Negotiation phase
In order to establish a mutually acceptable agreement between Lilly and Covance, strategic drivers and an increased understanding
of each company's business needs were established. Lilly wanted to divest its Greenfield research site to an organization
that could operate it with greater utilization at reduced expense and maintain capability through continued employment of
the skilled employee base. Lilly's second goal was to send a greater percentage of work to a CRO in order to reduce fixed
costs and improve flexibility and value. Covance wanted to expand its business into early research support and clinical pharmaceutical
drug development while mitigating the risk of this increased commitment through a long-term partnership. Both companies were
eventually able to align their goals in the form of a long-term strategic alliance. The terms of this alliance included a
10 year, $1.6 billion dollar service agreement, the sale of the Greenfield research facility to Covance for $50 million dollars,
the closure of the Lilly Clinic in Indianapolis and a negotiated volume and commitment-based discount in pricing for the duration
of the deal.
Lilly views people as its most important asset. When this strategic partnership was negotiated, one important element for
Lilly was that the highly skilled employees at the Greenfield site remain employed. The business model utilized in this case
retained the majority of highly trained scientists for business continuity while enabling Covance to rapidly acquire new capabilities.
In arriving at this landmark deal, Lilly was able to sell an underutilized R&D site and repurpose it for future growth.
List of Key Performance Indicators
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Covance was also able to achieve several of its business objectives with this acquisition. First, Covance was able to acquire
a functioning R&D site that contained new scientific capabilities and complemented their current investments in the pre-clinical
and clinical development space. By increasing their presence and investment in the early discovery area, Covance was able
to provide clients with a greater footprint of services across the drug development value chain in a world class toxicology
facility, and at a discounted price.
One of the crucial elements to successful implementation of this agreement was the use of key performance indicators (KPIs).
Before the Lilly-Covance deal was signed, Lilly communicated a set of KPIs to gauge the quality and efficiency of the contracted
work. Covance provided a pricing scorecard for each deliverable required in each of the eight business lines: GLP Tox, Non-GLP
Tox, in-vivo Pharmacology, Imaging, Quality Control Labs, Central Lab Services, Clinical Pharmacology, and Late Stage Clinical
Trials. KPIs ensured that both parties were aware of what results were expected for each project. An examination of KPI trends
over the course of the agreement shows that they have improved and evolved over time to accommodate changes in standards and
expectations (see table on page 27). Metrics were also added or removed depending on their relevance and target values were
modified as necessary. This flexible approach to measuring success has allowed more KPIs to be achieved, allowing each company
to continue to raise its standards of excellence. In the first year of the contract, Covance conducted over 3,500 studies
without missing a deliverable, while maintaining quality in spite of the issues of transition.
A second key element of the contract included annual minimum commitments (AMCs), establishing the amount of work and the cost
of each study that Lilly would contract to Covance. AMCs were established in each of the eight business lines. A review of
the first three years shows that Lilly has surpassed the allotted spending in each year by 30 percent or greater. This is
a testament to Lilly's satisfaction in the quality and reliability of Covance in providing the contracted services.
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