Wednesday, September 16, 2009

The Business of Diabetes: Lilly Layoffs, Re-Org

It's been a while since I did one of my "Business of Diabetes" postings, but on Monday, September 14, 2009, Eli Lilly and Company announced it would eliminate some 5,500 jobs (or about 14% of its workforce) over 2 years and reorganize the company into 5 business units. The move was mainly an effort to to slash $1 billion in costs, which was big news for Wall Street as well as for Indiana, which has the lion's share of the company's employees. However, the layoff figures exclude hirings in high-growth emerging markets and Japan.

The company said the cuts and restructuring would (somehow) help it speed medicines from its pipeline to patients (although it is arguably more about slashing overhead costs than it is bringing products to market faster).

"It's clear we need to accelerate the flow of new products," said John Lechleiter, Lilly's chairman and CEO. "We really need to make some significant changes."

However, for diabetes patients, the layoffs aren't really a concern unless you happen to live in Indiana, but the latter part of the announcement is probably more meaningful. Until this reorganization, Lilly was organized around "functions," with separate U.S. and global marketing operations for each drug.

The 5 new Lilly business units that were announced are 1) cancer 2) diabetes 3) established markets 4) emerging markets and 5) Elanco, its animal health business. In a rare change, this move will leave the developer of Prozac and Zyprexa without a separate business unit devoted exclusively to mental health, as the neuroscience business will now be folded into the "established markets" business unit (the largest of the 5 businesses named). Meanwhile, diabetes, which was previously folded into a more generic "endocrinology" business with separate marketing organizations around the world, will now be given its own business unit which reports directly to CEO John Lechleiter, with profitability responsibilities.

The stated criteria Mr. Lechleiter used to establish Lilly's new diabetes business unit was as follows:

"Diabetes - Lilly has long been a leader in diabetes care, with a dedicated asset base and a portfolio of commercially successful products and promising pipeline opportunities. The need for new and improved treatments for patients with diabetes is great: an estimated 246 million adults are affected worldwide. In addition, Lilly remains one of only a few global insulin suppliers."

Company spokeswoman Angela Sekston said there was more room for growth in the diabetes market, as incidence of the disease, which is associated with other health problems, are mushrooming.

For patients with diabetes, this re-organization establishes a diabetes business unit which reinforces not only the company's commitment to the diabetes business (some speculators a few years ago had questioned whether Lilly might consider selling the insulin business, one of the core businesses upon which this company was built), but it also ensures more consistent investment in and prioritization for the diabetes business, which had been eclipsed by mental health and other businesses in recent years which were deemed faster-growing and therefore more deserving of research dollars. Perhaps with responsibility and a budget, Lilly can re-establish this as a core business, but the path will not be easy thanks to numerous missteps taken by the company over the past 15 years.

The leader chosen for the diabetes business, is Enrique A. Conterno. Conterno has served as president of Lilly USA, the company's U.S. business operations since January 2009. Conterno served as senior vice president of healthcare professional markets for Lilly USA.

Mr. Conterno was Born in Lima, Peru, and earned his bachelor's degree in mechanical engineering from Case Western Reserve University in 1989 and then earned an MBA at Duke University in 1992. He joined Lilly as a sales rep in 1992, and rose through the ranks at Lilly over the years. For example, from 1993 to 1995, he held roles as a financial analyst, marketing associate, and business development manager. In 1996, Conterno became sales and marketing director for the Peru affiliate for Lilly, and in 1998, he became the sales and marketing director for Lilly's affiliate in Brazil. In 2000, Conterno was named executive director of marketing for the intercontinental region and Japan. Conterno served as president and general manager for Lilly's operations in Mexico in 2003, and was named vice president of Lilly USA's then-neurosciences business unit in July 2006.

Clearly, Mr. Caterno brings practical, first-hand experience (especially in marketing and international operations), but he's not a medical doctor or scientist, he's a businessman. Given his experience in developing markets such as Peru and Brazil, he undoubtedly has a global perspective. But his perspective which may be different than Novo's, which aims to "convert" the world (regardless of cost) to proprietary, patent-protected proprietary molecules (e.g. "analogues"). Lilly's recent focus has been mainly on the type 2 market, which explains why the insulin business has been allowed to see such radical market share declines. Hopefully, this move will enable the company to refocus its efforts on sales channels it has long ignored, notably the pharmacy benefits managers (PBMs) who pay for 80% of all drugs sold in the U.S. today.

Because Lilly was late to negotiating deals with PBMs who manage the formularies for many insurers, it has lost market share rapidly to rivals Novo Nordisk and Sanofi Aventis, both of whom have cut deals with this enormous but largely invisible player in the supply chain. Most insurers want deals that include both a rapid acting analogue and a long-acting analogue, and because Lilly only offers Humalog, PBMs are forced to cut deals with either Novo Nordisk for Levemir or Sanofi Aventis for Lantus, and most healthcare formulary managers prefer to minimize the number of different suppliers they deal with, not increase them.

Although Lilly's diabetes business remains big, it has arguably been poorly managed in recent years. For example, its insulin business has fallen from #1 in U.S. insulin market share with about 83% share to #3 with less than 40% share today. It's Humalog rapid-acting insulin analogue has lost share to rivals, and to make matters worse, it's patent expires in 2013, a little over 3 years away. Lilly's insulin business has lost significant market share to Danish rival Novo Nordisk in recent years (as well as Sanofi Aventis, which does not even offer a full insulin product line in the U.S.), and it stands out as the only one of the global insulin manufacturers that does not presently have a long-acting insulin analogue -- in fact, the company offers no basal insulin today. Although the company claims to working on something to compete with Lantus, the fact is that there is nothing imminent. In fact, the company's basal insulin analogue is not even yet in Phase 1 human clinical trials. Interestingly, the company has 2 products, one being an autoimmunity treatment, and another being a beta cell regeneration treatment, both of which are further along in development than it's competition to Lantus and Levemir. Most of it's diabetes innovations have come from partnerships, particularly with Amylin, and more recently with Macrogenics on an autoimmunity treatment and Transition Therapeutics, which signed a commercialization agreement for a beta cell regenerative therapy. Both are now undergoing late-stage clinical trials.

Last year, I reported that Lilly had "returned to its roots" in the diabetes business and had finally allocated some research dollars to that business.

What is not clear, however, whether Mr. Caterno can make up for years of under-investment in the diabetes business. Lilly may be forced to partner with others besides Amylin to bring products to market sooner, rather than the traditional path of doing everything in-house. Activist investor Carl Icahn has bought a significant stake in partner Amylin Pharmaceuticals, Inc. but the fact that Lilly's cash was used to buy ImClone Systems, Inc. last year limits its ability to buy another company so soon after a major deal.

As I wrote a few years ago, these JDRF-sponsored partnerships suggest that Lilly's type 1 diabetes business strategy is evolving, and evidently, is quite different from Novo Nordisk's (which aims to keep patients with type 1 diabetes on insulin for as long as possible, and start those with type 2 diabetes as soon as possible). But the the work will not be easy, and as Lilly's patents expire rapidly in the coming years, there will be tremendous pressure on management to get new products on the market as soon as possible.

That, however, may not be in the best interests of patients, and the drug industry has a bad habit of rushing drugs to market by hiding research reports of adverse events and expanding drugs applicability to new patient groups too quickly. This means that Macrogenics teplizumab CD3 monoclonal antibody treatment could potentially be rushed through final-stage trials on newly diagnosed, and likely expanded to established type 1 patients as soon as possible (assuming it is FDA approved). But the question is whether we will learn about the adverse events of these treatments? That remains to be seen.

1 comment:

Anonymous said...

But the question is whether we will learn about the adverse events of these treatments? That remains to be seen.

Short answer: Only after the company has reaped huge initial profits and the dead bodies that have piled up in its wake can no longer be overlooked.

This interesting link shows just how promising Lilly's pipeline appears to be.