Eli Lilly CEO draws on family lesson, company sales potential to map drumaker’s future

Eli Lilly CEO banking on new drug pipeline

INDIANAPOLIS — There are some life experiences few will ever have. And as the oldest of nine children and CEO of a Fortune 500 company, John Lechleiter has a couple under his belt.

As Eli Lilly and Co.’s chairman and CEO, Lechleiter brings some of his childhood lessons to bear in leading the major drug company, which is based in Indianapolis.

At the moment, the Harvard-trained chemist is trying to rally support on Wall Street. Management has raised Lilly’s 2009 profit outlook twice since July, yet analysts still say the company’s future is far from secure.

They question whether Lilly can fill a gaping revenue hole that will open in a few years when drugs that currently account for more than half of Lilly sales lose patent protection.

Where’s the new revenue going to come from? Analysts see bigger competitors like Pfizer and Merck making huge acquisitions to add new revenue sources. Meanwhile, Lilly stakes its future on its own pipeline of drugs in development, which is only now emerging from a roughly four-year drought with the launch of the blood thinner Effient in August.

But Lechleiter says Lilly’s pipeline has helped it rebound from significant patent losses three times during his 30-year career at the company. He’s betting there will be a fourth, due in part to a reorganization announced last month that aims to speed up drug development.

Some of Lechleiter’s resolve also traces back to his father, who supported a large family while enduring the ups and downs of the automobile industry at his Louisville, Ky., car dealership.

Lechleiter sat for a recent interview in Lilly’s Heritage Hall museum, which highlights the company’s 133-year history. Here are some excerpts.

Q. Lilly touts more than 60 drugs under development, but the approval process has grown tougher, generic competition is intense and many analysts doubt the strength of your pipeline. Why do you have so much faith?

A. I wish we could order up innovation and smooth out the inevitable ups and downs that patent expirations yield. We can’t always do that.

I think what we’re trying to do instead is focus on running the business the right way — through what we know is going to be a challenging period — and then do everything in our power to speed up the progression through the pipeline of those drugs that we reckon are going to make a difference early in the next decade.

Q. You’re facing patent expirations for your two best-selling drugs, the antipsychotic Zyprexa and the antidepressant Cymbalta, and other blockbusters. You think your pipeline can replace what they generate?

A. We haven’t given specific guidance about what we think we will or won’t replace out of that. I think the point would be can we launch new products that we think are capable of growing into products that have substantial enough revenue to help us offset these losses.

We have products like the cancer treatment Alimta, like our insulin franchise and some other things that we know will also be growing. There are still significant growth opportunities in Japan, which is our second largest market. I think there’s a whole mix of things that we hope to put into play.

Q. What do you mean when you say the industry’s historical approach to drug development is broken?

A. I think as we look at simply the research and development investment curve, where investment’s going up sharply and the numbers of new drugs are coming down, I think one has to say this is a model that’s not sustainable.

Something’s got to change.

Q. Lilly purchased biotech ImClone Systems a year ago for $6.5 billion. Since then, the industry has seen deals with price tags that dwarf that. You say large-scale deals buy time. Why are they bad for Lilly?

A. We don’t see a compelling case that would indicate these large combinations have created sustained value for shareholders at the bottom line. At the end of the day, if you put one plus one together, that new enterprise has got to generate twice as much innovation to sustain itself, roughly speaking, and I don’t think anybody’s figured out how do all of our businesses become more innovative.

I think Lilly has sufficient critical mass and the financial wherewithal to address how to become more innovative as we are. The byproducts of these large combinations are always a lot of disruption and a lot of distraction for what can be an extended period of time.

Q. You’ve mentioned you wouldn’t mind shopping for another deal. What would be the ceiling for a purchase price and where do you stand in this search?

A. We’re looking at opportunities that are going to be smaller than the ImClone acquisition.

Even after the ImClone deal, we remain in a strong financial position, and we have the wherewithal to do additional deals, but we’re going to approach that very, very thoughtfully.

Q. Are biotechs still attractive?

A. Yes, I think there are lots of opportunities, and it’s not all mergers and acquisitions. At any one time, we have a lot of discussions going on about licensing opportunities or partnerships of some kind.

Q. You’re juggling a lot right now, not unlike your parents. They raised nine children in a three-bedroom house. What did you learn from them that helped shape you in your current role?

A. I remember when the car industry really turned down in the 70s. I don’t think my dad told me everything, but I mean the domestic auto industry during the oil shock in the 70s was just absolutely on its knees and then struggled again in the early 80s.

You know, he never gave up. They kept their dealership open, and he found a way to provide for us all. You succeed by continuing to show up. You work hard, you do the right thing.

My determination with this company is no less than that.

Q. You walk to work every morning, using different routes, why?

A. I know I need more exercise than I probably get. I work out a couple times a week, but I’m not a workout guy. I walk mainly because it’s fun. In the morning it allows me to collect my thoughts. Walking home in the afternoon is therapeutic because you basically can walk off the stress of the day a little bit.

Q. The health care reform debate must be a key topic you’re thinking about. You’ve said you’re disappointed the word innovation never comes up in discussions. What do you mean?

A. Innovation can actually help us ease the cost burden, improve quality and give people the kind of access that they need. We’ve got to have a system that furthers and encourages innovation in all respects, or we’re going to be forever rationing care and essentially not progressing the degree to which we can expect to have healthier, longer lives.

Q. Lilly’s stock price is down more than 30 percent since your first day in 2008. Obviously the recession played a role, but what do you tell average investors?

A. It’s easier for me to talk about our performance than the stock price, but let me try to answer your question this way: Lilly from a performance point of view — in terms of our volume-driven sales growth, cost management and taking market share with key products — is performing quarter to quarter very well in my tenure and was doing so before my tenure.

I think as long as we’re executing well on a succinct strategy and meeting our own internal milestones, then I think the stock price eventually will catch up.