Speeches & Presentations

The Return of Innovation

John C. Lechleiter, Ph.D.

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

October 29, 2010

The Dallas Friday Group

Dallas, Texas

Good afternoon.

It’s a pleasure to be here today … and to have the opportunity to address the Dallas Friday Group.

Since 1978, you’ve provided an important venue to explore vital national issues … and I’m honored to join the distinguished list of those who have shared their thoughts with you.

I also have to console you about the Rangers – never count them out – they’ll be back!

As a long-suffering Cincinnati Reds fan, I said, “Big Mistake” when Josh Hamilton was traded … but now I think you can say it worked out well for everyone.

The American League Championship Series made for some interesting comparisons.

  • The Rangers hit .304 … to the Yankees .201;
  • The Rangers’ pitchers had a 3.06 earned run average … to the Yankees’ 6.58;
  • But what makes these numbers even more remarkable, the Rangers’ payroll is $55 million … to the Yankees $206 million.
  • [The salaries of just Alex Rodriguez and C.C. Sabathia exceed the entire Ranger’s payroll.]

So even though the Yankees spent virtually four times as much, the Rangers outhit and outpitched them – in terms of value, it was not even close.

I recount this in part because I figured – what the heck – you’d enjoy it … but also to get you thinking about something that’s been overlooked in the debate over how to improve U.S. healthcare!

That debate has revolved around access … quality … and costs … all of which need addressing. But we’ll never improve in any of these areas – in fact, we risk going backwards – without taking into account two fundamental game-changers: innovation and value.

I’d like to begin today by offering a different perspective about the value of medical innovation… and what it will take to increase that value in the years ahead, to increase our collective “ROI” – Return on Innovation!

Our thinking about health care and medical innovation tends to be dominated by costs – and it’s easy to understand why. U.S. health care spending doubled between 1980 and 2000 … and it doubled again over the last decade.

The question we need to ask, however, is not: “Is healthcare too expensive” … but: Are we getting our money’s worth?

To answer that question, we need to weigh costs against benefits. To determine value – in medicine or anything else – we need to take into account not just one – but both.

When you do account for both, the answer to my question may come as a surprise.

There are a lot of ways we might measure value in medical innovation, but clearly, among the most fundamental, is life itself. And here, the impact of modern medicine is nothing short of astonishing. These are data from Harvard economist David Cutler:

  • For tens of thousands of years of human existence, life expectancy at birth was maybe 20 to 25 years.
  • In 1800, at the time of our Founding Fathers, life expectancy had risen to about 35 years.
  • In 1900, life expectancy in the U.S. at birth was 47 years – a substantial gain of about one-third over a century.
  • By 2000, life expectancy at birth had skyrocketed to 78 – 30 additional years! That’s an increase of 66 percent over 100 years – unprecedented in human history!

What accounted for this dramatic extension of life?

When you look at the data, the gains in the 20th century fall into three distinct periods:

  • From 1900 to the 1950s, there was a steady increase in life expectancy.
  • From the mid-1950s to the mid-’60s the trajectory leveled off.
  • Then, the increases resumed again all the way into the 21st century.

Turns out, the bulk of the gains in the first half of the century was the result of fewer people dying of infectious diseases.

The reasons include cleaner water … better sanitation … and better diet.

But another big boost resulted from the invention of novel drugs that could – for the first time in history – cure infectious diseases. The major breakthrough came with penicillin in the 1940s … followed by entire new classes of antibiotics – breakthroughs, by the way, where Lilly played a pioneering role.

By mid-century, however, the big gains from fighting infectious diseases had been accomplished … and medicine had few weapons to combat other major killers – such as heart disease and cancer. In fact, those diseases were on the rise as people lived longer.

This explains the decade starting in the mid-’50s when lifespan mostly held steady. It led one researcher to lament in 1969 that, quote, “Modern medicine has little to offer for the prevention or treatment of chronic and degenerative diseases that dominate the pathological picture of advanced societies.”

He turned out to be about as right as the Decca Records executive who rejected the Beatles by saying “Guitar music is on the way out.”

In fact, starting around the time of the Beatles, a revolution in medical technology led to a resurgence in the growth of life expectancy.

One driver, it turns out, was the reduction of infant mortality. A second – and even bigger boost – came from a series of breakthrough treatments for diseases that had proven impervious to medical science throughout human history.

Let’s look at the impact of medical innovation on the two biggest killers: heart disease and cancer.

New diagnostics let physicians peer into the heart … new interventions like bypass surgery and stents – which were pioneered by Lilly’s ACS subsidiary in the ’80s – enabled patients to survive damaged blood vessels … and hearts could even be replaced through transplantation.

Even better – for the first time, people could prevent coronary damage with new drugs that controlled blood pressure … reduced cholesterol … or broke up clots.

As a result, since 1975, death from coronary heart disease has declined by nearly 60 percent! Think about that.

To put a human face on that figure, more than one million additional Americans would die of heart disease or stroke each year if the death rates today were what they were 30 years ago.

The decline in cancer deaths over this same period has been less dramatic … but no less steady.

In 1975, the five-year survival rate for all cancers together was 50 percent. In other words, if you were diagnosed with cancer in 1975, you had a 50/50 chance of living five years.

Today, the five-year survival rate is nearly 70 percent.

Seen from another angle, the American Cancer Society says that from 1991 to 2007, the death rate for all cancer dropped 17 percent. Again, over 100,000 more people would be dying from cancer every year without this decline.

And while some cancers still remain beyond the reach of today’s medicine … we’re making progress against many others. Before 1950, a child diagnosed with leukemia had three months to live. Today, a child diagnosed with leukemia has an 80 to 90 percent chance of being cured.

Let me distill the cumulative benefit from medical advances into a context many in this audience will appreciate:

If you’re older than 50, like me – I admit – we’ve added nearly a decade to lifespans just in our lifetimes! Seen another way – each day of our lives, every 24 hours, we’ve gained an additional five hours! [Although it’s still not enough hours to clear my email.]

It may be impossible to quantify the profound human benefits of these additional years of life … but two University of Chicago economists assessed the economic benefits. Kevin Murphy and Robert Topel have calculated that – quote:

“Improvements to life expectancy alone – ignoring improvement in the quality of life – added about $2.6 trillion per year to national wealth between 1970 and 1998. By comparison, average GDP over this period was about $5.5 trillion – the uncounted value of rising longevity is nearly half the measured national output.”

And, in fact, people are not only living longer … they’re living better.

Functional disability in the United States fell through the 20th century at an average rate of .6 percent per year … and there’s some evidence to suggest these declines actually accelerated toward the end of the century.

A 2006 study found that, from 1982 to 2005, the prevalence of chronic disability among elderly Americans declined from more than 26 percent to 19 percent … a drop of more than 25 percent.

And this jibes with common experience. We all know people in their 70s – and even 80s – who have left behind rocking chairs for sea kayaks … tandem bikes … and cross-country skis. And while we might be frustrated with the rise in overall healthcare spending … a big chunk of it is due to the fact that these folks are now healthy enough to get a knee replacement or a coronary bypass or cancer treatment in their 70s and 80s and continue their active lifestyle … which sounds better than the alternative to me.

So, again, are we getting our money’s worth from medical innovation?

It depends: What else would you choose to spend your money on? When you reflect on these benefits I’ve outlined – extra years, and higher-quality years – what else could possibly provide you comparable value?

We have this strange habit – both here in the U.S. and throughout the industrialized world – of accounting for health care and medical innovation primarily as a cost in the grand economic equation – as something to be subtracted in the tally of each nation’s productivity. There is something fundamentally flawed in this perspective.

In an provocative essay written nearly a decade ago, Charles Morris posed it this way:

“Gouging coal out of mountains to run power plants so that we can waft cool air over the brows of investment bankers is totted up as ‘industrial production’ – an unambiguous increase in national wealth, like jet skis and video games. But new hips that allow people to walk … intra-ocular implants that restore their vision … stents that put them back to work, are classified as non-productive ‘services’ that somehow make us poorer.”

I think many will agree with his point that the output of this activity – what health care does for us – is the highest kind of “good” in every sense of the term. In fact, it’s probably the greatest good we could ever purchase for our money.

With the help of medical innovation, not only have we purchased additional decades of life and health … but the economic payback from these gains is also difficult to overstate. The payback is years of productive work, economic value added, consumer spending, and tax dollars paid – which together outweigh the costs of treatment overwhelmingly … even if you resist putting a number on the intrinsic value of being alive!

Just as the return on medical innovation repays its cost many times over … I believe one area of innovation accounts for the greatest part of that return.

A study by Columbia University Professor Frank Lichtenberg found that the launches of new medicines accounted for 40 percent of the increase in life expectancy during the 1980s and 1990s.

In other words – in the study – for every year that life expectancy has increased, five months can be attributed to the availability of new medicines.

Furthermore, there’s compelling evidence that innovative medicines are also the most cost-effective part of health care.

  • Over the last 40 years, the use of medicines has cut in half the number of hospital admissions for 12 major diseases.
  • The power of new cardiovascular medications in the past 30 years to prevent or delay heart disease already has eliminated the need for tens of thousands of costly surgeries and hospitalizations.
  • Other medicines have kept thousands of patients with mental illness from facing institutional confinement for months or years – often at taxpayer expense.

Lilly recently hosted David Snow, CEO of Medco – the largest pharmacy benefit manager in the U.S. Given that Medco’s business is to help their clients manage their health care spending, you would say David is an expert on cost-effective medicine.

One piece of data he shared was that Americans with chronic and complex diseases – such as diabetes, heart disease, osteoporosis, and cancer – account for 75 percent of U.S. health care spending. Furthermore, according to Snow, “For 88 percent of chronic and complex diseases, drugs are a first choice for medical intervention.”

Consider diabetes. If unmanaged, diabetes can lead to a cascade of potential complications that exacts a growing human end economic toll – including blindness, amputation, kidney disease, and death.

David looked specifically at the costs of treating patients with diabetes depending on how well they adhered to their prescribed course of medicine. Medical costs for those in the least compliant group were nearly $9,000 a year. Costs in the most compliant group were about $4,600 – just about half. What’s interesting is that as people kept taking their medicine, their costs for prescription drugs increased (as you would expect) … but this increase drove overall costs way down.

The math is similar for many diseases. In case after case, innovative medicines are often the most medically- – and economically-effective alternative.

Here’s how David Snow summed it up for my Lilly colleagues. He said: “Drugs used properly are part of the solution, not part of the problem.”

Having said that, the CDC says that 60 percent of patients with diabetes don’t have their disease under the control required to avoid the terrible complications I referred to earlier. This is too often because they fail to take their medicine. We see similar poor figures for a number of chronic conditions. So improving adherence rates for patients suffering from chronic diseases is fertile ground for further increasing value in health care.

At the same time, Lilly has refined our strategy around increasing the value of the medicines we develop. We’re well aware that, for many patients – as well as those paying the bills – too often even the most innovative medicines fall short.

That’s why we’ve been transforming our company and the products we deliver – from medicines that provide efficacy at the population level to those that provide improved outcomes for individual patients.

With the help of new tools and advances in life science, we’re working to tailor medicines to individual patients’ needs – providing them the right drug at the right dose at the right time.

Tailoring can be done using:

  • personal (or what are called phenotypic) characteristics – such as age or weight;
  • established biomarkers – like long-term blood sugar for people with diabetes;
  • and more novel markers depending on the patient and the intent of the therapy. These are emerging from new tools and technologies such as pharmacogenomics … bioimaging … and bioinformatics – all of which are advancing how we understand, classify, and treat patients.

Our objective is not to argue for the use of Lilly products wherever they might be used … but only where the data show they should be used. 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.”

From the point of view of patients and their doctors, a tailored therapy will provide a better benefit/risk trade-off, because they can have a higher degree of confidence that it will work effectively and without harmful side-effects. From a value-for-money standpoint, more tailored medicines should also reduce the heavy costs associated with non-responders. Payers will get what they are paying for.

In short, this is exactly the kind of innovation our customers really want … and exactly the greater value we’re determined to deliver.

In making the case for the value of medicine, I also need to point out that seven out of 10 prescriptions Americans fill this year will be for generic drugs – and generics in this country are clearly one of the best bargains in health care. However, it’s important to remember that these drugs are the fruits of our research. Generics would not exist without the billions of dollars and 10 to 15 years of research required to bring the original breakthroughs to market. The cost-effectiveness of generic drugs – a tremendous boon to our citizens and people around the world – are the legacy of pharmaceutical research … and, part of the overall value we help create.

For all the value generated by innovative medicines and felt at a personal level by each one of us … the full picture is not complete without accounting for the impact of life sciences research on the broader U.S. economy.

Recent data show that:

  • the biosciences industry today employs some 1.3 million Americans …
  • and supports a total of 7-1/2 million jobs across the U.S. economy.
  • From 2001 to 2008, jobs in life sciences grew by nearly 16 percent – that’s about 4-1/2 times the rate for the national private sector.

Texas is a good example of this impact. The life sciences is one of six industry clusters targeted by this state for development since 2004 … and what followed was a five-year growth rate of 14 percent. In 2008, there were 71,000 jobs in biopharmaceuticals alone … and Texas is one of the leading states for clinical trials and total biopharmaceutical output.

Today, the U.S. is the undisputed leader in medical advances. Our biopharmaceutical sector is the envy of the world. U.S. inventors and companies:

  • hold the intellectual property rights to a majority of new medicines;
  • they account for more than 80 percent of the world’s biotech R&D;
  • and they’re testing more potential medicines in clinical trials than the rest of the world combined.

This wasn’t always the case. As recently as 1990, the pharmaceutical industry spent 50 percent more on research in Europe than in the U.S. By 2001, that was reversed, with the industry spending 40 percent more in the U.S. And we’ve never looked back.

But this leadership is increasingly at risk.

So, in my remaining time, I’d like to turn to an area where all of us have a role … to promote an environment where innovation – and medical innovation, in particular – can thrive.

America’s genius for innovation has always been our greatest competitive advantage, but, unfortunately, we’re in danger of losing that strength.

A recent study ranked the U.S. sixth among the top 40 industrialized nations in innovative competitiveness, but 40th out of 40 in “the rate of change in innovation capacity” over the past decade. The ranking measured what countries are doing – in higher education, investment in R&D, corporate tax rates, and more – to become more innovative in the future. The U.S. ranked dead last.

I firmly believe that, when it comes to sustaining innovation, the burden remains on enterprising businesses like those represented in this forum. However, the one thing that the biomedical industry has a right to ask of public policy is to help preserve the environment in which innovation is possible in the first place.

The fact is, the pursuit of innovation in any field is a difficult, high-risk venture. If innovation is to take root and grow, it requires a combination of elements I have described as an “ecosystem.”

The first element of this ecosystem is an atmosphere in which innovation can thrive, a society that understands and appreciates scientific inquiry, and free markets where innovators can expect to be rewarded for the risks they take and the value they create. This has always been an American strength. Yet today you'll hear some people say that we have all the innovation we need — or that, in this difficult economic climate, we just can't afford any more of it! This is nonsense – for all the reasons I’ve talked about this afternoon – and more!

The second element of the ecosystem — nutrients — comes in the form of monetary investments. For investors to take the risks associated with innovation … and certainly medical innovation is a very high risk enterprise … they must have a fair chance at earning a return when they succeed. That requires the ability to offer innovative products at market prices; solid protection of intellectual property; a fair, rigorous, and transparent system of regulation; and a tax structure that provides companies the ability and incentives to invest in the first place.

The final and most important elements of the ecosystem are the seeds of innovation, which equate to talented people and their ideas. Human talent is our most precious resource, but one that remains woefully underdeveloped in this country.

This is a huge issue in itself, but let me just mention two essential tasks:

  • First, with our kids falling further behind on international comparisons in education, we've got to get dead serious about broad improvement in science and math instruction in our grade schools and high schools.
  • Second, we need immigration laws that allow and encourage top scientists from other countries to choose to work and to remain in the United States. This does not entail drastic changes, but a sensible increase in visas for highly skilled immigrants and a shorter, simpler green-card application process.

Today, I’ve tried to broaden our perspective about value in healthcare … and the critical role of innovation in multiplying that value.

To paraphrase Medco’s David Snow, innovation is not the problem in our health care system. It is a huge part of the solution. And it is an absolute requirement if we’re to overcome the medical and economic challenges of our aging population.

A report issued earlier this year on Alzheimer’s disease said that the global costs for caring for people with dementia in 2010 would surpass $600 billion – equal to about 1 percent of the world’s GDP. Another report released in May said that Alzheimer’s will cost the United States some $20 trillion by 2050 if we don’t find successful treatments. That’s trillion, with a “T.”

And even that unimaginable figure doesn’t account for the immense human suffering – a toll that is truly beyond calculation.

As the leader of a company committed to improving outcomes for patients with these devastating diseases, this is not just academic for me.

We know that the treatment for Alzheimer’s disease – and for cancer, diabetes, and other tenacious diseases – will most likely come from labs like ours … and that finding innovative medicines is both a moral – and an economic – imperative.

  • Without innovation, we won’t be able to provide more effective health care to a rapidly aging population … or control health care’s real cost drivers, including long-term care and hospitalization.
  • Without innovation, we will be defenseless against growing scourges – such as Alzheimer’s disease … diabetes … and cancer.
  • Without innovation, the staggering health crises that linger in the developing world will get worse … not better.
  • Without innovation, we will not come close to matching the last century’s progress in longevity and quality of life – and may even go backwards.

By nurturing medical innovation, by recognizing fully the value it creates, and by putting in place sound public policies, we will continue the amazing progress that transformed human life in the 20th century … and create value that stands above all other: the value of greater health … productivity … and life itself.

Thank you!