Eli Lilly
...ering the company to realize very large profits. Companies attempt to gain market share through massive advertising campaigns. Direct consumer advertising broadens peoples understanding of diseases and available treatment and encourages requests for specific branded products. The process of drug discovery, development and clinical approval are extremely effort-intensive and expensive. Drug-makers however faced increased pressure to reduce prices. The implementation of cost-containment practices increased the competitive pressures in the pharmaceutical industry. To confront these market pressures, some drug-makers responded by mergers. Other firms invested heavily in or acquired innovative biotech companies in hopes of tapping new technologies. The combined companies represent formidable forces in an increasingly competitive global prescription drug market. These mergers are enabling the merged companies to reduce costs through operating efficiencies by eliminating redundant marketing efforts, manufacturing plants and R&D efforts. By offering more comprehensive lists of drug products, the merged companies can also provide customers with more competitive prices. Eli Lilly for example acquired Sphinx Pharmaceuticals to gain knowledge in combinatorial chemistry and high-throughput screening. Speeding up the drug development cycle became a priority for al drug-makers. To shorten the cycle new technologies such as genetic engineering, combinatorial chemistry and high-throughput screening were incorporated in the process. The major challenge facing Eli Lilly is to introduce new drugs, which are superior in therapeutic value faster than their competition into the market. These drugs need to have price benefits over existing drugs as well and therefore efficiencies and costs need to be improved. New technologies need to be explored to shorten drug development life cycles. Eli Lilly had already acquired Sphinx, but need to investigate the opportunity of merging with another drug company to further enhance expertise and reduce costs. The challenge also is to improve their market share by massive advertising and education of physicians and patients. 3.1.1.2. In terms of the Industry Life Cycle The product life cycle of a drug is restricted to the term of patent protection. As soon as a patent expires, generic drugs are introduced with a major drop in drug prices. The time of introduction of a new drug into therapeutic category is crucial. As stated in the case study being first to market with a new class of therapeutic agents is increasingly crucial for a product to be commercially successful. More often than not the first three drugs introduced within a new class would together control over 80% of the market. Before the development of a new drug is pursued it is essential to evaluate the current status of competitive drugs on the Industry Life Cycle. Depending on the position of the competitive drugs on the cycle, a company has to drop the introduction of their products or has to come up with a totally new improved version. Development of Eli Lilly migraine drug is about at the end of the incubation phase awaiting clinical tests and approval from the FDA to be conducted. The competitors drugs are still in diversification stage. The challenge for Eli Lilly is to introduce their new drug before their competitors are able to consolidate their position in the market, in other words before standardisation is reached. 3.1.1.3. In terms of Technology S-curves My feeling is that the traditional method of drug development has approached its natural physical limit and that drug companies can not improve this method anymore to speed up the drug development process. The environment wherein the pharmaceutical companies are operating is pressurising them to reduce cost and development time. The demand for drugs to intervene in disease processes has also increased putting additional pressure on the companies to come up with drugs that show therapeutic benefits over the existing ones. This forces pharmaceutical companies to find new innovative ways to develop drugs cheaper and quicker. Companies are forced to switch to a different S-curve. Combinatorial chemistry is still in its infancy and only just starting to show slow initial growth, but it appears that this is the way to go. 3.1.1.4. Summary of challenges according to importance The following is a summary of all the challenges facing pharmaceutical companies in the years to follow: 1. Being first to market to be able to take part in an 80% market share. 2. Exploring new methods to reduce development times of drugs. 3. Producing drugs at lower costs due to continuous pressure to reduce prices of drugs. 4. The continuous threat by lobbying groups to reduce the patent protection period and being able to survive under these shorter periods. 5. Combating generic drugs by finding even better drug alternatives for long term survival. 6. To keep up with market demand for drugs that have the ability to cure diseases like for example cancer and aids. 7. Massive advertising campaigns and education of physicians and patients on the benefits of a companys drugs over that of the opposition. 8. Finding a suitable partner to merge with to confront the ever increasing pressures in the market. 3.1.2. The impact of challenges in the competitive environment on a new drug development process. Pharmaceutical R&D has to undergo huge changes in the coming decade due to the challenges in the competitive environment. These changes will be driven by the pressure to decrease drug prices and the cycle time of drug development as well as the need to increase the number of new drugs entering the market. An apparently obvious way of increasing the number of new drugs discovered is simply to force more compounds through the R&D process and to better aim these at more disease targets. A new drug development technique needs to deliver a tenfold increase in the number of compounds that can be generated for assays and a hundred-fold increase in the number of compounds that can be screened. The technique must enable drug-makers to constantly produce drugs with superior healing abilities to combat the threat of generic drugs. The new technologies will present pharmaceutical companies with an opportunity and a challenge. They will face pressure to reduce R&D expenditures but also need to access the new technologies to meet the demand for new potential therapeutics. To balance these competing requirements, many will have to enlist information technology to target compound libraries. The use of robotic methods will allow chemists to increase their productivity in ways that previously could not have been imagined. A chemist armed with these new technologies, will produce more novel compounds in a week than a chemist could previously produce in a lifetime. Finding the most suitable compound earlier will ensure that the drug development cycle is shortened and the cost of development is reduced due to not taking up all of current average of five years to do basic research and preclinical screening. This will enable a pharmaceutical company to be first or at least third to market which is crucial to capture the majority portion of the market before competition becomes too fierce. Manufacturing overhead makes out a large portion of a pharmaceutical companys costs due to the highly knowledgeable labour force employed. The new drug development process should be automated as such to enable a company to decrease its overheads and save costs. Automation of the process should also reduce human errors. 3.1.2.1 Most important issues of the new drug development process The following are the most important challenges for the new drug development process: 1. Reduction in the cycle time of the drug development process. 2. Increase in the number of drugs entering the market. 3. Decrease in the prices of drugs and thus cost of drug development and manufacturing. 4. Increased productivity. 5. Ability to combat the threat of generic drugs by enabling companies to find better compounds. 6. Adopt the use of information technology. 3.2. Combinatorial Chemistry 3.2.1. Changing the drug discovery process Combinatorial chemistry is an innovative technique that quickly produces large numbers of structurally related compounds simultaneously. These compounds are then screened for ones that could have medical value. It has changed the way drugs are discovered. This approach differs from the most common way drug makers have discovered new drugs. They typically began by looking for signs of a desired activity in almost anything they can find. Once they identified a promising substance they laboriously make many modifications one at a time to the structure, testing after each step to determine how the changes affected the compounds chemical and biological properties. The entire procedure is time-consuming and expensive; it takes many years and millions of dollars to move from one lead compound in the laboratory to a bottle of medicine on the shelf. Combinatorial chemistry however enables researchers to generate quickly as many as several million structurally related molecules. These are not just any molecules, but ones that a chemist, knowing the attributes of the starting materials, expects will have a desired property. Screening of the resulting pool of compounds reveals the most potent varieties. Combinatorial chemistry can thus offer drug candidates that are ready for clinical testing faster and at lower cost than ever before. Combinatorial chemistry employs the use of state-of-the-art robotics to allow chemists to increase their productivity in ways that previously could not have been imagined. A chemist armed with these new technologies, will produce more novel compounds in a week than a chemist could previously produce in a lifetime. In practice, however, combinatorial chemistry has disrupted well-established routines in laboratories. For one thing, the rapid synthesis of drugs has led to a new problem: how to screen those compounds quickly. Traditionally, potential drugs were tested in live animalsan activity fraught with logistical difficulties, high expense, and considerable statistical variation. Laboratories therefore developed test-tube-based screening methodologies that could be automated. Called high-throughput screening, this technology required significant innovations in equipment (such as high-speed robots) and in the screening process itself to let researchers conduct a series of biological tests on members of a chemical library virtually simultaneously. As stated in the case study many processes involved in drug synthesis were not routine and required individual adjustments by skilled chemists. This indicates that although the technique is automated and has made the discovery process quicker, it did not make the process easier. Experienced chemists are still required that knows the attributes of starting chemicals and have the skills to make the required adjustments in the synthesis processes. The increased automation of routine experiments will not remove the human element in innovation. It will allow them to focus on areas where their value is greatest: generating novel ideas and concepts, learning from experiments, and ultimately making decisions that require judgement. Combinatorial chemistry also has risks. This technique is still new and has not proven itself. It worked only for certain groups of compounds and no new drug candidates had been uncovered by this technique. This technology provides opportunities to cheaply and quickly find promising compounds, but the fundamental question is whether it will provide ideal compounds or simply a means to identify an interesting range of leads that can be further evaluated. Compounds generated by combinatorial chemistry are only 80-90 % pure compared to the 100 % of traditional processes. The positive signs of activity might only be attributed to the impurities in the compound. Companies therefore still have to use combinatorial chemistry and traditional synthesis in concert, and the companies that are best able to manage the new and mature technologies together so that they fully complement each other will have the greatest opportunity to achieve the highest gains in productivity and innovation. Although counter measures have been taken to reduce the number of compounds to be screened, there is still the risk that the millions of compounds that will be generated by combinatorial chemistry would not be able to be screened with the available screen capacity a company employs. Another risk is that traditional chemist exhibit high resistance to this new technology. This will result in that the technology might not get of the ground. 3.2.2. Effect of combinatorial chemistry on different stakeholders Combinatorial chemistry and high-throughput screening can slash the costs (both financial and time) of experimentation and dramatically increase a pharmaceutical companys ability to develop innovative drugs. To reap those benefits, though, organisations must prepare themselves for the full effects that these new technologies would have on the different stakeholders in the development process. These stakeholders include the traditional chemist, research scientists, middle and senior managers. The new technology will change the way drugs are discovered. The process will enable researchers to generate quickly as many as several million structurally related molecules, a process totally different from the traditional way of developing drugs. It will allow chemists to increase their productivity. The increase in the generation of compounds, automation of processes and increase in productivity will sent a message through to these stakeholders that they are no longer required. They will immediately resist this new unproven technology. It is therefore the responsibility of middle and senior managers to convey the message that the new technology is not adopted to cut there jobs, but that it has a vast potential for innovation. It will however lead to a reduction in cost based on the potential of the technology, but that their expertise will still be required to use the technology to find new innovative products faster. They must inform the traditional chemist and research scientists that the new technology will significantly increase the efficiency and speed at which they would be able to generate and screen chemical compounds. They will no longer need to painstakingly create one compound at a time. Instead, they can use combinatorial chemistry, quickly generating numerous variations simultaneously around a few building blocks, just as todays locksmiths can make thousands of keys from a dozen basic shape cuts, thereby reducing the cost of a compound from thousands of dollars to a few dollars or less. The traditional chemist and research scientists must be informed that the increased automation of routine experiments will not remove the human element in innovation. It will allow them to focus on areas where their value is greatest: generating novel ideas and concepts, learning from experiments, and ultimately making decisions that require judgement. To further overcome the natural resistance, management must implement various mechanisms to control how the new technologies are being adopted. They should allow the new technology to be used in tandem with the traditional methods until such time that the new technology has proven itself. Together with this initiatives management must limit the chemist from using the traditional screening methods to force them to use the high-throughput screening for example. 3.2.3. Comparison between Combinatorial Chemistry and Traditional Methods A comparison between combinatorial chemistry and traditional methods will be given in the table below. The comparison will be categorised under following heading: major differences, cost emphasis, time, technology emphasis, shortcomings, benefits and employee commitment & skills. Category New technology: Combinatorial Chemistry Traditional Methods: Synthetic chemistry Genetic engineering Rational Drug discovery Major differences A large collection of related compounds are quickly generated simultaneously. Chemists know the attributes of the starting materials. Making use of test tube-based screening methodologies in conjunction with automation. Compounds are synthesised one at a time. Chemist looked for desired activity in almost anything. Screening is done in live animals. Cost Emphasis The number of compounds created at once reduced the cost considerably. Typical cost per compound is $12 (ANON. 2000:1). Expensive: costs average at $5000 to $10000 per compound. Total costs are typically in the region of $30-50 million. Time This technique increased the capacity to screen compounds by eight-fold and the capacity to synthesise new compounds by a factor of 120. It takes one chemist to generate 3300 compounds per month (ANON. 2000:1). Synthesis required 7 to 10 days per compound. Firms spend on average 124 chemist-years for each drug to reach the market. It takes one chemist to generate 4 compounds per month (ANON. 2000:1). Technology Emphasis Make use of robotics and information systems. Made use of simple databases to manage information. Short comings Still a new technology no new drug candidates had been uncovered by this technology. Combinatorial chemistry works only for certain groups of compounds. The skills of chemists are still required to do adjustments in the drug synthesis process. Must be used in combination with traditional methods since compounds generated by this method are only 80-90% pure. Process is labour intensive. Drug discovery takes very long. Basic research and preclinical screening can take up to 5 years to complete. Not being able to explore the potential molecular diversity, the current drug on the market might by no means be the best. Chemists work blind or at least semi-blind to make up thousands of different molecular-sized keys to find one that matches. Synthesised molecular keys have to be tested on animals resulting in logistical difficulties, high expense and statistical variation. Only 1 out of 1000 compounds makes it to human clinical trials. Although improvements have been made in the drug discovery process, it remained a shotgun approach. Benefits The new technology allows companies to gain information early on the toxicological profile of a drug candidate and thus significantly improves a companys ability to predict the drugs success in clinical testing and, ultimately, in the marketplace. Unpromising candidates are eliminated before hundreds of millions of dollars are invested in their development. Cost reduction Speed to market New products Traditional methods generate compounds with almost 100 % purity. Methods have proven their validity over the years. Employee commitment and skills Stakeholders in the development process might show an initial resistance to this chemistry. The new technology will however allow the stakeholders to focus on areas where their value is greatest: generating novel ideas and concepts, learning from experiments, and ultimately making decisions that require judgment. High skills still required to do adjustments in the drug synthesis processes. Labour intensive task relying on inspiration, hard work and luck. High skills required. 3.3. Analysis of Alternatives 3.3.1 Comparison between Alternatives Three alternatives have been identified to be recommended to the Project Team Advisory Council. They are: Alternative 1 Take the lead migraine compound directly into clinical trials and bring it to market as soon as possible. Alternative 2 Spend more time to refine the current lead migraine compound (using combinatorial chemistry). Alternative 3 Go back to the basic research and spend significantly more time to search for a new migraine drug platform (using combinatorial chemistry). The three alternatives will be compared in the table below under the following categories: time to market, cost implications, probability of success, risks, advantages, disadvantages and revenue. After the comparison the best alternative in a specific category will be identified to determine the most viable option for Eli Lilly to take. Category Alternative 1 Alternative 2 Alternative 3 Time to market Immediately available for clinical trials should hit the market in 2001. Expert predictions indicate that on average a 9 months delay to reach the market would be experienced. Expert predictions indicate that on average a 18 months delay to reach the market would be experienced Cost implications No additional cost expected. Current to date cost plus 9 months additional cost. Basic research would need to be started all over again. The current to date cost plus 18 months additional cost. Probability of success Experts indicate a 10 % chance of passing clinicals. Experts indicate a 12 % chance of passing clinicals. Experts indicate a 15% chance of passing clinicals. Risks Lilly might not field the best possible compound allowing a competitor to improve. Competitors might consolidate their position in the market resulting in a lower market share for Lilly when the hit the market. Combinatorial chemistry has not proven itself yet no new drug candidates had been uncovered by this technology. Competitors might consolidate their position in the market resulting in a lower market share for Lilly when they hit the market. Lilly might loose their position as the leader in 1f receptor science leaving competitors to introduce a new drug. Imitrex is currently the only new drug for migraines on the market, but still in the 1d receptor science. Combinatorial chemistry has not proven itself yet no new drug candidates had been uncovered by this technology. Advantages Quicker to market. Lower cost than other alternatives. Lilly is currently the leader in the 1f receptor science The lead compound LY334370 seem not to have any cardiovascular adverse effects. Traditional methods have proven that lead compound is ready for clinical trials. 9 months delay might enable Lilly to find an improved compound. Lilly is currently the leader in the 1f receptor science and it is not expected that a competitor would be able to adopt this knowledge in the next 9 months. Probability of passing clinicals increases. Exploring further molecular diversity would help broaden patent claims. 18 months delay might enable Lilly to find the best in its class compound thus insuring that the take a market lead. Improved products will increase probability to pass clinicals. Exploring further molecular diversity would help broaden patent claims. Disadvantages Lilly did not explore any other compounds. Time to market longer than alternative 1. Cost higher than alternative 1 will make drug expensive and reduce profit. Combinatorial chemistry has not proven itself yet no new drug candidates had been uncovered by this technology. Traditionalist not in favour of combinatorial chemistry. Patent for Prozac is to expire in 2003 lending urgency to Lilly finding another blockbuster. Sphinxs capabilities of combinatorial chemistry could not be used until September 1995, which would limit the uses of combinatorial chemistry. Traditional methods still need to be used in combination with combinatorial chemistry since it is only 80-90% pure. Time to market longer than alternative 1&2. Cost higher than alternative 1&2 will make drug even more expensive and reduce profit. Combinatorial chemistry has not proven itself yet no new drug candidates had been uncovered by this technology. Traditionalist not in favour of combinatorial chemistry. Patent for Prozac is to expire in 2003 lending urgency to Lilly finding another blockbuster. Sphinxs capabilities of combinatorial chemistry could not be used until September 1995, which would limit the uses of combinatorial chemistry. Traditional methods still need to be used in combination with combinatorial chemistry since it is only 80-90% pure. Revenue Start earning revenue in 2001. Start earning revenue in October 2001. Start earning revenue in July 2002. Identification of best alternative for each category: Category Finding Time to market Alternative 1 is the best option here since the drug will get to market faster than the other two alternatives. Cost implications Alternative 1 is the best option since no additional costs would be incurred. Probability of success Alternative 3 has the highest probability of success. However there had been a lot of disagreement between the experts placing doubt into the mind of Sharma. This is indicated by the high standard deviations found under each alternative. Risks Alternative 1 seems to be the lowest risk option since the lead compound has shown superior therapeutic benefits to that of drugs currently available in the market. The fact that combinatorial chemistry has not proven itself, competitors might consolidate their position in the market and a drug might be introduced by a competitor are higher risks than not introducing the best possible compound. Advantages Alternative 1 is also the best option here. There is no guarantee that a delay in the development of the drug would result in a better compound. Thus the reason of the level of disagreement among the experts. Disadvantages Alternative 1 is the best option here. All the disadvantages described in the table above counts more against Alternatives 2 & 3 than the fact that Lilly has not explore any other compounds. Revenue Alternative 1 is the best option since the company will start earning revenue 9 and 18 months before the other two alternatives. Alternative 1 came out to be the best alternative in 6 out of the 7 categories evaluated. Due to the level of disagreement among the experts the fact that Alternative 3 showed to have the highest probability of success also must be accepted with scepticism. A financial analysis will now be conducted to determine whether such an analysis would support the findings above. 3.3.2. Financial analysis 3.3.2.1. Assumptions The purpose of this analysis will be to determine Eli Lillys position in terms of the three alternatives and different case scenarios after five years of sales. A decision based upon the findings as well as the time to market, cost implication, probability of success, risk, advantage, disadvantage and revenue issues discussed above, will then be made on which alternative is the most suitable for Eli Lilly to follow. Assumptions valid for all...