Korea University The Korea University Business Essay

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INTRODUCTION

Eli Lilly and Company is a research-based global pharmaceutical company that was founded in May of 1876 and boasted a 122 year history at the time of the case in the year of 1998. The company was established in the state of Indiana by a 38 year-old pharmaceutical chemist named Colonel Eli Lilly who was frustrated by the ineffectiveness and poor quality of the medicines of his day. (Eli Lilly and Company, 2010)

The colonel introduced scientific methods into the product development process of his pharmaceuticals and in the 1920's revolutionized the treatment of diabetes by launching insulin, the company's first major blockbuster drug. Other major milestones for the firm included creating drugs that used recombinant DNA technology, drugs that were among the first of their kind (such as new classes of antibiotics and long-acting orally administered penicillin), and drugs such as Prozac that established Eli Lilly and Company as an industry leader. Net sales for the company more than doubled in less than 10 years with the company earning approximately $4.2 billion in 1989 and $8.5 billion in 1997

In the current case, the pharmaceutical giant needed to decide its future commercialization path for Evista, Eli Lilly's new and potential blockbuster drug that had received approval from the Food and Drug Administration (FDA) in December of 1997. Evista was to be taken for the prevention of post-menopausal osteoporosis and differentiated itself from other estrogen replacement products by also lowering the incidence of breast cancer and reducing total LSL in post-menopausal women without the negative side effect profiles of currently available drugs that served the same function.

The commercialization path for this drug was especially critical because the estrogen replacement market (the market that Evista would be competing in) had worldwide sales in excess of $1 billion dollars and many believed that Evista could become a $1 billion drug for the company. Thus, the drug would have an enormous impact on the health, success, and growth of the entire firm.

The company had the choice of following its traditional functioned based approach to commercialization or to transform its current heavyweight product development team into a focused product (commercialization team).

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MARKET ANALYSIS

In order to determine the best approach that Eli Lilly could take to launch Evista to capture maximum value for the company, a better understanding of the environment of the pharmaceutical manufacturing market and its implications is vital.

A new drug in the United States passes through a discovery stage, a development stage, registration stage, and is finally commercialized. The entire process from synthesis of a drug to its approval by the U.S. FDA took an average of 15.3 years in the 1990s (almost double the time it took in the 1960s) as the number of years it to complete its clinical phase and pre-clinical phase almost tripled and doubled from that time respectively (Harvard Business Review, p.21, 1999).

Partly responsible for this was the sharp increase in time necessary to develop a new therapeutic was the rise in the required average number of clinical trials per new application, (from 30 trials to 60 trials in less than 10 years) (Harvard Business Review, p. 17, 1999), the escalation in the average number of patients in each of the clinical trials, and the increase in the average amount of information that was included in each individual New Drug Application. The average number of patients jumped from 1,567 to 3,567 between the years 1977 and 1992, and during the same time period the number of pages skyrocketed from 38,044 to 90,650 (Harvard Business Review, p. 16, 1999). These increases in mandatory clinical trials and number of patients in each trial were also adding to the cost of developing a new drug, a number that saw an increase from $54 million to $500 million in the last 20 years (Harvard Business Review, p. 20 & p. 4, 1999).

The need for the increase in R&D costs was countered by downward price pressure as the invention of formularies (a list of prescription drugs that patients could be reimbursed for by health care insurers) made it even more crucial for pharmaceutical companies to develop more differentiated, more effective, and radically new products. This was because health insurance providers were honoring generic substitutions of branded drugs wherever possible, negotiating a bulk discount rate for any drug on their formulary, listing only one drug on their formulary even if more than one drug had the same effect, and trying to maintain the fewest number of medicines on their formularies.

Finite patent life, in addition, to the advent of formularies added to the need to come up with new drugs faster and better market these new products. Extended development times directly consumed company profits, and the Hatch-Waxman Act of 1984 significantly shortened the profitable lifetime for drugs in the United States by greatly reducing the time it took for generic manufacturers to take market share from the drug's original manufacturer.

Under the act manufacturers of generic drugs no longer had to perform their own series of evaluations but could simply make reference to the safety and efficacy data in the studies of the original therapeutic's manufacturer as long as the generic brand had the same active ingredients as the original drug it set out to mimic. Cutting eight to ten years for generics to appear on the shelves of pharmacies, companies such as Eli and Lilly had less time to recoup R&D costs. (Harvard Business Review, p. 9 & 10, 1999).

Possible future changes in regulations and laws in other countries also threatened the time that drug maker's could profit as it did in European countries in the early 1990s. This change imposes great risks by causing sudden changes in the competitive landscape. (Harvard Business Review, p. 5, 1999).

The illustration of the pharmaceutical manufacturing market above implies that the most important factors for survival in the industry is significantly decreasing the time to market from idea to commercialization, and to keep R&D costs minimal yet keeping R&D efforts more productive.

MANAGERIAL ALTERNATIVES

Traditionally (before Dr. August "Gus" Watanabe, the executive vice president of science and technology for Eli Lilly and president of Lilly Research Laboratories joined Eli Lilly's executive team), the company's were organized by function.

In organizations that use the function-based development team model or the functional team model, as Melissa Schilling and Charles Hill refer to it in the article "Managing the New Product Development Process: Strategic Imperatives" (1998) and Kim B. Clark and Steve Wheelwright in their article "Organizing and Leading Heavyweight Teams" (1992), the employees in the organization are divided by function. The marketers are grouped with the marketers and the engineers with the engineers and people whose work serve the same function are also physically located in the same area. In other words, people with different job functions are placed in different locations within the organization.

Each group works under the direction of a senior manager functional manager and a specialized sub-function manager, and primary responsibilities for the project passes sequentially from one function to the next. What is often termed as "throwing it over the wall" (Clark and Wheelwright, 1992). There is no project manager or dedicated liaison between the different functional department or groups (Schilling and Hill, 1998).

For Eli Lilly the function based team model proved itself as being problematic. Because in this model no one person is responsible for the results achieved or unachieved (Clark and Wheelwright, 1992), there was little accountability on a project-by project basis (Harvard Business Review, 1999). Tracking individual performance was difficult and significant delays were caused because a lack of communication amongst function groups. By nature groups only met periodically (monthly for Eli Lilly) (Clark and Wheelwright, 1992), and there was an absence of detailed project plans needed for guidance and for the prevention and anticipation of roadblocks.

For Evista, as they did with Zyprexa, Eli Lilly diverged away from the traditional and used heavyweight teams during Phase III of the clinical trials. In a heavyweight team a core group of people with representatives from all or various functions in the company are dedicated to a project full time and are physically located together in the organization to work together on a common project. Senior managers with substantial organizational influence, expertise, and the power to reassign people and relocate resources are assigned to manage the projects and dedicated liaisons facilitate communication among people from different functions (Clark and Wheelwright, 1998).

The heavyweight teams for Eli Lilly remedied the issues of the function-based model. Beginning with a very clear business charter and a contract book with details about deliverables and a specified timeline, individual responsibilities and goals became clear. The assigned heavyweight team took responsibility for the process and outcome of their work, and the ownership and commitment of each team member solved the issue of accountability. Needless to say, individual performance improved dramatically and tracking the performance was much easier.

The newly adopted team format also made it possible for all the necessary functions and subsystems within the company to complement one another and seek a "system solution" for a set of customer needs. Everyone on the team worked together to solve development issues as opposed to working only to reach an end result for their specific function. Communication improved among people from different functional areas, future issues were anticipated before they occurred, and even the issues that were not foreseen were dealt with immediately and solutions could be tackled from a number of functional angles.

Most important, however, was the end-result: "dramatic leaps in speed and quality" (Harvard Business Review, 1999). As mentioned above, time is one of the most critical factors in the pharmaceutical manufacturing business because the time and way to recoup investments and create profit are becoming more constrained by the changing landscape of the pharmaceutical market. Both Evista and Zyprexa were able to shave months, arguably years, off their timeline, however, without sacrificing quality. Zyprexa became the most successful in first-year sales ever and reached the $550 million mark, and the Evista team was able to improve quality by performing more clinical trials and accurate data acquisition on a worldwide basis without eating up more time. This was made possible by the IT systems expertise and innovation that was present in the heavyweight team.

The decision that had to be made in the case was for management to decide whether Evista would be commercialized using the function based team model that proved somewhat ineffective in the product development process or the heavyweight team model that brought them dramatic success in terms of time and readying Evista for a global market.

Although the heavyweight team model proved to be better suited for the production process it posed to create possible problems for the organization if commercialization was dealt with in the same manner. The availability of a limited number of key personnel with expertise and breadth of knowledge needed for product development would be further reduced, and sour feelings among the part of the organization but outside of the Evista project would continue to accumulate. Also, questions would continue to arise from those who did not believe in the heavyweight structure, and there were concerns that the technical expertise of the firm would be negatively affected and diminish if the technical experts were allowed to work on the launch of Evista (Harvard Business Review, 1999).

RECOMMENDATIONS

Based on the limited details that are given in the case about Eli Lilly and Company and its dilemma, a heavyweight team should definitely be assigned to tackle the commercialization of Evista. This conclusion was reached by taking into consideration that the company felt that a substantial amount of education needed to be conducted within the medical community to reach Evista's greatest market potential, that the market potential of the new drug reached a tremendous $1 billion, and that Eli Lilly and Company intended Evista to become its cornerstone product for its women's healthcare business.

Because Evista is a prevention drug and not a treatment drug, education of the medical community can be the factor that causes the success or failure of the product, and $1 billion is not a small amount to gamble with. Thus, the education, like product development, needs to be carried out with speed and quality. The quicker the members of the medical community are educated the faster possibility of Evista taking the first mover advantage, expanding its market share and reach in this sector, and establishing itself as the dominant standard in the estrogen replacement market (Schilling and Hill, 1998).

However, educating the global medical community would require an enormous amount of expertise that the marketing staff most likely does not possess, and having a heavyweight commercialization team that included key members of the medical staff would ensure that expertise in the product would not be lost when it was the most crucial. It would also enable Eli and Lilly to save a considerable amount of time in commercialization because the marketing team would not have to develop an expertise in the language of the medical community or the drug itself, and the quality of education provided would also be elevated because the technical staff more likely speaks better the "language" of the science and medical community.

The problem of limited personnel should be dealt with by raising investments in R&D to the industry average and hiring more experts. Stakeholders directly affected by the drop in Eli Lilly's market value should be informed of the company's intention and potential exponential growth to curb worries about company performance. Also, as suggested by Robert C. Cooper in "Winning with New Products Doing it Right" medical administration staff with expertise could be assigned two responsibilities. Their first responsibility the commercialization of Evista and their second responsibility to assist product development staff with work that does not require heavy involvement (Cooper, 2006).

Another option to deal with human resource issues would be to evaluate than halt or kill other projects that do not work around Eli Lilly and Company's core competencies of anti-infection central nervous diseases, and endocrine diseases, (such as cancer drugs), and the drug company should re-evaluate its portfolio and see which projects yield maximum potential value to the firm and kill projects that do not have much potential for future value. These resources should be used to the advantage of Evista's commercialization.

A road map should also be drawn along with the preparation of the project charger and the contract book for the team's process to foresee how Evista's marketing process will affect the entire organization.

Efforts to mend relationships and attitudes about Evista's heavyweight team outside of the group should also be taken prior, during, and after the team is constructed. Resources needed should be identified early on so there are no surprises and strict guidelines regarding the request, use, and amount of resources allocated to the team should be set beforehand. The company as a whole should be educated about the intention and potential of Evista and what it would mean for the company as a whole and each individual employee. A reward system should be put in place (such as extra shares of stock) for all employees of the company so that everyone would support and desire the success of Evista. Other incentives for technical experts not on the Evista team should be created to motivate them to work harder and perhaps mend the gaps that those working on the Evista team leave behind.

Having a heavyweight team for Evista is an enormous sacrifice, but should be taken because the potential it brings to for the entire company is even greater. Having a heavyweight team would expedite the time to market and maximize the effectiveness of Evista's global commercialization process.

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