Eli Lilly Possible Preparation Questions

1. what are tradeoffs of options?
2. how would each help strategic goals?
3. NPVs of alternative investments?
4. recommendations?

Operations Perspectives:
• High potency products would be more costly to keep in finished goods inventory and thus it makes sense to consider reducing them (pg 9 – Eli).
• Timing of new products may be a critical factor (e.g., wait costs increase and millions could be lost in potential sales). Also, “the period of market exclusivity and price flexibility was reduced, companies began to understand the value of getting a new compound to market as quickly as possible…” (pg 5 – Eli).
• Is flexibility more akin to risk pooling (increasing NPV cash flows)?

TRADEOFFS w/FLEXIBILITY:
Decreased utilization and increase in operations expenses (per year), but there is an
increase in flexibility, a decrease in the wait costs, and an increase in service.
From introductory perspective, this increases responsiveness.

*** Process Focused? Flex for product proliferation?

Continuous flow?
FLEX PROD = INCREASED VARIETY = FAST RESPONSE TIME
= INCREASED INNOVATION

DRIVERS FOR FLEXIBILITY:
(1) shorter product life cycle
(2) increased new products introduction
(3) unexpected competition (generics, rivals, etc.).
(4) demand/FDA approval uncertain

COMPETING WITH TIME:
(1) flexibility can reduce lead time
(2) flexibility may reduce informational flow/costs

MARKET/INDUSTRY (PORTER) ANALYSIS:
Potential Entrants-Eli Lilly faces constant pressure from potential entrants who may either develop a competing generic product or a drug from a similar family, w/o having to incur the R&D costs. They may also be able to set lower prices and even influence Eli to lower prices as a result.

Rivals- Eli Lilly faces significant threats from rivals in both US and Europe, who also possess large R&D budgets. They may be able to get a product out sooner (patent, etc.) and derive a first-mover advantage, or they may introduce a substitute that could erode the profitability of Eli’s products.

Buyers- Buyers are progressively represented by 3rd party payers (45% in 1991 from only 4% in 1960). HMOS and other types of managed care networks actually account for 64% of purchases in 1992 and are expected to grow to 75% by 1995. Their buying behavior (bulk purchases and relying on formulary lists that use only 1 or 2 drugs for every condition) result in discounts as low as 60% from pharm.companies.

Government: Threats come through the FDA regulatory process (ability to reject drugs and length of approval wait) as well as through the suggestion of price ceilings (the pharm. Firms proactively limited price increase for a period to prevent such regulation). In addition, the 3rd party payers (Medicaid/Medicare) become threats by commanding the cheapest possible prices on drugs.

Substitutes: A constant threat represented largely by generic drugs, which don’t have to
worry about recouping R&D costs. In 1993, roughly half of all prescriptions in US were filled generically compared with 2% in 1980 (they are typically priced 30-60% lower). Between 1993 and 1999, patents would expire on branded drugs that represent 20B in sales and generic drugs were expected to capture a significant share of those sales (pg 4 -Eli).

Suppliers: Probably the least of their threats, since many chemicals/compounds used in production are commodities. This may actually be an area of opportunity in that they can outsource to suppliers to save additional costs.

OPPORTUNITIES AND THREATS:

Threats-
• No blockbusters were far along the development pipeline in 1993.
• Avg. cost of goods as % sales went from 10% to 20% from 1980s to 1990s.
• One forecast put cost goods sold to 60% by 2000.
• Govt. intervention.
• Newer drugs required costly containment facilities to deal with the highly potent compounds and production.
• More stringent FDA/EPA regulations

Opportunities:
• Can create more value by reducing production costs.
• Can create more value by exploiting core competency (superior skills/resources -such as implementing it faster and cheaper).
• Can protect from mkt. risk by flexibility this strategy will consider the demand risk better.

** The lifecycle of pharmaceuticals appears to be toward maturity/decline (e.g.,nR&D grew from 1.1 B in 1975 to 12.6B in 1992, but # novel drug compounds only improved slightly). Thus, low cost (maturity) and innovation/flexibility (decline) should be considered with respect to strategic needs.

** From above, it may also make sense to augment the product-process matrix accordingly; such that, as the demand for high-volume drugs (i.e., low concentration) declines, we may want to move backwards to a batch flow or job shop process (not assembly line, high volume facility).

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