Randall Tobias Takes A Pruning Hook To Lilly

Not long after he took the helm at Eli Lilly & Co. last June, Randall L. Tobias directed a group of executives to go over his head for a solution to the company's problems--one story over his head. In Lilly's executive dining room just above the chairman's office, two strategic-planning committees met to hammer out an agenda for the Indianapolis-based health-care giant. On Jan. 18, Tobias unveiled the results of that work: He plans to spin off Lilly's $1.3 billion medical-device and diagnostics businesses and focus exclusively on its core pharmaceutical operations.

It's a long-overdue restructuring--and a sizable risk. The divestiture will rid the company of products whose manufacture and marketing shared little with those of drugs, the company's main money-maker. But it also will put the onus on a pharmaceutical operation challenged by the new economics of U.S. health care even while its new-product pipeline has slowed to a trickle.

NO SURPRISE. Tobias thinks the timing is right. The discontinued businesses provided operating profits of about $260 million last year, a 20% margin. But they distracted management attention from the mainline $4.74 billion drug business, which analyst Robert C. Hodgson of Cowen & Co. estimates produced operating margins of 32.5%. "This helps us clear the table," Tobias says, freeing the company to focus on buttressing its distribution channels. Armed with a healthy balance sheet, plus perhaps $550 million in cash that it may raise from divestitures, Lilly will consider acquiring distributors.

The move marks Tobias' first strategic initiative since the former American Telephone & Telegraph Co. executive took charge seven months ago. At the time he succeeded the popular Vaughn D. Bryson after a boardroom revolt orchestrated by former Chairman Richard D. Wood, Tobias did not have a detailed game plan. Heck, he admits, he hardly knew the business--despite serving on Lilly's board since 1986.

But Tobias spent several whirlwind months learning Lilly, rebuilding tattered ties to Wall Street, and outlining a cost-reduction program that includes the elimination of 4,000 positions. The price tag for the job cuts and other internal streamlining: a $1.2 billion charge against 1993's fourth quarter. Lilly's stock has responded, rising 40% from its August low, to $60.

The idea now, Tobias explains, is to refocus Lilly on some key questions: "What do we have, what do we need, and what do we have that we don't need?" It's no surprise that Lilly's medical-equipment operations didn't measure up. Its Hybritech Inc. has lost a large part of the prostate-cancer test market to rival Abbott Laboratories. Competitors such as Medtronic Inc. have outflanked the company's Cardiac Pacemakers Inc. with new-generation wares. And Lilly's Physio-Control Corp. defibrillator unit had to stop some production for a year in 1992 after a negative Food & Drug Administration review.

After shucking off the weak businesses, Lilly now will need to rejuvenate its shaky drug operation. Its highly profitable antibiotic Ceclor loses its patent protection this year, and new competitors are poised to challenge its Prozac antidepressant, worth $1.2 billion in sales last year. The problem: "For '94 and '95, our new-product outlook is fairly anemic," admits August M. Watanabe, Lilly's head of research.

Watanabe has restructured the research operation, eliminating three of eight major working groups, and emphasized development of line extensions to Lilly's most profitable products. But even with some 900 scientists spending nearly $1 billion a year to investigate 40 basic compounds, breakthrough drugs to treat such maladies as osteoporosis, schizophrenia, and diabetes won't hit the market for at least two years.

Lilly has plenty to catch up on outside its labs, too. In the drug industry, purchasing power is shifting from wholesalers to managed-care providers--whom Lilly has only begun to court. "We can't just push pills out the door anymore," says Sidney Taurel, president of Lilly's pharmaceutical division. So more than 100 people at Lilly's Indianapolis headquarters now help HMOs and other customers plan drug therapies, up from only 14 doing that work a year ago.

That's the kind of change Tobias wants. In his first days on the job, the CEO decorated his office in a way he hoped would symbolize his tenure. He hung an oil painting, commissioned long ago, of a drug wholesaler that was founder Eli Lilly's first sale. The message was clear: Lilly had to refocus on its customers. Now, amid the layoffs, divestitures, and acquisition plans, Tobias must turn that message into results.

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