John C. Lechleiter, Ph.D.
Chairman, President and Chief Executive Officer — Eli Lilly and Company
April 18, 2011
Annual Meeting of Shareholders
Ladies and gentlemen, shortly after I joined Lilly in the late 1970s, I remember viewing a multimedia presentation here in the Lilly Center titled, “The Path We Have Chosen.” It ran for years just across the hall, and I imagine some of you here today remember seeing it.
The path we have chosen is clearly laid out in Lilly’s mission: We make medicines that help people live longer, healthier, and more active lives.
We will be the company that continues to discover, develop, manufacture and market new medicines that represent true advances and provide real value for our customers, even compared to lower-priced generics.
A year ago at this meeting, I reviewed our strategy to create value by accelerating the flow of innovative medicines that provide improved outcomes for individual patients.
I noted that some of our peers are shifting direction, moving away from innovative drugs or staking their future on consolidation.
So I say again this morning: This is not our path at Lilly. With a commitment to patients as our True North, we are on course to a future of new and better medicines for people who need them … and growing returns for our company and our shareholders.
My message to you today is that, while the path ahead will not always be smooth or straightforward, and while our company and our industry face plenty of challenges, we are, in fact, getting there.
“Getting there” is the theme we chose for our 2010 Annual Report and for today’s meeting. When we say we’re “getting there,” we mean that we’re never content with where we are, that we’re continually and aggressively pursuing our goals, and that we’re doggedly determined to prevail. And if you interpret it to mean we’re “making progress”—well, we’re doing that, too!
We have a robust pipeline of promising molecules with the potential to address a variety of unmet medical needs. And, as I’ll explain, we achieved significant advances in our pipeline in 2010.
Before the full potential of our pipeline is realized, however, Lilly must first bridge the period we call “Years YZ” when we face a series of major patent expirations – including the U.S. patent for Zyprexa late this year. The loss of patented products will obviously hurt our top-line and bottom-line performance … but we’ve seen this coming and we’ve been preparing for YZ on many fronts.
As we’ve advanced our pipeline, we’ve continued to build the bridge to the future by delivering strong financial, commercial and operational performance … and assembling the businesses and capabilities that will help underpin our growth in the years ahead.
Our strong financial performance in 2010 was based on revenue growth of 6 percent – most of which was volume-driven. Lilly’s revenue growth rate in 2010 was the second-highest among the top 10 global pharmaceutical companies.
We translated this revenue growth into even higher net income growth as we continued to control costs … even while sustaining a strong investment in R&D and in key growth markets. By the end of 2010, we reduced headcount by more than 3,400 – excluding strategic additions – or nearly two-thirds of our goal of 5,500. And we’re on track to meet or exceed the goal we set in 2009 to reduce our 2011 costs by $1 billion.
Reported net income for 2010 was $5.1 billion, or $4.58 per share. On a non-GAAP basis, which excludes items totaling $0.16 in 2010 and $0.48 in 2009, earnings per share increased 7 percent, to $4.74. Our strong operating performance, along with prudent management of working capital, generated some $6.9 billion of operating cash flow.
In the first quarter of this year, revenue again grew 6 percent – 5 percent of which was volume – driven by increased demand in international markets and the strong performance of Cymbalta, Alimta and our animal health business. We achieved these results despite a significant decline in Gemzar sales due to generic competition. Although reported earnings per share declined due to the items noted on the slide, on a non-GAAP basis – which provides insights into the underlying trends in our business – earnings per share increased by 5 percent in the first quarter.
Helping to drive our strong performance are three growth opportunities that will extend through the YZ period: Japan, key emerging markets, and our Elanco animal health business.
As reported by IMS Health, Lilly today is by far the fastest-growing major pharmaceutical company in Japan – the world’s second-largest pharmaceutical market. Total revenues in Japan grew 32 percent in 2010… on top of 30 percent growth in 2009 … fueled in part by the launch of products and indications that were introduced much earlier in the U.S. and Europe. As I speak, our hearts go out to our Japanese colleagues and to all those affected by the devastating earthquake and tsunami. Fortunately, all 2,300 Lilly Japan employees are safe, and we’re praying for the country’s speedy recovery.
In 2010 Lilly also achieved 13 percent revenue growth across five key emerging markets: China, Turkey, Korea, Brazil, and Mexico. In China in particular, we’re growing at strong double-digit rates, and Lilly is now among the top ten multinational pharma companies in China. We expect that our emerging markets business will provide an increasing share of our growth during the YZ period and beyond.
A third important source of growth is our Elanco animal health business. Elanco revenues grew 10 percent in 2009 and 15 percent in 2010, well outpacing overall industry growth. Elanco has built a robust pipeline and is poised to maintain double-digit growth in the coming years … bolstered by continued business development, including our recent bid to acquire Janssen’s animal health business in Europe.
As we accelerate these growth engines, we continue to use business development to help augment revenues through the trough of the YZ period and return to growth in the years beyond.
To cite one timely example, earlier this month in the U.S. we launched Axiron, a medication for low testosterone … as a result of a licensing agreement we reached early last year with Acrux Limited.
In our most far-reaching initiative since our last shareholder meeting, Lilly and Boehringer Ingelheim announced in January a worldwide collaboration in diabetes. The alliance includes four diabetes compounds currently in mid- and late-stage development … Boehringer Ingelheim’s two oral diabetes treatments, and Lilly’s two basal insulin analogues … and it represents a significant step toward our goal of providing a broad portfolio of medicines across the spectrum of diabetes care.
Ultimately, the future of our company depends on discovering and developing innovative medicines, and we’re bullish about the potential of our R&D pipeline. We’re definitely getting there.
Lilly’s current pipeline includes 69 molecules in clinical development – a mix of both small and large molecules – and reflects significant progress. Since we met last year:
- 15 new molecules advanced into Phase 1 testing, including one currently in Phase 2;
- ten molecules advanced into Phase 2 testing;
- and three molecules moved into Phase 3.
- We also acquired four late-stage molecules.
One of those molecules – linagliptin, an oral diabetes medicine from Boehringer Ingelheim – if approved – could launch later this year. We’ve also submitted and hope to launch some very important new indications and line extensions over the next few years, including Cialis for symptoms related to enlarged prostate … and prasugrel for the medical management of acute coronary syndrome. And just last Friday, we announced with our partners Amylin and Alkermes that the Committee for Medicinal Products for Human Use has issued a positive opinion recommending Bydureon for approval in the European Union. If approved, Bydureon would be the first once-weekly therapy for the treatment of type 2 diabetes.
Within this pipeline, we have promising candidates in all our key therapeutic areas. I’ve already highlighted our growing portfolio in diabetes. In oncology, Lilly today has 30 potential medicines in development for patients with many types of cancer, including eight molecules from ImClone – two of them in Phase 3. We also have three molecules in Phase 3 for various psychiatric and neurologic diseases, reflecting our continuing commitment to neuroscience.
Since our meeting last year, we’ve terminated development of 16 molecules and sold one to a third party. While we’ve been disappointed in particular by several late-stage losses, we recognize that attrition is a normal part of the development process, and that early losses are not always bad things: if you’re going to fail in this business, the earlier you can make that call, the better. At the same time, we’re focusing on improving the probability of success of molecules that advance into late-stage development. And we’re making good progress.
All in all, we remain on track to have at least 10 molecules in Phase 3 by the end of this year. We currently have nine. Most recently, we began Phase 3 trials of our mGlu2/3 receptor prodrug for schizophrenia. And we still have at least three more opportunities for this year:
- Our IL 17 antibody, for which we have encouraging clinical trial data in rheumatoid arthritis and psoriasis; and
- Our two basal insulins– a novel basal insulin analog and our new insulin glargine compound.
The size, the quality, and the progression of our pipeline are not a matter of chance or luck. They reflect a systematic effort to increase the efficiency and effectiveness of our R&D, in a way that will produce the only results that matter – innovative medicines that address important unmet patient needs.
In the past, I’ve described a number of our initiatives to remake our R&D process … all aimed at what we call “reinventing invention.” Today, I want to provide some additional specific examples:
- The Development Center of Excellence we created only 18 months ago, using critical chain project management has achieved an operational success rate of over 90 percent in hitting planned next milestones for clinical development in 2010 and to date in 2011. This is a significant improvement over past performance.
- Scientists in our Advanced Analytics group continue to use new approaches in the design of our clinical trials. An example is the GLP Fc molecule for diabetes, where we have cut 6-12 months off the development timeline.
- We’re also implementing more broadly what we call “fast-to-proof-of-concept” strategies that help us determine more quickly, and at lower cost, whether to invest in further development of an early-stage molecule. Our virtual drug development network, called Chorus, has been able to reach clinical proof of concept about 12 months earlier and at half the cost compared to the current industry model. I’m pleased to note that the first two molecules for which Chorus established proof of concept recently reached late-stage development.
- We’re also making tangible progress in achieving our vision of tailored therapeutics, through the use of diagnostics in clinical trials. We believe that this approach holds the promise of increasing R&D productivity by allowing for smaller trials … and better demonstrating the efficacy of a new medicine by identifying patients most likely to benefit.
- For example, in clinical trials for solanezumab, our potential treatment for Alzheimer’s disease, we’re using Avid’s imaging agent Amyvid to identify beta-amyloid in the brain. Beta-amyloid plaques in the brain are thought to be related to the onset of Alzheimer’s. This could aid in patient selection for future trials of other anti-amyloid agents and potentially could be a therapeutic biomarker.
- Another example of tailoring involves mGlu2/3, the Phase 3 compound for the treatment of schizophrenia I mentioned earlier. We’ve pinpointed a genetic marker that may identify a sub-population with enhanced clinical response to this drug candidate. Nothing similar has ever been shown with existing antipsychotics – currently we simply don’t know in advance how particular patients will respond to a treatment for schizophrenia. If these results for mGlu2/3 are confirmed in the Phase 3 trials, it could prove to be the first solid evidence for tailored therapy in the field of psychiatry.
- We have an abundance of exciting molecules, targeting unmet medical needs, in clinical-stage development.
- We are advancing molecules with established proof of concept through our pipeline and into Phase 3. We will have important clinical data read-outs over the next 24 months that will enable us – and you – to further gauge our progress.
- And we are succeeding in our efforts to “reinvent invention” – measurably improving the productivity of R&D at Lilly.
- We’re truly “getting there.”
Lilly’s strategy – the path we have chosen – is fundamentally about innovation. As I stated in this year’s letter to shareholders, we will maintain our focus on what made this company great. The science has never been more promising, and the need for new medicines never greater. The work we do is indeed fraught with risk, difficulties, and inevitable setbacks – as it always has been – but we are working every day to overcome those obstacles and to prevail. And we intend to remain as tenacious as the diseases we’re fighting!
Throughout our company’s history, our success has been built on scientific excellence and a strong focus on research. More than 60 years ago, Mr. Lilly said, “Research is the heart of the business, the soul of the enterprise.” As we approach our 135th anniversary on May 10, these words still ring true.
We have a clear direction and a sound and thoughtful strategy to reach our goal. We have immensely talented employees, along with the financial resources to carry out our strategy, and we are achieving measurable progress on many fronts. We are acting with urgency – not simply to survive our YZ period, but to emerge stronger, more able, and more resilient, with the capacity to drive future growth for the benefit of patients and shareholders alike.
Thank you for being here today and for your continued support of our company.