Teetering on the brink of a vast patent cliff, Eli Lilly announced a reorganization and cost-cutting initiative Sept. 14. The program - intended to cut $1 billion in costs by the end of 2010 - is as much about enhancing R&D productivity as creating a leaner organization, according to the company.

Like other Big Pharmas, Lilly stands to lose billions of dollars in the coming years as key blockbuster drugs go generic. Lilly's patent cliff, which begins in 2011 when its top-selling drug, the antipsychotic Zyprexa (olanzapine), goes off patent, comes later than it has for others. It's one reason the Indianapolis drug maker has been able to avoid restructuring even as rivals such as Pfizer and Merck have reshuffled their businesses.

Zyprexa accounts for nearly one-quarter of Lilly's sales (the drug brought in $4.7 billion worldwide and $2.2 billion in the U.S. for Lilly in 2008), but the pain that will come from generics extends beyond Zyprexa. Generic versions of Lilly's chemotherapy Gemzar and osteoporosis drug Evista are also expected near-term.

News Follows A Month Of Setbacks For Lilly

Lilly's announcement of the reorganization comes on the heels of compounding negative news. For one, the firm decided to cut its losses with the Phase III osteoporosis candidate arzoxifene in August after data showed the drug fell short on key secondary outcomes measures (¹ Also see "Lilly Cuts Arzoxifene Losses, Will Not File NDA" - Pink Sheet, 18 August, 2009.). Then, a U.S. district court found a method of use patent for Gemzar invalid, which could hasten the availability of generic versions of the drug.

On top of that, AstraZeneca released positive data on its antiplatelet candidate Brilinta (ticagrelor), a potential competitor to Lilly's recently approved Effient (prasugrel), at the European Society of Cardiology Congress, leading some analysts to downgrade sales projections for the Lilly clot buster (² Also see "AstraZeneca's Ticagrelor Brilliant At ECS Congress; Will It Outshine Effient?" - Pink Sheet, 7 September, 2009.). Lilly did get Effient - a competitor to Bristol-Myer Squibb's Plavix (clopidogrel) - onto the market in August, but even that success was overshadowed by what was nearly a one year delay in FDA approving the drug ³ Also see "Effient Labeling Could Give Edge Against Plavix Through Pharmacogenetics" - Pink Sheet, 10 July, 2009.).

The only other drug Lilly has under review at FDA is a long-acting form of Byetta , exenatide LAR, for type 2 diabetes, and its Phase III pipeline includes only six candidates, two of which are in the risky Alzheimer's space. The Phase I and II pipelines are richer, with 58 molecules in development, as of July 1. But without new medicines to make up for lost revenues, short-term growth is unsustainable. Like much of the industry, the problems Lilly faces are as much about R&D productivity as generic losses. [Editor's note: This story was updated Oct. 1, to provide clarifying information on exenatide LAR.]

"Lilly faces a challenge not that dissimilar from many of our competitors," admitted Steven Paul, exec VP-Science and Technology and president of Lilly Research Labs. "Our late-phase pipeline at this point will not completely substitute for the loss of revenue streams when our patents expire on blockbuster drugs."

A Development Center Of Excellence For R&D

As part of the reorganization, Lilly will establish a new Development Center of Excellence, an organization that it says will accelerate late-stage drug development.

The new center will operate as part of Lilly Research Labs under the direction of Paul. The center will be responsible for drug development both pre- and post- commercial decisions. However, once a decision is made to commercialize a drug, the molecule will be handed over to one of four new pharmaceutical business units, which will then oversee development of the molecule. Generally, the hand-off will occur after Phase II with the exception of oncology, when the transition will take place earlier.

Lilly's COE will house two business areas that will be headed by Tim Garnett and Tom Verhoeven. Garnett, currently chief medical officer and senior VP-global medical, regulatory and safety, will oversee medical, regulatory, global product safety, translational medicine and global health outcomes. Verhoeven, senior VP-global product development, will be responsible for the clinical development organization, product R&D, toxicology and project management.

According to Paul, the reorganization is not just about altering the structure of R&D, but enhancing the quality and speed of the molecules getting to market, Paul emphasized. "Structure is important, but it's the tools that we are going to use here, the tools of advanced analytics, the tools of tailored therapies, or stratification segmentation of clinical trials early ... and the tool of Critical Chain methodology."

Lilly has been piloting Critical Chain - a project management methodology - for two years, and now plans to institute the program across R&D.

"It has now been implemented on 40 percent of our pipeline and our projects are 100 percent on time delivery compared to about 60 percent for the other 60 percent of the molecules that are in the more traditional development programs," Paul said.

Chorus - Lilly's independent development unit that conducts small-scale targeted experiments - will continue to operate separately from Lilly Research Labs. Chorus is still "incredibly valuable," according to Paul. Chorus has helped increase productivity of early-stage drug discovery at Lilly by moving experimental medicines rapidly to proof-of-concept (⁴ Also see "Lilly's Chorus Experiment" - In Vivo, 1 May, 2007.).

Oncology, Diabetes Get Business Unit Spotlight

In addition to the shakeup in R&D, Lilly also announced Sept. 14 that it will organize the company around four global pharmaceutical business units and Elanco animal health. While animal health remains a relatively small business for Lilly, it generates more than $1 billion in sales and is a growing area of focus around the industry. Drug makers like Pfizer and Merck, for instance, have been playing up their activity in the space recently.

Lilly's four pharma units are oncology, diabetes, established markets and emerging markets. The cancer emphasis is not surprising, given that following Lilly's acquisition of ImClone last year, one-third of the pipeline is now in oncology. John Johnson, currently CEO of Lilly's ImClone subsidiary, will lead the oncology unit.

Lilly bought the Erbitux marketer for $6.5 billion, a move intended to strengthen its pipeline and position Lilly as a serious contender in the oncology space (⁵ Also see "Lilly’s ImClone Buy Adds Oncology Candidates And Pipeline Pressures" - Pink Sheet, 13 October, 2008.). But much of Lilly's justification for the acquisition hinges on ImClone's early pipeline, and the firm will need to get differentiated drugs to market quickly to rationalize the premium price tag.

Diabetes, an area of business where Lilly has long been a leader with the insulins Humulin and Humalog , will be led by Lilly USA President Enrique Conterno.

The established markets unit, meanwhile, will include what Lilly terms "other important therapeutic areas," including neuroscience, osteoporosis/bone and cardiovascular. Lilly's decision to group drugs from these three therapeutic areas into one business division seems surprising, given blockbusters like Zyprexa, and the depression juggernaut Prozac and its follow up Cymbalta, have been responsible for much of Lilly's earnings growth in the last decade.

Despite appearances, Lilly says it is not moving away from CNS or osteoporosis.

"I received a call from a colleague at another company asking if we were divesting ourselves of neuronscience, and I said, absolutely not," Paul maintained. "We have a very rich pipeline of neuroscience drugs ...These molecules will hit in the '13, '14, '15 timeframe and will be growth drivers for the company down the road." Potential drugs include solanezumab and semagacestat in Phase III for Alzheimer's disease and MGlu2/3 in Phase II for schizophrenia.

Nonetheless, Lilly's currently marketed osteoporosis and CNS drugs are reaching the end of their natural lifecycle, he acknowledged, and will thus be managed as mature products. The established products unit will be headed by Bryce Carmine, currently exec VP-global marketing and sales, and will host Lilly's global marketing organization. Its geographic focus will include the U.S., Japan, Europe, Canada and Australia/New Zealand.

Lilly's final business unit, headed by Jacques Tapiero, currently president of Lilly's intercontinental region, is an emerging markets unit, mandated to increase the its presence in such fast-growing countries as China, Russia, Brazil, Mexico, South Korea and Turkey.

Lilly's new R&D structure, its creation of autonomous business units, and a greater emphasis on emerging markets, mimic some other recent industry reorganizations, particularly Pfizer's overhaul last year. Facing generic competition for its blockbuster Lipitor , Pfizercut $2 billion in costs in 2008, reorganized its R&D priorities, restructured its development organization and aligned comercial operations into separate business units. Similarly, Pfizer's business units include oncology, emerging markets and established products (⁶ Also see "Pfizer Restructures For A More Flexible Future" - Pink Sheet, 13 October, 2008.).

GSK, meanwhile, in an attempt to retain the flexibility and innovation associated with smaller biotechs, also reorganized its R&D into smaller disease performance units in the summer of 2008, shortly after CEO Andrew Witty took the helm of that Big Pharma.

At Lilly, cost cuts will come in corporate, general and administrative functions, the firm said. It plans to cut about 14 percent of its workforce, or about 5,400 jobs, by 2011.

In general, analysts reacted favorably to the news. "We see this as a necessary strategy (in line with similar moves by other drug makers) in view of a major impending patent cliff, U.S. healthcare reform uncertainties and mediocre prospects for recent new drug launches," Standard & Poor's Equity Research analyst Herman Saftlas said in a same-day note.

- Jessica Merrill ( ⁷ j.merrill@elsevier.com )

Lilly Plays Up R&D Productivity With Reorganization

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