The Increasing Competitive Market

Eli Lilly Case

• Neeraj Manthalkar

Objective:

In the increasing competitive market of 1990s the company had set two main goals for the company to achieve:

1. To get the products to the market in 50% less time
2. 25% reduction cost

In order to achieve this, the company is considering changing its manufacturing facility. There are two options available (as of now) for the company to make a choice. They are:

1. Specialized facility for each product
2. One flexible facility for all products

Summary:

Company plans to bring three new products to market in 1996(three years from now):

Alfatine, Betazine and Clorazine.         

It takes a long time(usually 8-12 years) to develop a new drug and test it. The long process included testing the product for biological activity and toxicity in the laboratory, testing for safety and efficacy in three phases of human clinical trials, developing a process for commercially manufacturing the product, designing an appropriate dosage strength and formulation and submitting the product for approval by federal regulatory agencies. According to study, only one out of thousand products made it to the market. Also, the amount of a new drug that would be required for market was unknown. The cost to develop one new drug was around $359 million.

Therefore, to bring a product earlier into the market, the manufacturing facility and process had to be setup well before the FDA approval. This involved risk, as it could be well possible that the drug may not be approved. If a specialized manufacturing facility was to be set up for a drug before approval, and it did not get approved, the facility would have to be retrofitted for another new product. Usually, the cost to retrofit a facility was the same as building a new one.

Exhibit 1: Volume of drug required over time

[pic 1]

As shown in the exhibit above, the production volumes started relatively slow, increased over time and peaked at about the fifth year. After the 10th year when the patent ran out, generic substitutes became available and the sales tapered. With the increased competition, government regulations it was important for a product to be first in the market and enjoy some time of exclusiveness before other competitors developed product for the same category. For a large market drug, one year’s net sale was worth $175 million.

Exhibit 2: Manufacturing Facility Alternatives and Costs:

[pic 2]

Exhibit 3: The exhibit below represents the annual volumes required in kg and the capacity both the options offer:

[pic 3]

Analysis:

(1) Specialized facility