Lilly Chief Tests Drug Search to Offset Sales Loss (Update2)

Feb. 25 (Bloomberg) -- Shortly after he became chief executive officer of Eli Lilly & Co. in April 2008, John Lechleiter, a former lab scientist, sent his senior executives a gift. It was a small digital clock counting down, second-by- second, to Oct. 23, 2011. That’s the day the drugmaker’s $5- billion-a-year schizophrenia pill, Zyprexa, goes off patent. Next to the countdown were four words: “Do what we do.”

The message: Lilly must pick up the pace of drug development so it can replace revenue lost when three top- selling medicines lose patent protection in the next few years, Lechleiter said in an interview in his Indianapolis office. The company stands to lose $10 billion in annual sales to generic competition by the end of 2016, almost half of its 2009 revenue, one of the steepest percentage losses resulting from patent expirations among the six biggest U.S. drugmakers.

Pfizer Inc., the buyer of Wyeth, and Merck & Co., which acquired Schering-Plough Corp., turned to consolidation to help solve their patent issues, to mixed reviews from investors. Lechleiter said he’s taking a different path, even as Lilly’s stock fell 11 percent last year. His push isn’t to get bigger, it’s to get faster, he said.

When Lilly faced challenges before, “each and every time the answer has been new, innovative products,” said Lechleiter, whose office wall displays the Periodic Table of Elements, the foundation tool for chemists, his first career as a Ph.D. from Harvard University in Cambridge, Massachusetts.

Two-Product Mission

Lechleiter’s mission is to introduce two new products a year starting in 2013, helped by a restructured development process based on an assembly line of tasks, roughly akin to the automobile manufacturing process. Each step is designed to work in concert to make the final product quickly and efficiently.

Shareholders say they aren’t convinced, an opinion supported by the stock’s worst-in-the-industry performance last year in the Standard & Poor’s 500 Pharmaceuticals Index, which rose 14.2 percent in 2009.

“Investors seem to price Lilly’s stock as if it will never develop another drug,” said Michael P. Krensavage, manager of Krensavage Partners LP, a hedge fund that owns Lilly shares, in a telephone interview.

Lilly gained 20 cents to $34.24 at 4 p.m. in New York Stock Exchange composite trading. The shares have declined 4.1 percent this year.

Lilly suffered two high-profile failures in July and August, when a multiple sclerosis drug candidate and an osteoporosis product fell short of expectations in clinical trials. Lilly’s blood-thinner Effient, approved in July, only pulled in $27 million in revenue in 2009, competing against Bristol-Myers Squibb Co.’s $6 billion-a-year Plavix.

‘Late-Stage Research’

Lechleiter’s efficiency-focused initiative is “clever, but how much money will it save?” said Tony Butler, an analyst at Barclays Capital in New York who recommends holding Lilly stock. “We need to see the fruits of late-stage research in risky areas like Alzheimer’s.”

Butler is one of 12 analysts who rate Lilly as a hold, according to Bloomberg data. Six recommend selling the stock, and five rate it as a buy, the data show.

“There’s always the risk -- will these molecules make it or not?” Lechleiter said, referring to Lilly’s 64 drugs in development. “But my response and, I believe, Lilly’s has to be, ‘Where do we find and how do we bring forth new innovation as quickly and cost-effectively as possible?’ That’s what we’re working on.”

As a first step, Lechleiter in September placed every department that plays a role in turning molecules into medicines under one roof, from the people who assess side effects to those who deal with the U.S. Food & Drug Administration in getting final marketing approval.

Intent on Speed

The unit, dubbed the Development Center of Excellence, is intent on speed and willing to try new strategies, Lechleiter said.

While testing drugs is usually carried out in three phases, Lilly plans to use just two in some cases. Last year, instead of having one clinical trial determine the best dose for a new diabetes drug, then a second to determine effectiveness, Lilly tested several doses at once. Statisticians assessed the data in real time, allowing researchers to drop dosages that weren’t working. Once the best dose was known, researchers tested it on the same group of patients, rather than recruiting new ones for a separate study.

The company may save 14 months on projects streamlined in this manner, said Timothy J. Garnett, Lilly’s chief medical officer.

‘Critical Chain’

Lilly is also adopting a technique known in industrial manufacturing as “critical chain,” which prioritizes individual tasks to save time, Garnett said in an interview. Previously, people working on a 30-page report might also be involved in other projects at the same time, so they might be given three weeks to return a finished project. Now, they may get seven days to complete the task, with specific instructions on their schedule and which person in the chain they need to pass the project along to next.

“If we say, ‘you only have a week, but that’s your No. 1 priority,’ it will only take a week. There’s a self-fulfilling element to it,” Garnett said.

In the past, Lilly’s drug-development process worked under a single umbrella system. Lechleiter has created five independent business units with top managers of each responsible for data and determining whether they want to bring products through clinical development. In this, Lilly is joining Pfizer and Bristol-Myers, both based in New York, in trying to narrow potential product targets.

Lilly’s units focus on cancer, diabetes, established markets, emerging markets and animal health.

‘Giving License’

“We’re trying to give license to our discovery and development scientists to really think about how you do these things in different ways,” Lechleiter said. “We’ve got to see timelines speed up.”

Critics say critical chain may be a bad fit with drugmaking.

Assembly line processes “work better in jobs that are predictable,” said Richard “Erik” M. Gordon, assistant professor at the University of Michigan’s Ross School of Business in Ann Arbor. The process of developing a medicine is filled with uncertainties, and timelines can be thrown off- kilter by external forces, such as delays at the FDA.

For Lechleiter, the changes at Lilly reflect a lifetime built around his fascination with the promise of science. He received his bachelor’s degree from Xavier University in Cincinnati, graduating summa cum laude with a degree in chemistry in 1975. He received his doctorate in 1980.

‘Loved Problem Solving’

Paul A. Wender, now a chemistry professor at Stanford University near Palo Alto, California, was Lechleiter’s mentor and Ph.D. adviser at Harvard. He remembers a young man who “loved problem-solving.”

Wender’s lab was focused on reducing the number of steps needed to make new compounds -- experience Lechleiter found useful when straight out of graduate school he joined Lilly’s agricultural division making herbicides. One of Lechleiter’s first challenges was to develop a more cost-effective way to make a particular molecule, Wender recalled.

“He solved that problem, and simultaneously developed an enabling technology that allowed others to progress with their research,” Wender said.

Three years after he joined Lilly, Lechleiter’s career path changed. He was pegged as a budding manager and placed on a track designed to broaden his skills.

Built Persona

Since becoming CEO, Lechleiter has developed a persona as a communicator within the company. He maintains two blogs on Lilly’s intranet and attends Wednesday morning meetings where Lilly scientists present their work. Though it has been more than two decades since he worked at a lab bench, he said he’s not afraid to ask a question or two.

“Usually I preface it by saying something like, ‘Excuse me if I’m really ignorant,’” Lechleiter said.

Tall (6 feet, 1 inch) and affable, Lechleiter uses his hands when making a point, and smiles as he touts Lilly’s pipeline.

He’s a devoted fan of the Indianapolis Colts, sharing that passion with many of his employees. The company dyed the water in the fountain in front of its headquarters the hometown team’s shade of blue the week before the Feb. 7 Super Bowl in support of the Colts’ effort to win a National Football League championship.

Lilly Endowment

Lechleiter’s Indianapolis pride may put him in good stead with the company’s No. 1 shareholder: the Lilly Endowment, a foundation that supports the city and state through charitable grants. The Endowment, founded in 1937 by the Lilly family through gifts of company stock, owns 135.7 million shares, or about 12 percent of Lilly, according to Bloomberg data.

The CEO is also unafraid to challenge Wall Street. Lilly spent 21 percent of revenue on research and development in the most recent quarter -- outpacing the industry’s average R&D spend, which is closer to the mid-teens.

“A lot of investors say: ‘Unless you cut back, you may be spending 24 percent of sales on R&D,’” Lechleiter said. “I say: ‘So what? That’s what we’re here to do.’”

Meanwhile, Lechleiter’s Zyprexa countdown clock keeps ticking. He’s got about 600 days to prove his strategy will help cushion Lilly when it hits the patent cliff.

To contact the reporters on this story: Meg Tirrell in New York at mtirrell@bloomberg.net; Arlene Weintraub in New York at Aweintraub1@bloomberg.net