Eli Lilly CEO John Lechleiter on Tackling the Pharmaceutical R&D Crisis (Part 1)

11/21/11Follow @xconomy

John Lechleiter has spent his entire 32-year career at Eli Lilly, and now he’s the CEO just as the company faces one of the bigger challenges in its history. Over a three-year stretch, Lilly will lose patent protection on five blockbuster drugs that generated $12.7 billion in sales last year—more than half of its revenues.

The pharma industry’s inability to produce a crop of innovative new medicines to replace the aging blockbusters is a well-worn narrative. But Lilly has taken heat for bucking a couple of popular coping strategies. One, it has resisted the urge to get tied up in a mega-merger like Pfizer/Wyeth, Merck/Schering-Plough, Roche/Genentech that often creates some kind of illusion of improved performance in the short term. Two, it has continued to ratchet up R&D spending to $4.9 billion last year even as other companies have turned to cost-cutting.

I met with Lechleiter to talk about the state of Lilly (NYSE: LLY) and the pharma business for about a half hour on Friday while he was in Seattle doing community outreach at the Washington Biotechnology & Biomedical Association’s annual meeting. We talked mostly about how pharma can get out of its current rut, and he was also willing to field a few questions that readers sent to me via Twitter.

It was a long conversation, so I’m breaking this into a special two-part edition of BioBeat. The second half of the chat will run tomorrow, featuring Lechleiter’s responses to the questions that readers relayed to me via Twitter.

Xconomy: You’ve made a decision to continue to invest in R&D at Lilly when a lot of other pharma companies are cutting back. Some on the Street are wondering why pharma companies are doing research at all, why not get out of that line of business? Give up, and in-license everything from biotech companies. Why continue doing research within Big Pharma?

Eli Lilly CEO John Lechleiter

John Lechleiter: I’ve been employed here 32 years, and we’ve been around 135 years as a company. Success has come, in general, from taking a long-term view. We invest in a steady and a patient way. We have a pipeline today of about 65 or so molecules, and most are coming from internal research. We work with partners, but it’s mainly driven by what I call our internal research engine. It’s the most exciting pipeline we’ve ever had. Many, but not all, of those pipeline molecules will mature into products. We’ve got to have the discipline and the courage to stay with that.

We can look back over the last 10 years and make a critique, whether it’s a Lilly critique or an industry-wide critique, which says we haven’t been as productive as we had hoped. But that doesn’t mean we should abandon ship. Industry always moves in cycles. Sometimes they are long cycles. Sometimes they are 10-year cycles. My own personal belief is that we are in a new era of higher research productivity. And that will be reflected in medicines that come out of our pipeline and other people’s pipelines.

The other thing is, new medicines just don’t grow on trees. There’s no universe of exciting molecules from “biotech” companies out there that are ready for the picking. If there was, you’d see even more deal activity than you currently see. Do we work with biotechs and academic institutions? Are we surveying that landscape? We are. But if I have to place a bet—and as a CEO you always have to place a bet—the bet I’m placing is that research efforts largely driven through our internal investment strategy, and working with partners around the world, is the best strategy for Lilly.

There’s no question we are focused on research productivity. I think we’ve achieved some pretty big gains. We are placing more than a dozen molecules a year, some years as high as 15-17 molecules, into clinical development. This is a huge step up from the kind of output we saw from our discovery efforts 10 years ago, and it augers well for the future.

X: But how many new FDA approved products have you introduced in the last, say, five years? Two?

JL: In the last five years, we haven’t had a lot. But in a period from 2002-2005, we had nine, if you count exenatide (Byetta) from Amylin Pharmaceuticals. There’s sort of an ebb and a flow. Unfortunately, unlike the fast food industry, I can’t just order up a replacement for the Big Mac to put on the menu overnight. I’d like to have more coming in at a time when we are beginning to lose patent protection on some of our products, but there’s going to be a lag.

I think our investors understand this industry has its ups and downs. In 2001, we lost our patent on Prozac, and in 2002, our sales declined. In 2002, we started launching new products, and in 2003, revenues grew. The challenge for Lilly, and it is a challenge for the industry, is that despite all of the changes we faced 10 years ago, is to show that we can sustain innovation over a long period of time. We’ve said to our investors, ‘Hey, the period from 2011 to 2014 is going to be pretty challenging for us.’ Here’s how we plan to get through that, and pay for our investment in research, and here’s the basis for which we’re going to grow once we get through that period. It will be based on new product launches from the pipeline that I mentioned.

X: You expect to enter an era of higher research productivity?

JL: We’re already in that. We’re seeing that.

X: What changed? What’s different now?

JL: A lot is different now. By the way, I don’t think this increased productivity is reflected in anybody’s stock price because investors are still saying, ‘Show me the results with launched products.’ I can have a very productive research organization, but it will be six to eight years before it translates into commercial products, unfortunately.

The reasons for increased research productivity are several-fold. Number one, it’s partnering. This is no longer an intramural exercise, but one in which we’re taking advantage of knowledge and tools through partnerships. It’s helping. For example, Lilly sold a preclinical testing site in Greenfield, IN, to Covance. We have a very significant partnership with Covance to work with them and do preclinical testing of our molecules in a way that’s very different from the way Lilly did that three or four years ago.

Secondly, the knowledge base we have is much bigger. In some cases, our knowledge of biological pathways now is akin to lights being turned on in a room versus groping around in the dark.

Third, the tools we have are better. Whether that’s imaging technology or computational science we can apply to these things. The fact that we can use X-ray diffraction technology through our SGX Pharmaceuticals acquisition in San Diego. [Through] the work they do with Argonne Labs in Chicago, we get crystal structures of targets on cell surfaces. The tools we have on hand to exploit the growing knowledge base is contributing to productivity improvement.

X: And you think we’ll see more FDA approved products 5-10 years from now because of this?

JL: Yes.

X: How many more? How much productive do you think things can get?

JL: That depends on how the narrow neck of the funnel manifests itself, and that of course is clinical testing. It depends on the strategies and regulatory challenges that one always faces in Phase 1, 2, and 3 clinical studies. It’s also going to be a function of how effective we can be at tailoring these therapies. Will we be able to describe, and how will we be able to describe, which patients these new therapies are best suited for? We are using genetic markers or biomarkers to make that determination. That’s something we’re very much involved in and committed to. It will have an impact on clinical stage productivity going forward.

X: Lilly has obviously continued to invest in R&D, but the mega trend here is against Big Pharma investment in R&D. Biotech venture capital is shrinking. The federal research budgets are getting tightened. Where do you think the drugs are going to come from over the long-term?

JL: An article published in the New England Journal of Medicine a couple months ago, in response to this always-asked question of where do medicines come from, this very erudite article said that 85-95 percent of medicines come from pharmaceutical or biotech companies. I think it’s incumbent on us to make sure we keep the ecosystem healthy and vibrant. We depend on universities, and the NIH and others to help develop the basic science that we exploit. This is true of any industry. But the fact is that if we expect to have medicines for treating Alzheimer’s, or be more effective at treating cancer, we have to hope we can sustain a healthy biopharma industry. Obviously, the U.S. leads the world now. We have global competitors, but the complexity of this work, and the capital required to do this task, will be something that stays with this industry. That’s why improving the productivity of research is exceedingly important.

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