Group 1
Shalina Bhatia 119 Arun Ravindran 138 Suman Kumar Saha 245
Anto Abraham 073 Arpit Rastogi 077 Ritesh Jain 112 Sandeep Tripathy 114
Shikha Gupta 300 Suja Barua 306 Suseendran 308 Vishal Gagrai 316
Case facts
Environmental analysis
Competitive landscape
New Product development process
Resistance to new technology – human factors
Evaluation of options
Recommendations
World’s 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
• Pass the 3 phases of US FDA Regulatory factors
• Combinatorial chemistry Technological
factors
• Aging US population and its diseases Demographical
factors
• Prices of drugs were exorbitant
• Cost effective techniques and related acquisitions
Pricing/Cost pressures
• Strong early mover advantage Early entrant
• Eli Lilly abided by the regulatory rules Regulatory
• Combinatorial chemistry
• Acquisition of Sphinx
Technological factors
• Focus on depression, hypertension, cholesterol , CNS disorders
Demographic factors
• Focus to develop drug quickly at a lower cost
• Concentrated on its core competency
Pricing / Cost pressures
• Focus on the side effects and drawback Imitrex
• Combichem to quicken process Early Entrant
Comparison of balance sheet summaries
Company
Sales in $ Mn
R & D in $ Mn
R &D as % of Sales EBIT
Net Income
NI as a % of Sales
RoE in %
RoA in %
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 Sales in $ Mn
R & D in $ Mn
R &D as % of Sales EBIT
Net Income
NI as a % of Sales
RoE in %
RoA in %
American Home Products 8966 817 9.11 2145 1528 17.04 35.9 7.1 Glaxo 8484 1287 15.17 2826 1955 23.04 25.2 16.1 Pfizer 8281 1139 13.75 2003 1298 15.67 30 11.7 Hoechst Celanese 7794 313 4.02 -55 186 2.39 5.9 2.3 Tekeda Chemical 7778 677 8.70 1124 518 6.66 7.7 4.5 Eli Lilly 5712 897 15.70 1828 1286 22.51 22.1 8.2 Sankyo CO 5575 477 8.56 887 395 7.09 11.3 5.8 Schering Plough 4657 620 13.31 1281 922 19.80 58.6 21.3 Rhone-Poulenc Rorer 4175 611 14.63 547 341 8.17 21 7.6 Wellcome Plc-ADS 3096 542 17.51 1098 632 20.41 22.1 14.4 Maion Merrell Dow 3060 462 15.10 632 438 14.31 20.5 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 Rank
1993 Rank Product Marketer Marketer's RoE
1 1 Zantac Glaxo-Wellcome Glaxo : 25.2% Wellcome : 22.1%
2 2 Vasotec Merck 26.90% 3 4 Prilosec Astra & Merck Astra : NA Merck : 26.9%
4 10 Zovirax Glaxo-Wellcome Glaxo : 25.2% Wellcome : 22.1%
5 6 Prozac Eli Lilly 22.10%
6 3 Capoten Bristol-Myers Squibb 32.30%
7 5 Mevacor Merck 26.90%
8 8 Adalat Line Bayer 11.90%
Average RoE = 22.96%
No direct correlation between R & D expense and superior returns or Profit Margins
Many Large firms don’t have products at the top Past and current investments may result in future ‘Hit’s 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
Human Clinical Trials
• 6 years
• Most stringent and time consuming : 3 phases
FDA Review
• 2-3 years
• 10% of drugs entering clinical trials reach market
Only phase that can be quickened
Quick ‘LEAD’
High throughput screening : Biologically test compounds from
all family of derivatives by Robots
Variations in molecular structures to create a
large pool of compounds
Iterative process in Traditional Chemistry
ADVANTAGES
Multiple derivatives at one go, so less time-to-market
Less expensive First mover advantage
DISADVANTAGES
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
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
ELI LILLY
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 ( non-
parallel 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 Cost
NPV(Billion $) Worst Best ER
Normal Launch as per industry sales $3.89 8.88 11.12 -0.23 0.13595
Normal launch with increcase mkt $12.04 8.88 11.12 -0.23 0.859659
Year delay $3.74 10.40 13.60 -0.23 0.182918
Two Year delay $3.54 12.12 17.88 -0.23 0.226318
Second Mover $1.77 12.1194 17.8806 -0.23 0.012162
As per computaion in the case $0.77 8.88 11.12 -0.23 -0.14085
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