Eli Lilly boss keeps R&D at heart of vision for firm’s future

When I spoke to John Lechleiter eight years ago, he had just taken over one of Big Pharma’s most venerable names at a distinctly inauspicious moment. Without an in-house drug launch in three years and and having sharply underperformed its peers over the previous decade, analysts and investors were getting bolshie.

Since then he has steered Eli Lilly through the trough of patent expiries that shredded up to 40 per cent of its revenues over four years, but, visiting Ireland again recently, he has clearly lost none of his conviction about the positive future for the company where has worked since joining as an organic chemist fresh out of a PhD programme at Harvard.

While more expiries beckon, they are not on the scale of past blockbusters. Lilly has also rejuvenated its pipeline, not least with Lechleiter’s purchase just months after taking over as chief executive of ImClone, an oncology biologics business.

In the past two years, Lilly has won approval for drugs to treat diabetes, cancer and psoriasis, with more under FDA review.

“The story of Lilly is that we turned the corner a few years ago when people started seeing the cup as half-full rather than half-empty,” says Lechleiter. “And while we have had a few pipeline failures coming along . . . I think where our stock multiple is today is a good measure of investor confidence in our performance . . .”

At the heart of his vision has been a commitment to R&D. When times were tough, Lechleiter recalls, some people accused him of wasting money by investing in R&D at a time when pipelines at both Lilly and in the broader industry had not been, as he puts it “particularly productive”.

“I think we did the right thing by holding the line. We increased R&D spending on an absolute basis every year up to 2014. We had to,” he says. “If you are going to lose products, you have to replace them. We had some pipeline failures. We needed to replenish the cupboard as it were. So it was the only way we knew how to do what we are in business to do and it has paid off. I think we have been vindicated.”

That continuing focus on R&D by one of the few scientists to head a Big Pharma business was in the news again this week as Lilly reported profits below analysts’ projections due to its continued heavy R&D spending – $1.22 billion (€1.07 billion) in the first three months of the year.

Under Lechleiter, Lilly has narrowed its focus to oncology, diabetes, autoimmune diseases and neurology where it is particularly invested in the pursuit of a breakthrough on Alzheimer’s. It also has a small presence that Lechleiter characterises as “interesting” in pain management.

He has also invested heavily in biologics, not least at the Kinsale plant. When he came to Ireland eight years ago, just days after his appointment, it was to formally lay the foundation stone for a €400 million biotechnology plant in Kinsale.

This time, he was back in Kinsale, unveiling another investment – worth €35 million – which applies new technology to the production of more traditional small molecule drugs, “the kind we take when we take a pill”, Lechleiter explains.

Continuous processing moves away from large-scale production lines. Smaller equipment, availing of sensor and digital technology, and with smaller inputs, can still match traditional output volumes by running the process continuously.

The upside is that the process requires less investment and delivers a safer manufacturing environment.

Cutting edge

“We are one of the companies on the cutting edge of this technology and Kinsale is going to be the place we are really going to put this into practice,”says Lechleiter.

Monitoring these new production techniques requires skilled engineers and chemists on site, he says. “The technology in making these products is going up. This is not something where we would seek the lowest-cost producer.”

The company, which first arrived in Ireland in 1981, has doubled its Irish staff numbers to around 1,000 in the past five years

Recruitment has not been a problem so far.“I think we maybe a bit spoiled. We have a good reputation. We have good connections, not only with local universities.

“But having said that, I think it is very important that Ireland continue to focus on Stem [science, technology, engineering and maths] education and continue to get kids interested in Stem disciplines and keep the sort of feeder pipe full. Because I think we are entering a golden era for biopharmaceuticals. It is going to be even more exciting.”

It hasn’t all been good news for Lilly in Ireland. The recent acquisition of Novartis’s animal health business sealed the fate of Sligo-based Elanco, an earlier acquisition out of the Pfizer/Wyeth merger.

That meant the loss of 100 jobs, which Lechleiter described as “unfortunate”, though he stresses the company is growing overall in Ireland.

Lechleiter is excited by the latest animal health investment, despite an industry trend of shedding non-core operations.

Lilly has been in animal health for 60 years or so, he says, and its different economic cycles and payer dynamics make it a convenient foil for a pharma business.

He describes a picture of Lilly as a company “anchored” on 15-20 per cent revenue coming from an animal health business (up from the current 5-6 per cent) and a similar amount from a “stable and predictable” insulin business, “and then having a more experimental piece up here, a riskier business where patents and products come and go.

“I think, from a financial structure point of view, I like that.”

Despite his liking of balance, Lechleiter has eschewed the trend to chase a share of the generics market, although Lilly has dabbled in biosimilars – generic forms of older, off-patent biologics. He prefers to deploy his resources on discovering new biologics. “I think that’s a better place for us to play and compete,” he says.

Under his watch, Lilly has also steered clear of the prevailing industry fashion for game-changing M&A, concentrating instead on creating a future for a company that ranks as one of the oldest in America, having been founded 140 years ago.

However, while inversion and the pursuit of a lower tax jurisdiction has not been on the agenda, the Lilly boss has little sympathy for the Obama administration in its recent clampdown that undermined the Pfizer/Allergan merger.

Competitive disadvantage

“As I sit here, the fact that the treasury department and US government believe it is in the US government’s interests to put these rules in place underscores the fundamental failure of our efforts to put a competitive tax system in place,” he says.

The current system not only “logically encourages” companies to do these deals, it puts US companies at a competitive disadvantage and puts Lilly and others “in a position where we are reluctant to bring back offshore dollars to be taxed on top of the taxes we have already paid”.

Despite the recent furore, he is hopeful that a new Congress will finally hammer out a meaningful reform built on what he says are now two “generally agreed planks” of the need for a lower headline tax rate and a territorial system “so you are taxed where you earn the money”.

A regular commentator on industry matters in the Wall Street Journal, he also recently took Capitol Hill and the Obama administration to task over their attitude to the cost of research.

"Developing medicines is risky, expensive and time-consuming, and everyone would be better off if it were less so," he wrote in the Journal before dismissing "meaningless disclosure mandates".

He called instead for policy efforts to streamline drug development and regulatory approval “without compromising safety”.

The debate over drug costs and the perception of excessive profit has been driven by two recent events – the blatant price-gouging of 32-year-old pharma executive Martin Shkreli and the only slightly less in your face price hikes on key medicines by the since departed and now somewhat contrite Mike Pearson at Valeant.

Unfortunate

Lechleiter has little sympathy for either and accepts it has done the industry harm.

“I think it has been most unfortunate as I think it casts a pall on the sector. I think critics and some politicians want to tar us all with the same brush.

“Frankly, I think the issue there of having sole-sourced generic medicines in many cases can be addressed by encouraging others to register and launch those same medicines and by clearing the current generics backlog at the FDA, and we have espoused that, even though we are not in the generics business.

“The reason that prices were raised like that to some extent reflects the fact that there was no competition so let’s encourage more competition.

“But I think it is fundamentally a short-sighted model and I think what has followed that has proven that out.”

Lilly has been accused of underplaying its prospects on financial performance. Lechleiter demurs, although he does concede the company doesn’t “toot our horn very much”.

He prefers to see the company’s guidance as “measured and thoughtful” rather than conservative. “The most we have said about the long term is that, by 2018, we want to get to the point where we have our total operating expenses at 50 per cent or less” after the devastating patent cliff eroded sales and margins dramatically between 2011 and 2014.

Those losses were already inevitable when Lechleiter took the helm in 2008 with an empty late-stage pipeline. Ensuring that position is not repeated has defined his tenure.

“I think the single most important thing for us is to convince our investors for the long term that we can be seen as a reliable source of innovation,” he says, adding that delivering seven to nine molecules at any one time in Phase III is seen as a critical measure to determine how we are going to be able to sustain our pipeline flow.

“There are always going to be ups and downs,” he adds, before finishing with a caution.

“We cannot afford another 10-year drought. We have survived one; we probably would not survive the next one.”