Case Study - Eli Lillys Project Resilience: Anticipating the Future of the Pharmaceutical Industry

Rebecca M. Henderson

2. Low Cost Innovative FIPCO - As its name suggests, the Low Cost Innovative FIPCO model puts cost at the center of every decision made by the firm. Relative to todays FIPCO model, the cost structure of such a firm would be on average 40-50% lower, with sales and marketing expenses probably reduced even further to allow for disproportionate investments in discovery and development. This firm succeeds not by cost-cutting but by making decisions in a completely different framework with costs at its core. A company adopting the Low Cost Innovative FIPCO model relies on external pricing signals to drive its sourcing of services along the entire value chain and aggressively uses sophisticated IT tools to create a global network of suppliers who can provide those services at the lowest possible price. The firm is rigorous about outsourcing all non-core work. The firms cost structure begins to look like that of an Indian pharmaceutical manufacturer, with professional salaries a tenth to a fifth of the U.S. level and a majority of clinical trials executed outside of the U.S. in the lowest cost locations. For this model to work, the U.S. regulatory authorities will need to change some of their policies, particularly around accepting data generated in other countries.

Questions to answer in 1-2 pages:

• How do these reflect the generic strategies of our lesson? (Porter's Generic Competitive Strategies)
• How do you think each model fits with the different future scenarios
• Which would strategy would you recommend Eli Lily chose to follow?

ELI LILLY'S PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY Rebecca M. Henderson Exhibit 8 Alternative Business Models Technical Blockbuster Model Develop products for large patient populations using reventie potential as main criteria Low Cost Model Develop innovative products using cost as a primary decision-making criteria Service- business Model Manage the "total patient using protocols focused on reducing total healthcare costs Conglomerate Disintegrated Model Model Maximize value by Focus business on leveraging the highest value economies of scope part of the value and reducing risk via chain and dominate diversification the competition Proliferation of Products Model Develop many products targeted at specific patients that are highly effective and valued Business Lines Human Human pharmaceuticals pharmaceuticals Human healthcare Multiple business lines Human pharmaceuticals Human pharmaceuticals Value Chain Fully Integrated Fully Integrated Services-based Sales & Marketing Fully Integrated R&D or S&M (not both) Fully Integrated Scope Broad TAS PC customers 00000 Focused TAS Specialty customers Focused areas of human health Broad Broad TAS PC customers Focused TAS Specialty customers Scale Important up to critical mass pt Important up to critical mass pt Scale is important Scale is not critical Key Capabilities Constant flow of potential products in R&D Quality manufacturing Defining customer value in marketplace Partnering to access external innovation Constant flow of low cost products Low cost manufacturing Defining customer value Out-licensing high cost products Portfolio management based on low cost attributes Important to manage large pt populations Designing programs that generate healthcare savings Negotiating contracts with insurers Decisive company buying/ selling decisions Formula to evaluate companies for buying-selling . Decentralized management of business units Important up to critical mass pt (for S&M) Large flow of potential products (R&D model) External focus on disruptive technologies (R&D) Defining and acquiring customer value (S&M model) In-licensing (S&M) or out- licensing (R&D) products Large flow of potential products Flexible manufacturing Targeting and marketing to specific patient populations Partnering to develop blockbuster compounds