Class 1 1

Trials of a new product

Technical advances

Responsibility for medical care

Financial strength

October 23, 2006

Class 1 4

Case Questions• Which of the alternatives would you recommend to the

Project Team Advisory Committee (PTAC)? – 1. Race to market: Take LY334370 anti-migraine to

clinicals?– 2. Refine: Use combi-chem to refine the compound? – 3. Restart: Search for a new migraine platform w/ c-c?– What are the strategic implications of your choice?– What are the direct financial implications?

• Background questions– How is combinatorial chemistry affecting R&D? What

are its benefits & risks to different stakeholders?– What public policy issues arise in this case?

Class 1 5

Eli Lilly – Drug Development: Key Points

• Competitive issues & responses

• Combi-chem v. traditional discovery

• Lilly anti-migraine options

• Integrating new technology

• Policy issues

• Implications

Class 1 6

Pharma Industry: Competitive Issues• Case reinforces industry trend implications

– High profits: Regulatory, R&D, marketing entry barriers– High R&D & marketing expenditures– High failure rate in clinical trials– Price pressure: HMOs, governments, generics

• Early entrants in new classes (#1-#3) prosper– But lagging firms did well with anti-depressants (Prozac #1): #4

& #5 (Pfizer-Zoloft & GSK-Paxil) displaced #2 & #3 (BMS-Desyrel & Novartis-Pamelor)

– Other examples: Zantac overcame Tagamet (h2 antagonists), Lipitor overcame Mevacor & Pravochol (statins)

~Later good products can prosper with good support

Class 1 7

Pharma Industry Strategic Responses• Industry activity

– Acquisitions: Cost reductions, biotech skills, block-buster replacements

– Drug development speed up • More $$• New techniques

• Lilly activity– Spin-off devices (Guidant), focus on pharma– Increase R&D to fill pipeline– Ally (Synaptic) & acquire (Sphinx) small firms

– Experiment with new development techniques

Class 1 8

Lilly Financial Trends, 1976-1995

SGA down, R&D up, ROS up Key issue: Prozac going off-patent

0%

5%

10%

15%

20%

25%

30%

35%

40%

SGA %

RD %

ROS

Class 1 9

New Techniques: Combinatorial Chemistry

• From: One-by-one screening - 20-30 per week– Expensive & slow– Requires individual judgment & experience

• To: High-throughput screening - 1000s per week – Examine representative variations around molecular

structure (out of millions of possibilities)– “Brute force” versus “hand craft”– Requires screening model of representative branches–

New type of judgment

Class 1 12

Traditional Discovery v. Combi-Chem• Cheap (?), fast• Trial & error• Goal: Reduce time• Emphasizes process knowledge

& skill• Parallel search• Threatens stakeholders• Brute force• Complements traditional• Bottle-neck is data processing• Applies to some compound

families• Partial purity

• Expensive, slow• Sequential learning• Goal: Reduce cost• Emphasizes scientific

knowledge• Sequential search• Requires years of training• Art, hand-crafting• Values experience• Bottle-neck is

analoguing• Flexible across

compounds• Near 100% purity

Differences in science

Differences in organization

Class 1 13

Combi-chem: Beginnings of Rational Drug Design

• Rational drug design: Drug development in which researchers use existing data to focus their efforts

• Combi-chem: Models of molecular opportunities

• Current experiments – Gene mapping to identify a single protein that causes a

medical problem, then design a drug to attack that problem– Proteome mining: Drug compound profile screening versus

disease mechanisms (e.g., Cambridge Labs in MA; Serenex in Durham)

Class 1 14

Combi-Chem at Lilly• Evolution of combi-chem at Lilly

– Start with internal development to develop basic understanding (Tech Core)

– Then acquire firm with high skills (Sphinx)– Initiate with pilot project (Serotonin Working Group “1f”

anti-migraine): Kaldor – Schaus informal link

• Opposition: Similar to almost all new technology– Still unproven in 1995– Traditional scientists threatened– Only viable for some compounds– Combi-chem compounds were only 80%-90% pure– Distractions, overload biological screening assay

Class 1 15

Lilly Anti-Migraine Options

1. Race to market – Take LY334370 compound to clinical trials

2. Refine: 9 month delay– Use combi-chem to find a better analogue

compound

3. Restart: 18 month delay– Use combi-chem to generate new compounds

from scratch

Class 1 16

Anti-Migraine Revenue Stream (1)NPV 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Race (no delay) 575 0 100 200 300 400 400 400 400 200 0Refine (9 mon delay) 428 0 25 125 225 325 325 325 325 162.5 0Restart (18 months) 300 0 0 50 150 250 250 250 250 125 0

AssumptionsEnd of year cash flowFixed product life cycle due to competitionDiscount rate=13%

But: Probabilities of success differ

Source: Based on case exhibits 9 & 10

Class 1 17

Probability of Passing Clinicals: Expert Opinions

Option (Success %)Expert Background Race Refine RestartLee Combi-chem science 8 15 20Pan Combi-chem science 9 14 19Bourell Traditional science 12 11 13Wecker Traditional science 11 11 13Pimentel Traditional science/mgmnt 10 10 14Peck Traditional science/mgmnt 10 11 11

Mean 10 12 15

Combi-chem scientists 9 15 20Traditional science 11 11 13

Class 1 18

Anti-Migraine Revenue Stream (2):Probability-adjusted NPVs

NPV 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Race (no delay) 575 0 100 200 300 400 400 400 400 200 0Mean probability of success 0.10 58CC scientists prob 0.09 49Traditional scientists prob 0.11 62

Refine (9 mon delay) 428 0 25 125 225 325 325 325 325 162.5 0Mean probability of success 0.12 51CC scientists prob 0.15 62Traditional scientists prob 0.11 46

Restart (18 months) 300 0 0 50 150 250 250 250 250 125 0Mean probability of success 0.15 45CC scientists prob 0.20 58Traditional scientists prob 0.13 38

Class 1 19

Probability-Adjusted NPVs of Anti-Migraine Options: Depending on Source of Probability Estimates

0

10

20

30

40

50

60

70

Mean Traditional Combi-chem

Source of probabilities

NP

V (

$ m

ln)

Race

Refine

Restart

“Race” has either highest or lowest NPV

21Class 1

Decision Time

• How much of a rush do you need to be in?

• Whose judgment do you trust most?

Class 1 22

Integrating New Technology

• Organizational issues

• Over-coming the organizational issues

Class 1 23

Organizational Issues

• Benefits of combi-chem: More discoveries, faster development, cheaper (?)

• Opposition: Disrupts jobs & social systems• Common issue with innovative products &

processes– New science– New marketing methods– New organization

Class 1 25

How Do You Introduce Disruptive Technology?• Don’t do it?

– Risk: Fall behind & get lost

• Out-source to specialists?– Risk: Lose ability to innovate, miss product links

• Initiate internally?– Risk: Social conflict, disrupt new & existing activities

• Best: Learn how to manage internal conflict– Capron & Mitchell: Firms avoid conflict, but those that

learn how take it on benefit– Incentives & rewards for cooperation & thoughtful

discourse, penalties for blind opposition– Requires top level support & evaluation of pilots

• Current parallel in pharma: New marketing styles

Class 1 26

Social & Policy Issues• Product quality

– Avoid short-term temptation to rush product to market– Caution is consistent with long-term strategic needs:

Customer goodwill, avoid expensive recalls– Consistent with internal morale– Social & political norm: “First, do no harm”

• Errors of omission– Waiting too long keeps good products unavailable to

people in need

Class 1 27

Follow-Up• Picked option 1, w/ partial option 2– Race: LY334370 to Phase I in 1995– Plus HT screening of 150,000 compounds (1 month)

• LY334370 outcome– September 1998: Phase III scheduled– March 1999: Delayed PIII due to possible liver toxicity– 2000s: Low-probability Phase III studies

• Combi-chem at Lilly– Assessed drug discovery for C-C opportunities– Piloted with insulin projects– Rotations with Sphinx (did all screening there)– Kaldor left for Syrrx (2002)– Lilly shut RTP facility (2004) after integration

• C-C now diffusing through industry

Class 1 28

Eli Lilly $$ Trends

PCS write-down

$0

$5

$10

$15

-10%-5%0%5%

10%15%20%25%30%35%

Sales ($ bln)

ROS

0%

5%

10%

15%

20%

25%

30%

35%

2005200219991996199319901987198419811978

Lilly/PhRMA sales Lilly RD/Sales Lilly SGA/Sales

Class 1 32

Implications• Pharma strategy tension

– Time-to-market v. product quality assurance (e.g., Vioxx, Baycol problems)

– Experimentation v. refining existing skills

• Evaluating options– Financial & strategic analysis– Information reliability & disagreement– Assess scenarios rather than “mushed means”– Need to assess credibility of people

• Dealing with organizational stresses of new technology

33Class 1

Health Care

Challenge

Cost effective & profitable

Full access without rationing Innovation, quality & safety

??

Class 1 34

Next Class

• Licensing– Case: Abgenix & the Xenomouse– Background readings on pharma-biotech alliances