Patents Ending, Eli Lilly Chases New Drugs
By DUFF WILSON
INDIANAPOLIS — John C. Lechleiter walks a mile to work every morning to think about the day ahead. He walks home in the evening, he says, “to try to forget about it.”
These are challenging times for Eli Lilly, the company he leads. It is losing patent protection in the next seven years on drugs that accounted for 74 percent of its sales in 2009, a decline considered to be the worst patent cliff facing major companies in the industry.
And it also had been hit by recent legal, regulatory and research disappointments, including the surprise announcement in August that a promising experimental drug treatment for Alzheimer’s was being dropped because it hurt patients’ cognitive functions more than it helped.
As a result of the compound issues confronting the company, analysts and others have been pressuring Lilly to undergo major transformations similar to those of its rivals Pfizer and Merck, which made giant purchases of other companies in efforts to diversify and spur growth.
For Lilly and Dr. Lechleiter, the company’s fortunes are not all that is at stake. Its economic health is closely interwoven with its hometown roots here, where it also works with about 3,000 Indiana businesses.
Dr. Lechleiter, a chemist who joined Lilly 31 years ago and was named chief executive in 2008, remains confident of the company’s strategy. He asserts that it can retool with in-house research and cost-cutting, rather than resorting to mergers or big acquisitions.
In a wide-ranging interview Tuesday, Dr. Lechleiter held to the company’s promise that revenue would not dip below $20 billion even in the expected low-tide year of 2014. He said efforts to trim $1 billion in costs and 5,500 employees by the end of 2011 were on track.
And he pointed to the potential for new drugs and pending decisions by the Food and Drug Administration that might expand the markets for existing Lilly drugs.
“We’ll see our way through the storm,” he said. “At a time when others say Lilly has to do a deal or Lilly has to go outside itself to solve its problems, we’re resolutely focused on what we have to do inside the company to make the innovative medicines that are at the core of value creation for Lilly and patients. That’s what we do.”
Long a powerhouse for psychiatric drugs like Prozac, Zyprexa and Cymbalta, Lilly is looking to new drug opportunities in treating cancer and Alzheimer’s, two diseases that Mr. Lechleiter said will become more pressing as Americans live longer.
Some analysts do not share his optimism, and point to a lack of promising products in the company’s short-term outlook. For example, Lilly has introduced only one product in the last five years, the blood thinner Effient, to sluggish early sales. It has virtually no new products to market until 2013, when it hopes to start rolling out two a year.
The patent losses are daunting: Its schizophrenia drug Zyprexa, whose $4.92 billion in sales last year represented 23 percent of the company’s total, goes off patent a year from now. Cymbalta, with $3.07 billion in sales, loses patent protection in 2013. In addition, Lilly lost legal challenges this year to Gemzar, a cancer drug that sold $1.36 billion, and Strattera, a treatment for attention-deficit hyperactivity disorder that sold $609 million.
J. P. Morgan last week predicted Lilly would face “a prolonged period of depressed earnings” with sales dipping to $18.6 billion in 2015 from a peak of $23 billion in 2010.
C . Anthony Butler of Barclays Capital called for Lilly to make some drastic changes, predicting that its revenue could drop to $18.8 billion in 2015. “I’m not sure what would drive the going-back-up part,” he said in an interview.
He also cited the company’s longtime relationship to Indianapolis as an impediment to taking measures like slashing costs to preserve its margins and dividends. “I worry that they can’t do that because they’re too ingrained in the fabric of the community,” Mr. Butler said.
Indeed, since its founding here in 1876, Lilly has become the city’s largest private employer. Mayor Greg Ballard’s father worked there for 33 years; the former mayor, Bart Peterson, works there now; and Indiana Gov. Mitch Daniels spent eight years on the Lilly campus.
Indianapolis, a city of about 800,000, is undergoing a tax-supported, $3.3 billion downtown building boom as it gears up to host the 2012 Super Bowl. On Monday, the city, company and a developer announced plans to develop one corner of a sprawling Lilly parking lot into a $150 million hotel, apartment, retail and restaurant complex.
“A recruiting magnet,” Dr. Lechleiter said as he walked through the lot, pulling a small wheeled suitcase filled with paperwork, on the way to work.
He walks, he said, for exercise and time to reflect. Dr. Lechleiter said he has accepted a ride only once, in a snowstorm, in the four years since he and his wife moved closer to work, living in a penthouse in a downtown luxury hotel.
As he passed through the lobby and hallways, he greeted a dozen employees by their first names before settling in his small corner office.
With a salary of $15.9 million, he has asked the board to freeze his pay “in light of the business challenges the company currently faces,” according to Lilly’s annual report. Derica W. Rice, the company’s chief financial officer, said Lilly has cut 2,100 jobs in the last year.
On the research front, Lilly is bucking a trend among a few competitors, which have decided to shift significant resources away from in-house development.
Just last week, Dr. Andrew Baum, a Morgan Stanley analyst, suggested at a forum in New York the industry giants would be better off abandoning research and buying others’. Licensing, he calculated, would yield three times the returns with less risk.
Mr. Baum said he expected the large European pharmaceutical companies to cut their research spending by about 40 percent in the next two years after a decade of dismal returns.
Lilly does not intend to take that path. Jan M. Lundberg, hired from AstraZeneca in January to lead Lilly Research Laboratories, said, “We don’t change our research based on quarterly earnings. It’s a long-term theme.”
Mr. Butler said Lilly has the industry’s highest ratio of research to revenue — 19.8 percent of $21.8 billion sales last year, or $4.3 billion, compared with 15.6 percent at Pfizer, which reported $7.8 billion research spending and $50 billion revenue. Biotechnology products account for about 40 percent of the 70 molecules in Lilly’s pipeline.
In a medium-size deal, its biggest purchase ever, Lilly bought ImClone Systems for $6.5 billion in 2008. On Tuesday, in New York, Lilly announced that about 140 cancer researchers from ImClone were starting to work in a new life sciences complex near Bellevue Hospital and NYU Langone Medical Center.
But its best prospects in the next few years are modifications of existing product lines. Its most promising new product is Bydureon, a long-acting form of the diabetes drug Byetta, according to Seamus Fernandez of the health care investment bank Leerink Swann. Bydureon, developed with Amylin Pharmaceuticals and Alkermes, is injected once a week instead of twice a day. Mr. Butler said sales estimates range from $1 billion to $6 billion. The F.D.A. target decision date is Oct. 22.
Lilly also hopes to expand C