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Lilly Looks For A Shot Of Adrenalin


The Corporation

LILLY LOOKS FOR A SHOT OF ADRENALIN

A few months before Vaughn D. Bryson became Eli Lilly's chief executive last November, he spent a week at a baseball "fantasy" camp in Vero Beach, Fla. The former college first baseman, who played pro for a summer before joining Eli Lilly & Co. as a salesman in 1961, picked up pointers from such former Dodger greats as Duke Snider, Roy Campanella, and Steve Garvey--and posted an impressive .333 batting average. As Bryson modestly explains: "Everything's a hit in fantasy camp."

If only the same were true for Lilly. As he celebrates his first anniversary as CEO of the ninth-largest pharmaceutical company in the world, Bryson has a long way to go before he can enjoy the same kind of glory he achieved at the plate. After years of stellar returns, Lilly's tradition-bound, slow-moving management style is beginning to take its toll.

PAST IS PROZAC. Without a major new drug expected in the near future, Lilly's existing line is looking tired. After surviving allegations that its top-selling Prozac induced violent behavior, Lilly's antidepressant drug is now facing growing competition. What's more, Lilly will lose key patent protections on its No. 2 product, the antibiotic Ceclor, in December. These two compounds alone account for nearly a third of Lilly's $6.3 billion in estimated 1992 sales.

If that weren't bad enough, Lilly's medical-device and diagnostics businesses, once the company's fastest-growing endeavors, have run afoul of regulators. Last May, Lilly suspended production of its emergency heart defibrillator after the Food & Drug Administration turned up a number of manufacturing violations, such as poor monitoring and record-keeping. On top of that, Lilly's Advanced Cardiovascular Systems Inc. was forced to halt shipment of a key catheter for several weeks because it failed to file proper documents with regulators. These and other problems are attracting closer regulatory scrutiny, says Ronald M. Johnson of the FDA's compliance and surveillance office.

The mounting strain became apparent on Oct. 20, when Lilly posted a bruising third-quarter loss of $269 million, after a profit of $297 million a year ago. Much of the red ink is due to $720 million in restructuring and accounting charges, including a $245 million write-down after consolidating some manufacturing operations. Although most of the charges are nonrecurring, it was a humbling experience for the Indianapolis-based company, which had boasted a 31-year string of profit gains. While analysts say Lilly's profits will rebound next year, they expect that earnings for all of 1992 will be down 43%, to $746.9 million.

IN FLUX. Ever since it was founded in 1876 by Colonel Eli Lilly, a pharmacist who served with the Union Army, Lilly has been one of the world's most successful drug companies. Its earliest coup was obtaining an exclusive license to produce and sell insulin in 1922. From then on, its earnings growth has been legendary and reached its apogee in the late 1980s. From 1987 to 1991, profits rose by an average 20% a year.

Unfortunately, Lilly's routine success bred a kind of rigid, bureaucratic management style. What worked in the past, Lilly managers believed, would always work. That kind of narrow vision even prevailed in research and development.

Consider Hybritech Inc., a San Diego startup that was developing a test for the early diagnosis of cancer when Lilly acquired it in 1986 for $300 million. Former employees say Lilly meddled too much and insisted on reviewing even minor decisions. Hybritech's original management team eventually quit, leaving the company in flux at a time when competition in the diagnostic field was intensifying. "Lilly took away the opportunity to work independently and make decisions quickly," explains David S. Kabakoff, a former Hybritech vice-president.

The bureaucracy also made Lilly slow to respond to events. That was amply demonstrated in 1989 when Scientologists, who oppose the use of psychiatric drugs, charged that use of Prozac led to violent and suicidal behavior. Lilly initially underestimated the threat posed from the allegations and didn't mount an effective defense until the following year. The controversy didn't die down until 1991, when the FDA gave Prozac a clean bill of health.

Bryson concedes that drastic steps are necessary if Lilly is to remain a top-tier drug company. He has already reshuffled the management of its medical-devices unit and is making progress in combating regulatory lapses. But a lot remains to be done. "I'm trying to communicate to this organization that success is not a birthright," says Bryson, a 54-year-old native of Gastonia, N.C. Lilly "is a company that needs to adapt to a changing environment while we still have a lot going for us."

ENERGIZER. Loosening up Lilly's starched Midwestern culture is a top priority for Bryson. Unlike his 65-year-old predecessor, Richard D. Wood, who was known for his highly centralized style--what some insiders called "command-and-control" management--Bryson encourages decision-making at the middle echelons. He has also made himself more accessible. A finance man, Wood lunched in the company's penthouse dining room; Bryson, a pharmacist who rose through the sales ranks, often eats in the cafeteria with Lilly employees. "Vaughn is willing to come downstairs to find out what's going on," says David W. Elliot, the new 32-year-old sales and marketing director at Lilly's Cardiac Pacemakers Inc. in Japan. "He has energized the place."

Bryson undoubtedly hopes a lot of that energy results in a new generation of products. But he has also taken some steps to encourage product development. For starters, he hopes to cut development time for new drugs in half, to 6 1/2 years. Bryson has also begun to draw on talent from outside Lilly, something that was unthinkable a couple of years ago. He has hired high-profile researchers from the National Institutes of Health and the Centers for Disease Control. "All the brains in the world are not going to reside in Indianapolis," he says.

Bryson is also expanding an ambitious plan to forge strategic alliances with young research companies that he hopes will pump new products into Lilly's pipeline. Since 1991, Lilly has paid nearly $200 million to two-dozen small companies to acquire minority stakes and marketing rights for products in development (table, page 70). The biggest deal so far is with Centocor Inc., a Malvern (Pa.) biotech company. In exchange for $100 million, Lilly received 5% of Centocor's stock and distribution rights to its antibiotic, Centoxin (page 71).

`GOBLINS OF ROUTINE.' By pairing Eli Lilly researchers with scientists from these early-stage companies, Bryson hopes to encourage innovation--both at the startups and at Lilly. "We must all overcome the goblins of routine," he urged in a videotape that was translated into 10 languages and viewed by Lilly's 30,000 employees earlier this year. To counter the "not invented here" syndrome, he is putting several hundred senior managers through a week-long management course that is supposed to make them more receptive to outside ideas.

Although there's a high failure rate among such startups, Bryson is betting that at least a couple of his investments will pan out. He is also confident that Lilly's own R&D efforts will produce some potential hits. That's one mf the reasons he continues to expand Lilly's sales force overseas. In April, Lilly bought the pharmaceutical subsidiary of Beiersdorf, a German health-care company, for an undisclosed sum, and it is now scouting for acquisitions in Italy. "To capitalize on the $350 million you've invested in a new drug," Bryson says, "it's in your best interest to take advantage of as many markets as you can as fast as you can."

Bryson's optimism about future products had better be justified. Prozac's share of total antidepressant prescriptions dropped to 18.1% in September, from 19.5% only this past February, because of growing pressure from competing drugs, such as Pfizer Inc.'s Zoloft. The more immediate concern is Ceclor, Lilly's $1 billion-a-year antibiotic. At least four generic-drug companies have already filed applications with the FDA to begin selling knockoffs when Ceclor goes off-patent in December. Lilly still holds several processing patents that are crucial to manufacturing the complex compound. Still, Ceclor "won't last forever," admits Ronald A. Matricaria, who next year will head up North American operations for Lilly's drug division.

For the moment, Bryson believes he can defend Lilly's market share. Lorabid, a new antibiotic launched in September, should make up for some of Ceclor's lost sales. Still, the future is tricky. Competition is growing. Development costs are rising. And the drug industry is losing its pricing flexibility as part of the backlash against high health-care costs. The company needs agility, speed, and a good eye for fresh opportunities. Only if it acquires those skills can Bryson coach Lilly to hit the home runs it will need in the years ahead.Julia Flynn in Indianapolis, with John Carey in Washington, Joseph Weber in Philadelphia, and Joan O'C. Hamilton in San Francisco


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