Fighting Off Depression At Eli Lilly
It should have been a triumphant debut when Sidney Taurel stepped to the podium in April to address his first annual meeting as chairman and chief executive of Eli Lilly & Co. After all, he had spent years preparing for the role. Born in Morocco and armed with an MBA from Columbia University, Taurel toured the world for 15 years in sales and marketing jobs for his first and only employer. As No. 2 at Lilly under Randall L. Tobias since early 1996, he was smack in the middle of one of the decade's most impressive turnarounds. But only moments before Taurel took the mike, Lilly announced a drop in sales of its blockbuster antidepressant drug Prozac. Even as the new CEO spoke of tripling Lilly's revenues over the next decade, investors were bidding down Lilly shares, sending the stock tumbling 11% for the day.
That pummeling is a foreshadowing of the challenge that lies ahead for Taurel. Around Lilly's sprawling campus headquarters bordering downtown Indianapolis, it's known as "Year X." That's the year--2003 or 2001, depending on how legal issues play out--when patents expire on Prozac, which accounted for nearly one-third of Lilly's 1998 sales. Taurel says, with only a tinge of hyperbole, that no company has survived an expiration on such a huge drug without being driven to merge. He cites as an example the deal that resulted in Glaxo Wellcome PLC after patents came off the Zantac ulcer remedy. "We really want to write the book on how to do it differently," Taurel says. "Year X has brought a sense of urgency to everything we're doing."
ANXIOUS. Lilly announced respectable first-quarter sales and earnings growth last month. But investors seized on a 4% fall in Prozac sales. The report was the first sign of a such a drop, but investors are clearly anxious. After sharply outperforming the broad market over the past five years and keeping pace with the nearly fivefold increase in drug-sector stock prices, Lilly stock has fallen 12% since Jan. 1, to about 76. That compares with an 8% drop for the Standard & Poor's drug index and comes despite Lilly's 19% growth in 1998 operating earnings, to $2.2 billion, on $9.2 billion in sales, up 16%.
Taurel, 50, took the CEO job last summer, ascending to chairman on Jan. 1, with a multipronged strategy already in place. He believes it will allow Lilly to weather the demise of Prozac's patent protection with no more than a year or two's slip in earnings growth. But the drop in sales last month made it clear that Prozac's slide has been accelerated by a feisty group of new competitors. Now, Taurel must hustle if he wants to keep Lilly's enviable growth record intact--in March, it ranked No. 25 on the Business Week 50 list of best-performing companies.
Taurel has no choice but to step up the pace of transition. Priority No. 1 is a delaying action. By battling competitors and seeking out new Prozac variants, Taurel hopes to extend the drug's patents. Second, Lilly is targeting promising drugs in its labs that can be brought to market faster. Finally, Lilly is searching the world for partnership deals--and remaking its culture to mesh with smaller biotech outfits.
Lilly execs acknowledge that if they can't fill the Prozac hole, investors may force them to reconsider their disdain for the industry's wave of big mergers. Lilly has twice studied drug-company combinations and concluded that independents grow faster than merged companies. Taurel believes Lilly, the eighth-largest in pharmaceuticals, already has all the heft it needs. And with a market capitalization of $83.5 billion, it would make for a mouthful of an acquisition--but not an impossible mouthful. Taurel would like to use Lilly's rich multiple for some small European acquisitions.
The exact timetable of Prozac's wind-down is uncertain. At best, Lilly has patent protection on a key molecule until the end of 2003. At worst, if several pending lawsuits succeed in arguing that Lilly shouldn't be awarded two patents, Lilly will face generic competition within two years. Either way, Taurel estimates that six months after the patents expire and generic copies flood the market, Prozac's sales will fall by 80%.
In fact, rivals have been nipping at Prozac's heels for years. In spite of the drug's growing sales, its share of the expanding antidepressant market has fallen from 47% to 32% over the past five years, according to IMS Health Inc. The latest inroads are being made by Forest Laboratories Inc., which launched Celexa this year with a wave of free physician samples and aggressive pricing. Celexa initially took Europe by storm, but Lilly didn't seem to notice, says Ronald M. Nordmann, a partner at money manager Deerfield Management. Lilly "flat-out missed" the implications in the U.S. market, he says.
LAB PRESSURES. Now Lilly is trying to recoup. It upped sales calls on doctors by 25% this year and produced a series of cable-TV infomercials. However, competitors say Lilly will be hard-pressed to restore Prozac's momentum. Says Kenneth E. Goodman, president and CEO of Forest Labs: "I don't know what else they can tell the [medical] community that they've already been calling on for years."
The ideal solution, of course, would be another blockbuster from Lilly's labs. The company has boosted research spending 60% since 1996. Lilly's $1.7 billion R&D budget last year trailed the expenditures of much larger competitors only slightly, and its 18% ratio of R&D-to-sales this year should top the industry. That has produced some big winners--Zyprexa, a schizophrenia drug, rang up sales of $1.4 billion last year. But other bets fizzled: Evista, a once-promising osteoporosis drug, has been a disappointment. And Lilly recently pulled the plug on three other drugs to concentrate on compounds that will fight breast cancer, attention deficit disorder, and sepsis. Still, Wall Street doesn't expect them to be huge hits. "Their research capability is among the best in the business, but what's coming is not filled with a lot of billion-dollar opportunities," says analyst Stephen M. Scala of SG Cowen Securities Corp.
That's why Lilly is leaning heavily on partnerships with other companies. In the past five months, Lilly has signed major licensing agreements to market new compounds for cancer, diabetes, and sexual dysfunction. One of the most promising is Actos, a new, orally administered diabetes drug developed by Japan's Takeda Chemical Industries Ltd. that Lilly hopes to have on the market late this year. Sales of Actos could hit $1 billion within three years, says Deerfield's Nordmann. Scala, at SG Cowen, estimates that if Taurel can balance slow growth of Prozac with new products from licenses and partnerships, Lilly could increase earnings 16% a year through 2002--still competitive with industry leaders.
It will take near-flawless execution for Taurel to keep Lilly on the path paved by his predecessor. Tobias, who resigned last July as CEO at 55 to pursue philanthropic interests, was vice-chairman of AT&T and an outside Lilly director when he was rushed in to fix the company following a boardroom coup in 1993. At the time, Lilly's earnings were flagging, its pipeline was dry, and its attention was scattered. Tobias moved quickly to spin off the medical-devices unit now known as Guidant Corp. and the agricultural chemicals business.
Not everything Tobias touched turned to gold. His $4.1 billion acquisition in 1994 of PCS Health Systems Inc., a drug-benefits manager, fell apart along with national health-care reform. Lilly wound up dumping PCS last year, selling it to Rite Aid Corp. for $1.6 billion after a $2.4 billion write-down. Still, the PCS disaster did point up perhaps Tobias' greatest achievement: remaking Lilly's insular culture to encourage more risk-taking.
Turning the reins over to Taurel--who is also a director of The McGraw-Hill Companies, publisher of BUSINESS WEEK--was natural. Taurel had earned high marks for his strategic thinking, having helped engineer turnarounds in Brazil and Europe, and for making Lilly more of a team player with industry partners. Now he faces an immediate challenge, just as Tobias did at the start of his reign. He'll need all the strategic thinking he can muster to handle life after Prozac.
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