Innovating at the speed of the 21st century in pharmaceuticals

| Commentary

Eli Lilly and Company is an innovation-driven biopharmaceutical company that aspires to make a significant contribution to humanity by improving global health in the 21st century. In this article, part of our Biopharma Frontiers series on how the pharmaceutical industry is evolving and how leaders can adapt, David A. Ricks, the chairman and CEO of Eli Lilly, discusses the opportunities and rewards for innovation and the implications for industry business models. This article is an edited summary of his conversation with McKinsey.

By any measure, pharma is better off today than it was five years ago. Theoretical advances are being turned into biomedical research and then into products that transform patients’ lives. But ideas can take as long as 15 years to play out because most advances—genomics, mass-produced antibodies, new drug platforms, and clinical insights—are highly iterative. For those excited about mRNA therapy or the next new thing, it’s a reminder that we need to invest wisely and be confident. The past three or four years have been very good, but they reflect effort over a long period.

Today’s industry is undergoing a shift toward specialty medicines for acute diseases and away from primary care for big populations with less-severe conditions. That’s partly because of the problem in demonstrating a meaningful difference for patients relative to standard of care. If you have melanoma and a PD-1 inhibitor improves your life expectancy from six months to three years, everybody gets it; we don’t have to develop a lot of real-world evidence about quality of life and patient-reported outcomes. But when improvements are more incremental, people struggle to see the value—even though it’s not incremental at all if you add it up over millions of people.

Accelerating innovation and product life cycles

One of the reasons we like our industry is that it’s sustainable: you invent something, and then you have a decade to plan the next thing. But now we’re entering an era where the biopharma innovation machine is working at a pace that outstrips the life of the patent. For the first time, we’re seeing technical obsolescence in pharma, where the product life cycle is shorter than the intellectual-property cycle. That’s already happening in virology and beginning to happen in oncology. The losers will be those that can’t innovate fast enough.

Paradigms can be changed, as we’ve seen in oncology. When you don’t have off-target toxicities—adverse effects on targets other than those intended as part of the treatment—you can think differently about regulatory review. And when you’re treating an acute disease such as cancer, you don’t have the long-term risks. Regulators have adapted, and so has drug development.

Now we’re looking at something like five years from the first human dose to approval for targeted therapies in oncology. A couple of years ago, the average was ten, so that’s a profound change. If you consider the industry’s current carrying costs and running costs and R&D infrastructure, cutting development times in half would be fundamental. The question is, can you reduce development times in areas beyond oncology?

There’s potential for highly targeted therapies for infectious diseases, but chronic diseases will probably come later, because predicting long-term side effects is still very difficult and it’s a regulatory issue. Even so, we’re seeing things speed up, especially in patient-recruitment times. Lilly’s average prelaunch period is about nine years from the first human dose to approval and marketing. On average, about three years of that is spent recruiting people into the study. If we could organize everyone at the beginning, we’d go from nine years to six, which would create profound advantage and get therapies to patients faster.

Rethinking portfolio management and strategic focus

Therapeutic areas are getting so large that we’re seeing pure-play companies of real scale in segments such as oncology. There’s enough value in some segments to focus on them exclusively, with markets of $30 billion to $40 billion or more. This specialization will speed up learning curves and timelines, but it also creates new risk because a disruptive innovation or a change in government policy can change your business model overnight. This takes pharma companies back to the age-old debate on focus versus diversification.

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At Eli Lilly, we’ve chosen to tighten our focus but not become a pure play in anything. That’s a hard path, but we think carefully about how we stack up against the companies that specialize in a segment, such as diabetes, and what role is played by portfolio effect. It’s not just about products but expertise. There’s only so many people in a given field who can do world-class drug development; do they work for you or someone else? The war for talent is escalating, particularly in hot areas such as immuno-oncology.

Getting rewarded for innovation

Once you’re past drug development, you need to think about how you launch your drug. I think the industry, regulators, and payors all have an opportunity to get more sophisticated about what it takes to launch a drug in a given therapeutic area and get it reimbursed. We’ll see more of a value-pricing concept in which pharmaceutical companies get paid for the value they deliver to patients. You’ll probably lose out if you don’t meet the innovation threshold that gets rewarded, but there are benefits, too. You can develop a big data package in a sample size similar to your population so that you can say to a payor, “If you pay $10 a day for this therapy, you’ll save money. Let’s measure it together, and you can decide whether or not to renew.”

The next evolution is saying, “We believe in our data, and what we want to get paid for is the value created in your population.” A lot of healthcare reform is about shifting risk around in the system. This new step will shift risk to the innovator on delivery but remove the bigger risk of uncertainty, driving down pricing. That’s exciting, and it will help our business model if we can manage to execute and build trust with payors.

Being able to use data in this way will also shift the burden of proof to other parts of the healthcare system. People will be forced to measure how efficient a hospital visit is and how effective primary care is at maintaining chronic diseases. Whenever we go out and measure these things, we see how high the bar sometimes is for medicines relative to all this other stuff. And we know a lot about medicines from controlled experiments.

The risk companies have to consider: Will our trial results extrapolate? Did we run a tougher test than the general population, or an easier one? People will have to think about making their Phase III design robust enough to scale. But more relevant data is something that could change the industry and make it grow in a static healthcare market.

At Lilly, we need to tell a story of pure innovation that creates step-change improvements in patients’ lives, such as insulin that takes effect immediately so people with diabetes don’t have to measure what they eat. But then you have the competition between pure innovators, incremental innovators that take off-patent products and make them more convenient, and mixed models. We believe the market needs to sort that out. The rules of engagement globally aren’t good at recognizing these differences, and as a result we’re probably under rewarding innovation and over rewarding other things.

Externalizing in R&D and beyond

At Lilly, if we see a new technology where we can supplement our know-how with a partner’s, it can be very powerful. We’ve had a lot of success in our external portfolio by taking options in product-focused companies that are set up and run with a single purpose. It’s a crisp, fast, capital-efficient model. We look at the opportunities and get to an answer, and if it’s no, we don’t waste our time and money. But if it’s yes, we’re happy to invest because we’d still be working on the problem ourselves if we didn’t.

Biopharma Frontiers: What the future holds for the industry

Biopharma Frontiers: What the future holds for the industry

Recently, pharma has seen a lot of deals of one kind or another, and they will continue. In the preclinical and early phases, all the evidence shows that biotech has been much more productive than Big Pharma, and trades have rocketed as a result. But Big Pharma has a huge advantage in getting capital in the late and go-to-market phases. Outside a few specialty markets, we still don’t have enough new breakout companies, and they’ve yet to show they can take a beginning-to-end approach that’s different from or better than what the old familiar names are doing. But some leaders have said, “Let’s tap into that improved productivity in early R&D.” Capital allocators and venture capitalists and even early IPO players are much more stringent than Big Pharma has been with its assets, so they get the productivity.

When I go to my research team, I don’t talk about which therapeutic areas (TAs) we want to get out of; others do, but you risk becoming an uninformed buyer and losing your core capability in this new TA-focused world. Instead, my vision is to compete in a much more transparent way so that your internal teams think they’re competing for your resources with a venture-backed company, and vice versa. But there’s a frictional cost to deal making, though the productivity advantage on externally sourced assets has so far been enough to overcome it at the scale of the overall industry. Hence you see all the Phase I and Phase II asset sales going on. We’re probably finding a market equilibrium.

So what’s next? Maybe more early investing in options and rights by Big Pharma and making the membrane between internal and external teams more permeable. The other place where companies could be more aggressive is later in the life cycle. Because of the stickiness of everything we do, there has been less commoditization than perhaps there should be, whether in manufacturing or services such as pharmacovigilance. Some activities, particularly those late in the life cycle and at launch, are too strategic to trade out. But in early phases, you have expertise gaps, and post-launch, when things are stable, our cost structure is probably not as competitive as it could be. By pooling resources, we might be able to develop a shared model that creates value for everyone.

Today’s industry is more volatile than before because of competitive pressure, the innovation cycle, and companies responding to margin demands from investors. But the gains for winners are bigger than ever, and so too will be the downside for those who lose. Being nimble, fast, and attuned to the outside world and having the right people—all these basics matter more than ever.

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