CASE STUDY ON ORGANIZING

ELI LILLY

Indianapolis, Indiana

Tick-tock. After being named Lilly’s new CEO, you sent each top executive a digital clock
counting down the time to October 23, 2011, the day that Lilly’s 20-year patent runs out on Zyprexa, a
schizophrenia drug which generates $5 billion a year in revenue. On that day, Eli Lilly loses the exclusive
right to sell Zyprexa, and other drug manufacturers will begin selling generic versions for much lower
prices. Lilly has seven other major drugs that will fall off the “patent cliff” in the next seven years, and
stands to lose 75 percent of its annual revenue if it doesn’t generate new “blockbuster” drugs. Like a
Hollywood studio, Lilly needs to keep coming up with “blockbusters” in order to sustain profitability and
market share. Hence, the message inscribed on the clocks, “Do what we do,” that is, discover and
develop new drugs at Lilly. Tick-tock.

Lilly isn’t the only pharmaceutical company in this situation. Over the next three years, the
entire industry will see half of its revenues fall off patent as three dozen major drugs become eligible to
be sold as generics. When that happens, the company that held the patent typically sees sales of that
drug drop by 80 percent. Pfizer will lose an estimated $13 billion a year when Lipitor, the top-selling
statin, a cholesterol-lowering drug, loses its patent. By 2012, Merck will lose patent protection on its
three top-selling drugs, Fosamax (osteoporosis), Singulair (asthma), and Cozaar (blood pressure), which
account for 44 percent of its sales.

Unfortunately, Lilly has been here before, when its patent expired on Prozac, a drug for
depression, taken daily by 40 million people. Then-CEO Sidney Taurel said, “The situation we had in the
mid-1990s, of having 35 percent of our sales dependent on Prozac, won't repeat itself.” Taurel took
steps to energize Lilly’s drug development by increasing the research and development (R&D) budget by
30 percent, hiring 700 new scientists, and instructing Lilly’s 7,000 researchers to focus on drugs that
could produce 500 million dollars a year in sales. This time, however, expanding headcount and
increasing R&D budgets aren’t options. With the potential loss of so much revenue, you had to lower
costs. Accordingly, you laid off 5,500 workers and cut $1 billion in annual expenses. Less Funtleyder, an
analyst at Miller Tabak & Co. in New York, said, “It’s been another tough year for Big Pharma [cutting
37,000 jobs]. Lilly is not in this boat alone, by any means. But they probably have the biggest immediate
challenge, because their patent cliff is so steep.”

With those short-term steps behind you, the long-term challenge is to grow Lilly’s drug pipeline?
But how? You need to encourage faster, less expensive innovation, which is never easy. Some think that
large budgets, centralized approval for allocating research dollars, and siloed research (where few know
and understand what others in the company are working on) stifle innovation and slow the decision-
making process. If that’s the case, what might Lilly do internally to restructure itself to improve
communication in product development teams and speed up the entire drug development process?
Also, if the traditional company structure used by pharmaceutical firms, typically functional, product, or
matrix structures, haven’t been successful at encouraging drug development, are there nontraditional
organizational structures that Lilly could use to do so that can also help to speed development and lower
costs? Finally, to what extent should Lilly outsource parts of its drug development process to outside
vendors and companies? Because you risk creating new competitors with your own dollars when you
outsource, a general guideline is to only outsource noncore business activities. But when you’re a
pharmaceutical firm, drug development is the core of your business. Is there a way for Lilly to effectively
outsource drug development that gets around those risks? Tick-tock. Tick-tock. The clock is running.

If you were Lilly’s CEO, what would you do?