Lilly has deepened its commitment to its fully integrated pharmaceutical network strategy, most recently adding a deal with the contract research organization Covance.

Lilly is a leader in developing the network approach - dubbed FIPNet - which is characterized by positioning the company at the hub of a number of partnerships and by the smaller partners taking on a greater share of the risks and potential rewards. The strategy contrasts with the more traditional fully integrated pharmaceutical company, or FIPCO, model.

Under the deal, announced Aug. 6, Lilly will award Covance a hefty piece of the drug maker's research, mainly toxicology testing and early-stage clinical work, but also some Phase II and Phase III clinical trial support.

Lilly will sell its 450-acre preclinical campus in Greenfield, Ind., to Covance for $50 million. The companies will then sign a 10-year service agreement, awarding Covance a minimum of $1.6 billion worth of work.

For Lilly, the deal is aimed at reducing R&D spending (though the company did not indicate by how much) in a challenging environment. A number of big pharmas have been proactive on the outsourcing front, but Lilly is one of the leaders, looking to cut costs and manage risk ahead of the patent cliff it faces in 2011 when its top-selling drug Zyprexa (olanzapine) loses protection.

Network Took Shape In Asia

Company management has been vocal too about industry's need to transition to FIPNet. "Lilly has been transitioning to a new, more networked business model by increasing collaborations with organizations outside the company's walls to generate ideas and build capabilities, sell products, reduce costs, manage risks and accelerate productivity," the company said.

The model had been mostly associated with research collaborations in Asia. Lilly has FIPNet deals in both China and India, including arrangements with Hong Kong-based Hutchison China-Meditech; Mumbai-based Nicholas Piramal; Bangalore-based Jubilant Biosys; and Hyderabad-based Suven Life Sciences (¹ Also see "In Search Of Risk-Sharing Partners In China, India, Pharma Says" - Scrip, 6 March, 2008.). [Editor's note: PharmAsia News is FDC/Windhover's site for Asian biotech and pharmaceutical news. To register for a 30-day risk free trial, visit www.pharmasianews.com or call at 800-332-2181.]

But Lilly has imported the strategy to U.S. shores, including an innovative risk-sharing partnership with the investment firm TPG-Axon Capital and NovaQuest, the partnering arm of the CRO Quintiles, on two investigational Alzheimer's drugs (² Also see "Lilly Creates Three-Way Deal To Share Risk In Alzheimer’s Drug Development" - Pink Sheet, 28 July, 2008., p. 19).

Merck also is in the forefront of the FIPNet movement, as illustrated by its deals with the Indian research companies Advinus Therapeutics and Nicholas Piramal (³ Also see "Nicholas Piramal India Inks R&D Deal With Merck" - Scrip, 19 November, 2007.).

Lilly and Covance are already partnered in certain research areas, mainly preclinical toxicology, and Covance already operates a laboratory in Indianapolis and a Phase I clinic in Evansville, Ind.

Lilly Researchers Could Transfer To Covance

Covance expects to recognize a minimum of about $160 million annually from Lilly under the deal, including backlog revenues under the existing partnership that will be folded into the new arrangement. In 2008, for example, Covance is already expecting $70 million from Lilly, Covance CEO Joe Herring said during a same-day conference call.

Lilly will transfer responsibility for its non-GLP (good laboratory practice) toxicology, in vivo pharmacology, quality control laboratory and imaging services to Covance. The contract also includes a committed level of clinical pharmacology, GLP toxicology studies and Phase II-IV services.

The change in control at Greenfield, expected in October, could result in some job cuts at Lilly, though Covance plans to offer employment to 260 Lilly employees. Those workers will have the option to work for Covance, apply for limited roles at Lilly or depart with a severance package. An additional 225 employees at Greenfield will move to Lilly's site in Indianapolis. Lilly would primarily retain senior drug development staff, while jobs such as study directors, study coordinators and animal care technicians would transfer to Covance, Herring explained.

CROs are able to conduct research at lower costs by using expensive equipment and scientific expertise efficiently, conducting the same types of studies over and over again for multiple clients.

That means Covance plans to operate the Greenfield site like its other research arms, offering services to other pharma and biotech clients. The company expects to expand the client base at the facility beyond Lilly beginning in 2009. The site is expected to focus on GLP toxicology testing and specialty services like non-clinical imaging.

But will third-party clients find Covance's relationship with Lilly to be a conflict of interest?

For his part, Herring said he does not expect third-party clients to be concerned about the partnership or the site's previous ownership by Lilly.

"One of the key considerations is separability of the site," he said. "We're buying the whole Greenfield campus, and so the day this comes over to Covance, the entire site will be Covance." In addition, he pointed to a backlog of toxicology work in Covance's other facilities that clients are anxious to have completed.

"We think that there are a number of clients who will come and see and appreciate that this has converted from internal Lilly capacity to a valid stand-alone CRO," the exec said. No one client will account for more than 10 percent of Covance's annual revenues, he added.

Lilly disclosed several other developments in connection with the Covance announcement. The company will lease a new worldwide headquarters for its animal health division, Elanco, currently based in Greenfield. Additionally, Lilly will significantly reduce and largely close the Lilly Center for Medical Science, a Phase I clinic that employs 48, with work transferring to Covance.

The firm is also transferring clinical trial monitoring work in the U.S. and Puerto Rico to Quintiles and data management work in the U.S. to i3.

- Jessica Merrill (j.merrill@elsevier.com)

Covance R&D Deal Meshes With Lilly’s “FIPNet” Model

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