Gilding Lilly

As the company marches toward its patent cliff, CEO John Lechleiter has a bold new plan to save it. But it's going to take more than ImClone to restore Lilly to its former glory. Does Lechleiter have what it takes?
Nov 01, 2008

Pharma mergers are important—but they aren't often sexy. Sure, back in 1998 there was the riveting tale of SmithKline Beacham abandoning American Home Products (now Wyeth) at the altar for a merger with Glaxo Wellcome—only to have the mega-deal collapse. But that was a decade ago. More recently, Roche's courtship of Genentech has had a bit of heavy-fisted drama, but for real soap opera appeal, nothing in the recent past compares with ImClone. There's the New York biotech's sordid past—with jail time for Martha Stewart and then-CEO Sam Waksal—the ongoing relationship between ImClone and its marketing partner Bristol-Myers Squibb, the BMS offer, chairman Carl Icahn's withering rejection, and at the last moment, a brief but intense interest from a mystery bidder ... finally revealed as Eli Lilly.»

It's not the kind of thing we've come to expect from Lilly. But as one of the first actions of a new CEO with new ideas, it has observers reading the tea leaves to figure out what the merger—style and all—portends for the 132-year-old pharma.

Fat and Profitable

For the last decade, Lilly was governed by CEO and chairman Sidney Taurel, a 37-year Lilly veteran who came out of the international marketing unit. A Spaniard born in Morocco and schooled in France, Taurel had a distinctive, formal style that his years living in the Midwest did little to soften. Some called him bureaucratic; others complained that he just didn't mix in with employees. Nonetheless, on Taurel's watch Lilly grew fat and profitable. There were dark times, of course—none darker than the earlier-than-expected loss of Prozac revenues to generics. But Taurel pumped money into R&D and launched nine new drugs, including the megabrands that account for a significant share of Lilly's current annual sales of more than $18 billion. When Taurel tapped his COO, John Lechleiter, as CEO in March, he passed along a company with stellar, double-digit growth.

Behind that growth lies a problem, though: Lilly is fighting for its life. "Eli Lilly's patent expiration profile starting in 2011 is probably the worst in the entire pharmaceutical industry," explains Seamus Fernandez, an analyst at Leerink Swann. By the time Lechleiter took the reins, Lilly hadn't launched a new drug in three years, and seemed at risk of stalling out from the lack of innovation. Without new products to replace Zyprexa, Cymbalta, Cialis, and others, Lilly's revenue could drop by 60 percent by 2014. (By comparison, in the dark post-Prozac days of 2001, sales dipped only 7 percent.)

And that's the best-case scenario. Also on the horizon: continuing sales declines of Byetta due to side effects and a possible thumbs down from FDA of its long-acting form, the threat of biosimilars (which would affect Lilly's biotech-heavy portfolio), patent challenges surrounding cancer drug Gemzar, and a potential $1 billion liability settlement over Zyprexa.

So it's no surprise that Lechleiter has been moving quickly in his new position. Since taking the top spot, Lechleiter has:

» Initiated the purchase of ImClone, Lilly's largest acquisition ever

» Orchestrated the most advanced outsourcing deal in the pharmaceutical industry to reshape the R&D model and drive down costs

» Implemented a new management structure to streamline the organization and improve accountability.

Admittedly, these are not innovative moves. Like other companies, Lilly is looking to a familiar litany of strategies: diversifying into biotech, outsourcing to create a leaner, more nimble organizational structure, and buying any good drug that the company can get its hands on. "It's clear enough what we need to do—there's no magic or tricks to this," says Lechleiter. "The question is which company is going to effectively do it?"

But there's more to Lechleiter's approach than business discipline, reorganization, or even science. In his early months on the job, he's come across as a man self-consciously fashioning himself into a leader, not just for his own company but for an industry that, for many reasons, has gone astray.

His watchword—and it's not always a popular one in the industry—is transparency. "He's been interviewed more by CNBC in the past year than Taurel was in his whole tenure," says Clifford Kalb, who heads the consultancy C. Kalb and Associates. "He wants to make Lilly a higher profile company."

Certainly, Lechleiter has built a type of momentum, with news, and some potentially sensitive data, flowing out of Lilly at an unprecedented pace. At a time when Lilly has to make all the right moves to survive its looming "patent cliff," it has yet to be seen whether Lechleiter is a surgeon reconstructing Lilly—or a pathologist, detailing its ills, but too late to cure them.

Change Maker

John Lechleiter has the manner of a man from the middle of America: friendly, plain-spoken, salt-of-the-earth. Born into a Catholic family back in the 50s, when the "Catholic" in "Catholic family" meant big, he was the oldest of nine children and shared the attic with his four brothers at their modest house in Louisville. As far back as he can remember, Lechleiter wanted to be a scientist. In college, during a summer internship at the University of Minnesota, he fell in love with organic chemistry, which he went on to study at Harvard. From graduate school, John joined Lilly in 1979 as a senior organic chemist in process research and development—and has worked for Lilly ever since.

Though trained as a scientist, Lechleiter says his most formative experiences at Lilly came when he was put at the intersection of people and structures. For example, in 1991, as head of product development, he was charged with undoing the bottleneck of molecules coming out of research. He found that by organizing scientists to work together in new ways, he could dramatically speed the flow of projects.

"I saw I could make a difference at an organizational level and have that kind of an impact, change something for the better, move people from one point of view to another," says Lechleiter. "Good leaders can show a group of people that there's something they can accomplish that they never thought they could."

The experience came in handy in 1998, when as senior vice president of pharmaceutical products, he and his team re-engineered the hand-off between development and manufacturing, which had grown so dysfunctional that development occasionally planned drugs that were impossible to make.

The older and more established the organization—or leader of that organization, for that matter—the more difficult it is to change. And with Lechleiter's background, you'd expect him to be a pretty traditional guy—bound to the industry's past and ultimately conservative in approach, not the guy you'd pick to shake things up. But that's not what you hear from those who know him.

"He is a very rare mix of scientist-leader," says Jim Hall, director at the consulting firm Oliver Wyman. "You don't see that very often, someone who has come up through the organization and who is willing to flip it upside down. Fred Hassan did that at Schering-Plough, but he came from the outside and didn't have any connections. John has a much more difficult challenge and he's willing to take it on."

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