Eli Lilly and Company

Eli Lilly and Company

Case Analysis

March 13, 2006

Elli Lilly and Company

The case under analysis, Eli Lilly & Company, will be covering the positives and negatives with regards to the business situation and strategy of Eli Lilly. One of the major pharmaceutical and health care companies in its industry, Lilly focused its efforts on the areas of "drug research, development, and marketed to the following areas: neuroscience, endocrinology, oncology, cardiovascular disease, and women's health." Having made a strong comeback in the 1990's due to its remarkably successful antidepressant Prozac, was now facing a potential loss in profits with its patent soon to expire. The problem was not only the soon to expire patent on Prozac, but the fact that Prozac accounted for as much as 30% of total revenue was the reality Eli Lilly now faced. (Pearce & Robinson, 34-1)

Summary of Key Strategic Issues

In choosing to narrow its focus on its core pharma business in the 1990s, Lilly appears to have either deliberately or inadvertently made a choice to funnel their efforts into the category of neuroscience with the patented products Prozac and Zyprexa, Lilly's top sellers. Its imbalanced portfolio and lagging international sales was the consequence of its dependence on just a few key products. This type of a strategy with a focus on neuroscience was not well suited to the more cost conscious international regions whose focus was treatment of disease. Other factors that played against them were the regulations in non-US developed countries on pricing and payment programs for pharmaceutical drugs through national health insurance programs. Due to this fact, Lilly wouldn't have earned as high of a profit margin on its blockbuster drugs, Prozac and Zyprexa, in Europe and Japan as it did in the less price-conscious U.S. market.

Eli Lilly's recent decline in market capitalization was brought on through the rapidly changing market conditions, intensifying pressures of competition, rising R&D expenditures and the erosion of prices on leading products. Additional issues that seem to have hampered performance were their failure to meet international sales expectations, expiration of key patents, and its poor performance against competitors. On some measures this can be attributed to the fact that Lilly's rigid, centrally controlled operating structure did not fit well with today's rapidly changing pharmaceutical market environment. Although a culture change may be evident to boost company performance, "the leadership would without out a dought face resistance in any effort to lead organizational change at Lilly, especially change of organizational culture. "

(Greenberg, Jerald p 132-133)

External global conditions

The firm's external environment consists of three main sectors: the Remote Environment, the Industry Environment, and the Operating Environment. All of these environmental sectors affect the firm's operations both on an international and domestic level.

In comparing these conditions with Eli Lilly it's no wonder they were scrambling for an effective strategy that would keep them at the top of there game. The Remote sector is comprised of five factors that are not influenced by a single firm. The main factors are: economic, social, political, technological, and ecological. The managed health care programs launched by the Clinton administration had an effect on most of these factors. From this emerged PBMs to aid in helping control costs of pharmacy benefits programs. "Due to there profitability, some pharma companies retained these firms as part of there business portfolio." However, when Lilly tried using this for strategic benefits, it ultimately failed due to conflicts of interest. It may have worked better for Lilly to let the company run independently as a source of revenue. (Pearce & Robinson, 37-38)

The Industry sector is made up of the entry barriers, supplier power, buyer power, substitute availability, and competitive rivalry. These contending forces are of the greatest importance to the firm in strategy formulation. Lilly was heavily involved in strategic alliance for the benefits of R&D. They used this to strengthen their standing in the industry hoping that it would make up for the 30% in revenue they stood to lose with Prozac. Zeprexa was developed in the late 1990's that boasted sales of $1.4 billion accounting for 16% of company sales. This was a glimmer of hope that would become the next Prozac. Lilly also signed an agreement with Sepracor to help create a new form of Prozac that might allow Lilly to hold on to their exclusive rights to the patent. This inadvertently triggered an investigation by the FTC for alleged anti-trust activity.

The Operating sector of the external environment deals closely with competitors, creditors, customers, labor, and suppliers. In assessing the competitive position of the firm, the following criteria are usually dealt with: Market share, breadth of product line, effectiveness of sales distribution, proprietary and key-account advantages, price competitiveness, advertising promotion effectiveness, location of facility, capacity and productivity, experience, financial position, relative product quality, and R&D advantages/position. Although mergers would truly aid Lilly in strengthening their market position in all of the factors listed above, "it seems the companies leadership is content in (management and Board of Directors) maintaining their preference for "independence" over mergers." (Gadiesh, Orit & Buchanan, Robin P 12-17)

Porter's Five Force in relation to Eli Lilly

New Entrants

One factor that comes into play with Eli Lilly is the threat of new entries to the pharmaceutical industry. The threat comes into play through company diversification in mergers, acquisitions and product differentiation. In the case of Eli Lilly, as they continue to shrink, competitors are increasingly growing through acquisitions, mergers, and differentiation of product. New entrants to the industry keeps the game interesting and lively as the competition works to out do each other.

Buyers Bargaining Power

With an industry such as this, customers ranged from individuals purchasing over the counter pharmaceuticals to patients who are administered medications not having had a choice in the matter.