In a move to shave R&D spending, Lilly announced a deal with Covance awarding the contract research organization 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.

Under the deal announced Aug. 6, Lilly will unload its 450-acre preclinical campus in Greenfield, Ind., selling it 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 didn't 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.

Lilly management has been vocal too about industry's need to transition from fully integrated pharmaceutical companies (FIPCOS) to FIPNETS, the new buzz-acronym for fully integrated pharmaceutical networks.

"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.

Among Lilly's recent FIPNET deals is 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 (¹ Also see "Lilly Taps Investment Firm To Help Fund Phase III Alzheimer’s Trials" - Pink Sheet, 24 July, 2008.).

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.

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 standalone CRO," the exec said. No one client will account for more than 10 percent of Covance's annual revenues, he added.

Lilly announced 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)

Outsourcing R&amp;D: Lilly Turns Work Over To Covance

More from Archive

More from Pink Sheet

Outsourcing R&D: Lilly Turns Work Over To Covance