networks to a previously unheard-of degree. Such integration, in turn, requires the retention of core knowledge and skills … and the creation of new expertise – and value – in the management of complex networks.
Lilly’s R&D operations in Singapore provide an excellent example. Our Singapore Center for Drug Discovery is really the nerve center of our emerging global FIPNet in systems biology. Lilly could not manage this network without strong, in-house expertise on toxicology, drug disposition, process research and development, and other key functions. And that is in addition to the information systems and other Lilly-owned tools that we are developing to integrate a network of partners spanning four continents.
Ultimately, the great uncertainty of FIPNet is not what we might lose but rather what we might gain … and whether we are capable of transforming ourselves in such a way as to take these gains on board. Let me explain what I mean.
Realizing the full potential of FIPNet will require Lilly – and other companies that pursue this model – to transform their own cultures.
We will need to develop more courage. Setting up a wholly owned overseas affiliate is a relatively stress-free undertaking … compared with entrusting significant portfolio assets to a young company on the other side of the world, led by people who were until recently the employees of your arch competitors. I am describing an actual situation for Lilly!
We also will need to develop more humility. Yes, our own expertise is crucial – and we will be called up to teach our networked partners constantly. But we will also be called upon to listen … and to learn. Big Pharma urgently needs to find new ways of getting things done. And the new ways are more likely to originate with people who did not spend their careers living with the old ways.
And we will need to develop more of a stake in the success of others. FIPNet is not an undertaking for which our expenditures should be seen purely as “costs.” As I have said, one thing that distinguishes FIPNet from traditional sub-contracting is the role of venture capital in many cases, along with various risk-sharing arrangements. The network will be stronger and more effective to the extent that Lilly and similar companies recognize their own gain from the success of their partners.
I have been talking about the new attitudes and behaviors that we will need to develop … to help FIPNet succeed. Let me conclude, however, by talking about something that must not change. At Lilly and among other large firms that develop globally integrated networks, we must guard against weakening our own brand – especially our reputation for ethical conduct … and our values. Indeed, this is the one area in which it is appropriate for us to transfer to our partners our old beliefs and business standards … spreading them throughout the network.
I believe that FIPNet – or whatever one chooses to call this approach – is part of a highly optimistic vision of the pharmaceutical and biotechnology industries.
This may sound rather contrarian to you, since optimism is not the dominant sentiment right now in the pharmaceuticals industry … or in health care more generally.
It is certainly true that health-care costs have been growing at a rate that most observers believe is unsustainable. The “mega-trend” of human aging is the major force driving this cost explosion – which in turn consists of three developments that had never before combined in human history.
Number One was the World War II Baby Boom in the industrialized world. That was followed a generation later by Number Two: the dramatically lower birth rates that have prevailed since 1970s. Number Three is the major increase in average life expectancy in much of the world, as a result of improved public health infrastructures, as well as better treatment options for diseases.
The result of these developments has been nothing less than the inversion of the traditional age pyramid. This is most pronounced in Europe – where today already, there are more people over 40 than under 40. But the phenomenon is universal in the developed world, and getting more extreme. By 2030, the median age in Europe will be nearly 50.
The inversion of the age pyramid has contradictory implications for health care: more demand on the one hand … and less ability to pay on the other hand.
Indeed, turning the age pyramid upside-down wrecks the traditional model of health care payment, in which large numbers of young workers supported small numbers of older retirees. Even in the U.S., where the inversion of the age pyramid is not so extreme, Medicare is facing an unfunded liability of around $30 trillion in the decades ahead. And of course, the healthcare cost crisis extends well beyond public payers. Businesses and individuals are also facing an intense squeeze.
In this rather dire situation, I am convinced that innovation is the answer.
As the secrets of the human genome are slowly but steadily unlocked … and, as the biological pathways of disease are increasingly understood … the therapies of the future will be safer, more effective, and more precisely tailored to the kinds of patients who will benefit from them. In other words, they will become vastly more valuable than they already are today.
Just as in the energy sector and elsewhere – where we look to new technology – I believe that successful R&D in the life sciences can turn the economic crisis of human aging into a potential boon.
There is only one truly essential requirement of this vision – namely, the application of human ingenuity on a global scale. The global strategy play is the one that matters most.
This is certainly not a modest requirement, but it is an attainable requirement. It is attainable, I believe, once companies and other organizations in health care manifest the courage, the humility, and self-confidence to collaborate globally … as a matter of course.
Not everyone will call it “FIPNet” – of that I am certain! But I hope that many more will realize that open, collaborative, and truly global relationships are good for business … and good for patients.
Thank you for kind attention.