Industry Analysis

TABLE OF CONTENTS

Industry Analysis Business description & history Environmental Analysis Mission Statement Situational Analysis SWOT Analysis Five Force Model Strategy Formulation Strategy Implementation Competitive Strategy Analysis Strategy Evaluation Key Success Factor Reference

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Industry Analysis The Pharmaceutical Industry is a $300 billion industry. The high competition in this industry allows new entrants to enter the industry with low legal barriers. Competitors in the industry will engage in price competition and experience low product differentiation, along with trends of supply being greater than demand. The profit potential of this industry fluctuates from low to high, pending on your company’s success of research and development. One of the major factors of the Pharmaceutical Industry is the increasing elderly population which consumes three times as many drugs as any other population, and this population is increasing. The elderly population is expected to reach 690 million by the year of 2025.

Figure 1.1 shows changing expectations over the last nine years for the future growth, profitability and P/E levels of major drug companies. Sales Growth (left axis) - 3-5 year forecast estimates. Net Margin (left axis) - expected net margin in the next 3-5 years.

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Business description & history

Eli Lilly & Co. is among renowned pharmaceutical industrial leaders. The company employs more than 41000 people worldwide and has business spanning 158 markets worldwide. The company believes in exceeding customer's expectations by working creatively to understand the customer's needs and taking actions necessary to meet those needs.

The company started in May 1876 in Indianapolis by a 38 year old pharmacist and veteran of the US Civil War. Colonel Lilly had been dissatisfied with the ineffective and poorly prepared medicines at his disposal. He decided to form a company that would manufacture medicines of the highest possible quality, dispose the products to physicians and the company would be highly streamlined to incorporate the latest technology for pharmaceutical production purposes. Together with a young full-time scientist, he established the newest techniques in quality evaluation and laid the foundation for quality pharmaceutical products. This tradition continued with his son Josiah K. Lilly, Sr. and two grandsons Eli Lilly and Josiah Lilly Jr. Their management style, corporate culture and corporate philosophy continue to progress and lead the company to the 21st century. Today Eli Lilly & Co. generate net income $2.56 billion (2003 estimate) with sales growth of 14 percent. Pursuing a continuous growth strategy and progress in the field of pharmaceutical, the management continues to invest its income in various projects to discover new products to meet customer's needs .The company's mission is to provide for medical needs through internal research and production specializing in six core areas: "neuroscience; endocrine disorders; cancer; infectious diseases; cardiovascular diseases; and gene regulation, bone and inflammation”. Not only this but the 3| Page

new medicines discovered in the past decade include "treatment of cancer, schizophrenia, osteoporosis, diabetes and cardiovascular complications." Products include registered trademarks like actos, Alimta, Cialis, Evista, Forteo, Gemzar, Humatrope, The Humalog Family of Insulins, The Humulin Family of Insulin’s, Iletin II pork, ReoPro, Xigris and Zyprexa. In the past two years the company has streamlined its infrastructure to increase its pre-tax earnings. To achieve higher earnings Eli Lilly & Co. has been involved in many innovative production process including experiments with biotechnology and collaboration with other pharmaceutical companies.

Environmental Analysis Eli Lilly & Co.'s management is responsible for the development of its policies and governance controls. The company pride itself in designing, monitoring and revising its internal control system to provide the decision makers with efficient information. At the employee level, the company has set a code of conduct called The Red Book which applies to all levels of employees. From time to time the employees are appraised and any kind of violation of The Red Book results in punishment through legal actions Not only this but the company prides itself as a leading innovative pharmaceutical company that continue with the tradition of excellence by keeping at par with new tools and technology in the industry. The organization is to extensively capitalize on business opportunities and venture funds. Initiatives like Lilly Bio Ventures, Eli Lilly Venture Fund, and InnoCentive LLFC are evidence of these efforts. Not only this but the company and its management especially the CIO believe in the company's flexibility to be able to meet the challenges within the business environment. Integrating information systems and developing an IT based infrastructure of Sun Microsystems eased outsiders access of the company information and to communicate 4| Page

with internal business partners. Streamlining the internal structure not only enables the company effective address outside challenges but also to effective compete against other giants like Pfizer, Zenith Goldmine Pharmaceuticals, Inc., Dr. Reddy's Lab, Ltd. And Teva Pharmaceuticals.

Since the company is heavily reliant on the legal and political external environment a mere change in laws could greatly affect its performance. For example the pharmaceutical industry depends on intellectual property rights protection which allows the companies to innovate and invent new products. Violation could result in expensive litigation as well as recouping Lost business, investments and sales. Similarly, Eli Lilly & Co. realizes the importance of technology driving the industry which is why its success is greatly dependent on the IT infrastructure it maintains. Not only this but it also recognizes the contribution of the community and the academic institutions in helping it achieve new therapeutic approaches.

Mission Statement Eli Lilly is a global research-based pharmaceutical corporation headquartered in Indianapolis, Indiana, That is “Dedicated to creating and delivering innovative pharmaceutical-based health care solutions which enable people to live longer, healthier, and more active lives.”

Situational Analysis Strengths The Company has one of the most organized business infrastructures in the world. With branches spread out in 158 countries, there is great diversity and creativity pooled in the

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company for its management. The company does not believe in numbers of employees but in the number of quality employees who could greatly provide input for effective planning and decision making.

Together with its infrastructure, the employees at Eli Lilly are equipped with the latest technology to innovate and produce new products as and when the customers desire. Weaknesses

Despite this fact, Eli Lilly greatly depend on the government and the pharmaceutical regulators for its effective strategy. Legal suites as well as the struggle for retaining rights of protection have till now protected Eli Lilly from losing its top position. Yet, the management is fast losing its strategic edge as customers tend to take negative view of the financial losses as a result of these legal suites. Opportunities

one of the most important aspects that Eli Lilly has maintained throughout its history is the integrated approach to health care. Unlike other pharmaceutical companies that tend to specialize in particular areas, the company has committed itself in providing customers with integrated health care services and products. As a result it tends to infiltrate the health care system of the country. This approach greatly influences the kind of opportunities available for exploiting in the future. Threats Yet, the very factor that provides opportunities to the company remains to be one of disputable factors. This is because without specialization, Eli Lilly tend to avail only 6| Page

fragmented shares of the market which decreases its chances of attaining top position within the industry.

Five Forces Model Competitive Force 1: Rivalry among existing firms Eli Lilly is a leader in a somewhat competitive pharmaceutical industry. Its major competitors include Pfizer Inc., GlaxoSmithKline PLC, and Novo Nordisk. The pharmaceutical industry is high growth, high competition industry with product differentiation being the main industry driver. Lilly spent 705.5 million dollars in the 4the Quarter of 2004 in Research and Development. High Research and development cost for Lilly and its competitors lead to high

Product differentiation with new products being introduced on a regular basis. Lilly has 2 7| Page

new products in the final stages of FDA trials with a new product planned to be introduced in 2005. Lilly has also recently purchased a new compound from Merck Inc which shows promise in treating insomnia. The drug market has a steep learning curve which leads to Lilly being engrossed in steep competition with the other major drug companies. Lilly does, however, maintain a low fixed to variable cost ratio which leads to low competition on the basis of price. Competition in this industry is primarily based on product differentiation. The exit barriers in the pharmaceutical industry are very high which makes this industry that much more competitive. Lilly is a very specialized company, focusing solely on pharmaceuticals.

Competitive Force 2: Threat of New Entrants

The threat of new entrants into this highly specialized industry is very low. There is a big first mover advantage for those companies such as Lilly that have been in the industry a long time and have a big investment in research and development built up. This is a key to being competitive in this industry. It would be very hard for a company to make the move to pharmaceuticals due to the fact that it is such a specialized industry. There is a very steep learning curve in the pharmaceutical industry which also prevents competitors from entering the market. There is an already built up capacity in existing distribution channels that Lilly and its competitors have built up over the years. High marketing investments and established relationships with health care providers make it hard for new entrants to be able to cut in. There are also high legal barriers to the pharmaceutical industry with new products having to go through an extensive testing and approval process from the FDA.

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Competitive Force 3: Threat of Substitute Products

In the pharmaceutical industry there is a somewhat substantial degree of product substitution with many drugs being offered to treat the same illness. The threat of substation lies not with the end user, but with the doctor that prescribes the medication. Drug companies such as Lilly spend a great deal of resources to send out drug reps. to inform doctors of new drugs on the market. In order to have an advantage over its competitors a drug company has to spend extensive amounts of money on research and development costs, as well as marketing in order to discover and sell new and innovative drugs. The drugs ability to successfully cure whatever illness it is designed to cure is the basis of the industry. Therefore, the company that comes out with the best drug will have a considerable share of the market for curing that particular illness for as many years as it has a patent on that drug. Once the patent expires, however, rival drug companies can make generic versions of that drug and can be able to re enter the market for that particular illness. This potential for other drug companies to eventually be able to take away a share of the market is what drives up the research and development costs of pharmaceutical companies. They are always on the lookout for better performing drugs to introduce and re gain their share of the market.

Competitive Force 4: Bargaining Power of Buyers

The bargaining power of buyers is intermediate in the pharmaceutical markets the same holds true for Lilly and Co. Two elements of bargaining power of buyers are price sensitivity and relative bargaining power. Buyers are less sensitive to price because Lilly produces some drugs that have no substitutes and are not replicated in the generic drug markets. Buyers are 9| Page

more sensitive to price when generic drugs are available. Relative Bargaining power of buyers is intermediate because drugs are prescribed by a Doctor and the buyer does not have the option of switching products if the price is too high, but if a generic drug is available, the consumer can opt not to purchase the brand name drug. Therefore the bargaining power of the buyer depends on what a Doctor tends to prescribe, and the status of patents and available generic counterparts.

Competitive Force 5: Bargaining Power of Suppliers

The bargaining power of suppliers is low because there are many drug suppliers that produce generic compounds that are used in a great number of pharmaceutical products. Lilly purchases large quantities chemicals and chemical compounds many of which are used in more than one type of drug. Lilly can choose from a plethora of companies offering the exact same materials, therefore bargaining power of pharmaceutical suppliers is low. With high bargaining power over suppliers, and buyers with little bargaining power, Lilly can increase profit margin on their products by increasing retail prices and decreasing supplier prices.

Strategy formulation: Review strategic decisions the company has formulated during its development and growth. In the past, the company has been engaged in access and cost-containment measures. This strategy basically provides the customers with the choice to access particular medicinal needs within the cost range. With the help of Medicaid and Medicare, the US population has greatly benefited from this structure and Eli Lilly wants to capitalize on this fact by prescribing only effective medicines without redundant costs associated with medical treatment. 10 | P a g e

On the other hand, from the production point of view, Eli Lilly has been involved in various ventures to produce new treatment and medicines based on its research and development department. This has been critical to the growth of the company due to the fact that the industry is heavily reliant on new and innovative technology for producing new products and medicines. However, the past the government has levied restrictions on and off which has altered most of the strategic efforts by the company. For this reason, earnings have decreased significantly.

To resolve the government has again altered its policies pertaining to the pharmaceutical companies for the next few years by inducing R&D processes and rewarding innovative efforts. The FDA has approved new methods for treatment of diseases like leukaemia and such research development efforts so as to promote US pharmaceutical companies.

Strategy Implementation The restrictions and the new regulations have to be accommodated by pharmaceutical companies and Eli Lilly is not indifferent to this approach. Eli Lilly realized the importance of the information system and how it would allow the company to remain connected, communicate, generate funds, create awareness as well as announce its new strategies. By implementing its IT infrastructure, it has in one achieved communication needs for both stakeholders and shareholders. Half the competition is won as its internal customers has become greatly satisfied with the ease and usefulness of the database of information for R&D and innovation purposes. To further the strategy, the company equipped its offices with computing power, data and storage capacity via private networks so as to institute research and development at all levels Not only has this but Eli Lilly also been involved in change process management. Through 11 | P a g e

process re-engineering approach, it has been able to mediate its business models to various segment of the business. Entrepreneurial groups as well as e-enterprise groups could also join in with the company with least cost structure. The problem of innovation is thereby resolved through this strategy.

Competitive Strategy Analysis With health care on the rise there are a significant number of pharmaceutical companies in the market. Lilly has created a competitive advantage by differentiation of their drugs. With the production of drugs like Strattera, which is the first non-stimulant medication approved by the FDA to treat Attention Deficit Hyperactivity Disorder, other companies cannot produce a substitute or a replica. This gives Lilly a sustaining competitive advantage because it sets them above their competitors and that is why they are becoming the leading pharmaceutical company in the market. Another way that Lilly sustains a competitive advantage is through their superior product quality and variety. They will conduct pre-clinical trials to obtain proof of safety and effectiveness before any human ever takes a new drug candidate. Lilly also offers a wide product pipeline of superior drugs that have hit the market in the past three years. The drugs are related to curing osteoporosis, bipolar depression, type II diabetes, and also ADHD in children and adults. Last but not least, and the most important factor in obtaining a competitive advantage is the investment in research and development. With one of the top five total operating revenues in the pharmaceutical industry, Lilly is also ranked fourth in money spent on research and development in 2003. Lilly has capitalized on their resources and has recently built new 12 | P a g e

research laboratories in Indianapolis to compensate for their 8,800 scientific employees. Lilly is not just limited to the United States but also does clinical research and development in many other countries. They now own manufacturing plants in other countries which is advantages since there products are marketed in 138 countries worldwide.

Strategy Evaluation From the above analysis, it is clear that Eli Lilly's operating environment is highly complex. Not only does the company compete at the local level but it is also competing at the global level as well. Issues like intellectual property rights, trade marks, brands and research rights all require great participation of the local governments and industrial leaders to formulate legal frameworks for the protection of companies. However, not all governments are the same. In some countries there are few regulations while in other regions of the world, medicinal rights are very strict. Not only this but it is also clear that the local companies may pose as threats to Eli Lilly as they have a better legal standing with the local government as compared to Eli Lilly which is a multinational companies. Nevertheless, the current model of grouping entrepreneurs from the local level works efficiently as it addresses the local needs as well as the company's needs to have an edge over competitors. Ventures like Eli Lilly Venture Funds and Eli Lilly all contribute to this direction.

Another aspect of the company is that it relies greatly on the FDA for formulating internal regulations and policies. Much of the research and development strategy reflect the FDA's incentives. The lack of internal original infrastructure that is immune to the external environment pose a great threat to Eli Lilly in the future. 13 | P a g e

The company's resources which are directed towards governmental endeavours and FDA directives would render useless and result in losses should the FDA alter its regulations. Consequently, these decisions taken by the company may in the long run result in unbalancing the company's position. Instead what Eli Lilly should be doing is formulate objective base strategies that would allow the company pursues organizational goals or project goals. These projects should utilize pooled resources instead of allocating resources to infrastructure utilization which would save on investment cost in the long run and increase market capitalization.

Key Success Factors One of Lilly’s greatest key success factors is its capability to create strategic alliances and marketing partnerships with other thriving corporations. Lilly joined forces with German firm Bushranger Ingelheim Pharmaceuticals to market the anti-depressant drug Cymbalta. Despite having to withdraw its application to sell the product as a treatment for stress urinary incontinence in the U.S., the drug generated $61 million in the fourth quarter of 2004 in Europe. Lilly also has an alliance with Amylin Pharmaceuticals, Inc., to collaborate on the development and commercialization of exenatide for the treatment of type 2 diabetes. Another success factor of Lilly is its brand name products. Drugs such as Strattera and Cialis have proven to be very effective among consumers throughout the years. Lilly is committed to the improving the quality of their products and maintaining the integrity of the data that supports the safety and effectiveness of their drugs. The success of these products creates even better credibility for Lilly and Company.

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Lilly’s marketing ability is a success factor that is directly related to its financial success. The company ran a 60 second commercial spot advertising the male enhancement drug Cialis during the 2004 and 2005 Super Bowl championship games. The Super Bowl is the mostwatched television event in the U.S., and would provide an extremely large viewing audience. Each 60 second commercial costs about $6.8 million, which shows the financial stability of this powerful company. Sales of this drug totalled $153 million in the fourth quarter of 2004 due in part to the marketing strategies of Lilly. Lilly’s ability to market and sell its drugs all over the world is another one of their key success factors. Lilly’s drug Cymbalta has been approved in 30 countries to aid major depression. Lilly’s ability to sell and market drugs outside the borders of the U.S. open the market up for more potential customers. Lilly announced a seven percent increase in its dividend effective for the first quarter of 2005. The increase in dividends shows that a leading innovation driven corporation such as Lilly is profitable and will continue to grow in the future. Pfizer, one of Lilly’s biggest competitors, was accused in 1999 by Public Citizen of withholding evidence about the link between its pain drug Celebrex and heart problems. This mistake on Pfizer’s behalf caused customers to lose trust allowing other competitors such as Lilly to gain a competitive advantage. This also shows that Lilly is not the only company that faces the problems with information disclosure. Lilly’s ability to develop, manufacture, and patent drugs before its competitors will also give Lilly a competitive advantage. Lilly currently has patents on the ingredients in drugs such as Zyprexa, Humalog, and ReoPro. New drugs such as Alimta for cancer treatment, Cialis for erectile dysfunction, and Strattera for ADD accounted for 20 percent of Lilly’s 2004 fourthquarter sales. Eli Lilly also acquired Applied Molecular Evolution, a research and development company that is recognized as a leader in optimizing and developing human bio 15 | P a g e

therapeutics, in February of 2004. This acquisition will aid Lilly in discovering new drugs for the future. Pharmaceutical companies also face the threat of competitor’s ability to create generic drugs. These companies can sell the same product at a lower price due to lower research and development costs. Lilly has the ability to create generic drugs while also maintaining its edge in the market of new drugs. .

Reference http://www.termpapergenie.com/advertising.html http://www.phrma.org/ http://www.lilly.com/ http://www.imdb.com/ http://www.commentwire.com/commwire_story.asp?commentwire_ID=6311 http://www.fool.com/news/mft/2005/mft05020220.htm http://biz.yahoo.com/prnews/ http://edgarscan.pwcglobal.com/servlets/RunQuery? goal=wf_next_region&accession=0000...

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