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Transforming Drug Development: A Lilly–Covance Case Study

Pharmaceutical ExecutivePharmaceutical Executive-12-01-2012
Volume 0
Issue 0

Eli Lilly's pioneering pact with leading CRO Covance made big news when it happened. Four years later, both parties can point to metrics that suggest the benefit is mutual.

The opportunity for innovation in drug discovery has never been brighter. The understanding of relationships between genetic makeup and disease is expanding. Our population is aging and in need of new treatments to prolong and improve the quality of life. Expectations for access to medicine on a global basis are increasing.


In spite of all of the opportunities, there are many factors acting in opposition to pharmaceutical innovation including: rising costs of R&D, longer development timelines, shorter periods of exclusivity for innovators to recover investment, pricing pressures, increasing regulatory expectations and expectations for demonstrating benefit over existing standards of care. The juxtaposition of opportunity with the need to improve productivity calls for innovators to consider new options for increasing value and reducing costs.

Eli Lilly is a global pharmaceutical company with approximately 46,000 employees operating in more than 146 countries and $22 billion in sales. Lilly invests more than $5 billion a year in R&D, but, like most pharmaceutical companies, must manage patent losses and an evolving R&D business model. In 2008, Lilly sought to reduce fixed overhead to focus on internal investments by selling or closing facilities and creating strategic partnerships with third parties. The Greenfield Laboratories in Greenfield, Indiana, were part of Lilly's history for nearly 90 years but had become underutilized due to an increase in global capability and affordability of third party contract providers. The Lilly Clinic for Pharmaceutical Research located at the Indiana School of Medicine was also underutilized for similar reasons. Lilly had dramatically increased the quality and volume of molecules in development, but needed access to broader and more flexible capacity than its own facilities could provide. Lilly also sought to create value from a highly capable but underutilized plant site for its employees, and for Indiana, which has been Lilly's corporate home for more than 136 years.

In 2008, Lilly was preparing for the pending patent loss of several of its successful innovative medicines while managing a full and flowing pipeline of molecules in development. In this evolving landscape, all portions of the R&D enterprise were evaluated and placed in a capabilities matrix in order to assess how the generous, but limited, R&D investments could be used to produce value (Figure 1). This evaluation was conducted against the anticipated patent expiry time period, where revenue growth would be negatively impacted, but where significant resources would also be required to advance the portfolio.

One fixed asset was Lilly's 600,000 square feet Greenfield Laboratory. This laboratory had become the home of Lilly's toxicology facility and was a strong contributor to Lilly's pipeline of innovation with years of demonstrated excellence in the design, conduct, and interpretation of safety studies for exciting investigational medicines in development. As Lilly's pipeline grew, more flexible and cost effective alternatives were required to advance the pipeline and reduce costs.

The goal: a new strategic partnership model

Lilly's initial outsourcing efforts date back to the late 1990s and were focused in toxicology. The long live-phase studies (oncogenicity and chronic toxicology) were the first to be fully outsourced starting between 1998 and 1999 with the redirection of internal Lilly resources for shorter term studies. By 2004, approximately 80 percent of all Lilly GLP toxicology study support was being provided by contract research organizations (CROs). Lilly challenged itself at that time to understand the efficiency of its operating model which maintained full GLP certification for the Greenfield facility despite outsourcing the majority of the GLP study work. The subsequent business analysis revealed that cost savings could be captured by either running all GLP work internally, utilizing the resources needed to maintain GLP certification to their fullest, or moving all GLP work to CROs. The business analysis also revealed that, based on portfolio growth projections, bringing all GLP toxicology work back "in house" would require major capital investments in expanding the Greenfield vivarium space and additional human resources to support that work. In mid-2005, Lilly took the calculated risk of moving all GLP study activities to an external network of qualified CRO providers to reduce fixed expenses and increase flexible capacity to deliver the portfolio.

Lilly wanted a strategic and reliable partner to maintain the quality of research and products while expanding the volume of capabilities available. Lilly developed the concept of becoming a Fully Integrated Pharmaceutical Network (FIPNet) and was evolving its thinking of CRO relationships to more strategic commitments across a smaller base. The three most important criteria Lilly selected to conduct this assessment were quality, capability, and reliable delivery.

Four options were evaluated for the Lilly Greenfield site prior to the ultimate decision to sell the facility and enter into a strategic partnership with Covance. The first option considered was to continue operation at the site by spinning off the location as a standalone contract service provider to compete with other CROs. This option was not selected due to the size, cost, lack of experience of Lilly's employee base in managing a CRO, and the need to leverage the available CRO capacity across the industry. Additionally, there was a low probability that competitors would place studies in a previously owned Lilly facility without significant time for transition. The second option was to vacate the site and outsource work to existing contract laboratories. A third option explored was to sell the site to the state of Indiana and designate it as a technology park and lease back only one or two buildings at the site for Lilly's use. This option proved to be minimally cost effective, not strategic, and difficult to manage. The fourth option was to sell the site to a strategic partner under terms and conditions equally beneficial to both parties. Lilly wanted a capable partner that would maintain the quality of research and fully utilize the capability of the site and staff. After careful consideration, Covance became the preferred partner with which to negotiate this historic transition. Additionally, Lilly's history and experience working with Covance was a determining factor because of their documented performance, trust in the dependable delivery of quality work and the strategic engagement of their leadership team.

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.

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.

List of Key Performance Indicators

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.

Announcement day and the transition phase

The strategic partnership was announced on August 6 and completed on October 3, 2008. The scope and complexity of the deal was unprecedented for Lilly as was the transition of a R&D site that was never previously anticipated to be outside of Lilly's control. Complex integration issues like the separation of information technology (IT) systems, utilities, site security, and facility maintenance needed to be quickly and effectively planned by a joint oversight committee. Closure of the Lilly Clinic also needed to be executed in an efficient manner. Regular operational briefings allowed Covance personnel to understand the current systems and processes, highlight issues, and begin to develop a gap analysis for the transition plan. Once the announcement was made, a joint transition team was formally introduced and expectations and priorities were set. The leaders of the transition team were responsible for integrating and coordinating a complex set of workstreams ranging from facilities and human resources to IT and in vivo pharmacology. In order to demonstrate their commitment to employees and ease their transition into a new corporate culture, Covance developed an on-boarding program that paired existing Covance employees with affected Lilly employees from their area of expertise. The effectiveness of this program was evident immediately. The retention rate of employees by Covance was 98 percent after the announcement and after one year, 95 percent of former Lilly employees remained.

Overall, the success of the joint transition team was due to essentially three key activities: clear and unambiguous objectives, support of the transition leaders by senior leadership, and rapid issue resolution.

In order for a partnership of this magnitude to continue to succeed, a governance structure was created to provide oversight on the objectives both companies had set forth in their partnership agreement. The governance structure was designed to promote clear communication and establish trust between staff members at multiple layers within the two companies. The governance structure was comprised of an executive steering committee (ESC), a business operating committee (BOC), and a business unit steering committee (BUSC) that monitors each of the operational groups.

The objective of the ESC is to set the mission, vision, and direction of the strategic alliance. The BOC monitors KPIs, implements the strategic aim of the partnership, and oversees critical initiatives such as cycle time improvements for study conduct. The BUSC forecasts future work demand, develops KPIs, and oversees project execution for each of the eight business lines.

Evolution of the partnership

Covance was concerned with their ability to retain employees through the transition in order to meet the needs of the contract. Employees were given the opportunity to apply for positions at Covance that were similar to their previous positions with Lilly. As previously mentioned, a majority of employees, the most critical resource to the transition, remained at the Greenfield site, allowing this partnership to smoothly transition.

Lilly-Covance Partnership Economic/Fiscal Impact Analysis

To gauge the progression of the partnership each year, voice of the alliance (VOA) surveys are distributed to employees from Covance and Lilly to gain insight on many elements of the alliance. Questions are asked in 13 areas related to cultural, operational, and strategic fit to address strengths and weaknesses of the alliance.

Data from the 2009 survey showed a variance of more than 10 percent in three areas of employee answers: roles, team coordination, and skills/competence. In the other 10 areas, the difference between the two results was smaller than 10 percent, indicating that both parties were in agreement in how they viewed each other. By 2012, there was no variance of more than 10 percent in any category surveyed and the gaps in each area narrowed relative to 2009, demonstrating that both companies had made great strides in improving the site operations. Additionally, in 2012 the response of the percent favorable for each area was =70 percent which according to Lilly's historical data sets indicates a highly functioning partnership. Based on this analysis and trends of the previous three surveys, the next area of opportunity lies in making both sides more satisfied.

Key learnings

Corporate growth is difficult to effectively manage, but Covance was able to grow a high quality business with committed volume and acquire new facilities in a single deal structure. Forming this strategic partnership with Lilly has enhanced Covance's discovery and pre-clinical capabilities to engage a broader set of clients. In the course of executing this strategy, it was apparent that Covance also needed to change its business processes to understand and adapt to the speed and efficiency of newer, less linear study designs, such as in vivo pharmacology.

Very quickly, Covance recognized the value of integrating the scientific disciplines at the site by utilizing a full service model for the discovery work instead of adapting the functional approach used in the past. Prior to the partnership, Lilly research, including pharmacokinetics, toxicology, and ADME, was often performed in a "siloed" structure with each scientific group conducting studies within their area of expertise, without a view of the overall study plan for the project or compound. It was common that once a study was completed and reported back to the requestor, it was up to the project team to aggregate the data sets. Once the transition was complete, the site staff soon realized that integrating these independent functions provided an opportunity that had not existed inside Lilly. As a result, value was also created through the integration of pharmacology and non-GLP toxicolgy. Additionally, Covance learned that applying their standard study systems that were run effectively at their other sites required an adjustment to the non-linear nature of early discovery work conducted at Greenfield. There was also a need to immediately build fire walls against other companies conducting work at the facility.

One transition element for former Lilly employees was their need to recognize a shift in relationships and perspective as previous colleagues became sponsors rather than co-workers. Four years since the deal was completed, communication and flexibility are crucial as Lilly's proportion of the site's capacity decreased while the site built a new client base that supports more than 100 unique sponsors. Another key benefit of the strategic partnership is access to unique external viewpoints which allow for the sharing of non-proprietary information. This information can benefit approaches to protocol development, study design, insights on how to improve standard cycle times for routine studies, and even data analysis.

In retrospect, the decision to opt for further expansion of the Lilly Covance strategic partnership, reaffirmed the significant positive economic impact the decision has had on the local community and the state of Indiana. If Lilly had decided to close the site and outsource the work to other entities globally, the loss of jobs in an industry that is essential to the economic strategy of Indiana may have put into question the long-term viability of the strategy.

To determine the economic impact of Lilly's decision to maintain a critical R&D capability in Indiana through a third party, a study was designed with Crowe Horwath, LLP to quantify and measure the direct, indirect, and induced effects at the Greenfield research site from October 1, 2008 to December 31, 2011 on the local and state economy (see table above). The study focused on key areas such as: employment levels, payroll (wages), and annual output from operational and capital expenditures from the date Covance acquired the site. The initial purchase of the site provided both local and statewide benefits since a majority of the approximate 250 Lilly employees who accepted positions with Covance in 2008 are still with the company today. In addition, from October 2008 to December 2011, Covance has hired more than 270 new employees at the site. At the time of the formation of this aspect of the partnership, Covance had been in Indiana for more than 20 years with a global facility in Indianapolis and a Phase I clinic in Evansville, with approximately 1,000 employees. Covance's own operations at the Greenfield site combined with the multiplied effects of those operations experienced by others are estimated to have added 564 jobs, $35.7 million in wages annually, and $102.4 million in annual output. As a result, Covance recently announced another expansion at the Greenfield site that includes new North American centers of excellence in genetic toxicology, sample storage and developmental and reproductive toxicology (DART).

The bottom line

The pharmaceutical industry needs fresh ideas for reducing recurring expense, expanding learning and increasing the cost effectiveness of discovery and development. This article elaborated upon tactics employed to foster success for both companies, thus allowing for the application of similar tactics for other organizations wishing to effectively decrease fixed costs while increasing flexible capacity. From this partnership, Lilly gained more flexible capacity, access to new, non-proprietary processes and systems that have decreased fixed costs. Covance gained added capabilities in new business lines, an assortment of highly trained scientists, and increased integration across business lines, thus sparking further innovation. It is evident that the economic impact retained and scientific productivity gained demonstrates that divestiture of core R&D capabilities is feasible in today's tough business environment.

Kathryn Torrey was a graduate student at the University of Illinois-Urbana Champaign. James Grace, PhD, is a Senior Director and Andrew M. Dahlem, PhD, is Vice President both at Eli Lilly and Company. Dahlem can be reached atdahlem_andrew_m@lilly.com.

Author's Note: The authors would like thank Stephanie Gleissner, Adrienne Takacs, Vince Romano, Mike Masnyk from Lilly and Andrew Eibling, Brad Wynja, and Chris Melling from Covance for their assistance in preparing this article. The authors would also like to thank Crowe Horwath LLP for analyzing the economic impact of the partnership.

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