Fixing Innovation: Lilly's CEO Says Why, and How

John Lechleiter

Following his keynote address last week at the Financial Times US Healthcare and Life Sciences Conference in New York, Eli Lilly CEO John Lechleiter huddled into a corridor to speak with PharmExec about his agenda as incoming chairman of PhRMA, and how to fix innovation.

Ben Comer: Will PhRMA endorse a presidential candidate?
John Lechleiter: It’s not been our policy to endorse political parties. We support individual candidates who support our positions. We’ve been clear about what we think the important policies and legislation  are: those that at enable us to do the work of medical innovation, to make our products accessible and affordable for the people who need them, and that promote a balance between incentivizing new effective medicines and ensuring safety, which is very very important. I think in recent years you’ve seen evidence that we’re able and willing to work with people on both sides of the aisle to help achieve those ends.

The US leads the world in biomedical innovation, and we like to think we’re among the first to benefit from that innovation as well. That’s really at the heart of what we aim to do to keep this industry strong. And a strong industry will also control the rising costs of healthcare. We know that if medicines are  properly used, they will offset or eliminate other cost burdens; at  10 cents on the dollar, which is what medicines comprise as a percentage of total healthcare [costs], these are a great bargain. We want to make sure that the ecosystem that supports medical innovation is not undermined by wrong-headed policies.

BC: Do you have a wish list of changes to the health reform bill?

JL: I think the major thrust of our activity subsequent to the passage of the Affordable Care Act in March 2010  has been to call for the repeal of the Medicare spending advisory board, IPAB. We’re not alone. As laudable as the  objective of controlling costs might be, we believe it’s a system that is just not going to work. It’s not going to serve the interest of patients; it’s certainly not going to accelerate progress in medical innovation.

BC: Polls show the American public looks at this question and says, well, price controls on drugs is a great idea.

JL: There is a tendency to look at price controls or controlling input cost as some sort of a solution.  But every time we try that experiment it backfires; we’ve seen that at the state level. The mirror image of that, on the positive side, is Medicare Part D. This is a program where the discounts that the system reflects in cost savings are negotiated between third party payers and the pharmaceutical company; we compete to get on Humana’s or UnitedHealth’s Part D formularies.  The estimated costs of Part D over this 10 year period has dropped by $40 billion because of this market-driven approach, which also means  that more and more medicines are available as generics.  Access thus comes at much lower cost.  Our conclusion?  The market works.  At the same time, I think we have to adopt a mindset that says while we do want people to  access our medicines, no one should  stand between them and their doctor on a decision about what’s the best medicine. Again, our industry role in Part D scores high because  seniors in most Part D plans pretty much have access to the full formulary.

BC: What is the industry contribution to addressing the debt crisis in Europe?

JL: We’re paying a certain price already, with challenges we have on receivables in certain countries, on arbitrary price cuts and a more stringent application of cross-border therapeutic reference pricing.  Germany has  a new system in place for a little more than a year  that we believe works against innovation by setting very stringent access controls for new medicines, in some cases comparing new medicines to very old and largely antiquated off patent drugs. This does nothing to reward innovation. Despite that, given the chance, we can demonstrate that the new medicines that we’re producing do add value, and save money in the long term. The evidence is there but it is not always reflected or accepted in the systems of health technology assessment adopted by many European countries, led by Germany and the UK.  The UK is rethinking its system, and we’re going to have to look at that very carefully.  The goal is to work diligently with the NHS to make sure  the UK remains a place, as it has been, that rewards innovation.  It’s in the interest of all parties to continue to foster a viable R&D industry in the country.

BC: In your keynote, you spoke about the importance of the long term, and taking the long view as a prerequisite to innovation. Are there any ways that investors or other stakeholders might be persuaded to take a longer view, and are there any emerging financial tools or tax restructurings that could be brought to bear on that?

JL: That’s a good question. Certainly we’ve argued, when we get back to this notion of innovation as an ecosystem, that tax policy is very important. Domains for establishing tax liability is a key concern, as is making the US R&D tax credit permanent.  Right now, unless it’s reauthorized later this year by Congress, the credit will  expire. Other countries have permanent and frankly more robust R&D tax credit systems, so that’s one thing we need to look at. As far as  other structural ways of incentivizing innovation, I think at the end of the day the biggest incentive for any investor, whether it’s a venture capitalist or whether it’s a person deciding whether or not to buy Lilly stock, is a level of confidence that new medicines can be taken through a clear and well-defined pathway, with the prospect at the end – if it’s successful – of being rewarded by gaining access to patients and being able to price the product at a level commensurate with its value. That is the number one incentive for anybody wanting to invest in this area, versus investing in automobiles or steel or Facebook. Capital is scare and investors do have a choice. So while I think the tax structure is important – we like other industries  argue for a territorially-based approach – I don’t think that’s decisive in our case. It has to be evaluated in terms of the broader investment environment.

BC: Is there one overriding action that could be done to fix the innovation problem?
JL: There is no magic bullet. We’ve talked about IP  protection: we should have longer data exclusivity guarantees and better enforcement of global standards in other countries.  We need regulatory systems that are timely, consistent, predictable, and scientifically based. Opportunity for access and market-based pricing are key incentives as well. There are other things in the constellation:  immigration reform is one.  It’s hard enough for us to hire the best scientists, who may happen to be foreign born and who went to US universities; but then we have to fight to keep them here. Why do we want them to go back to China and compete against us? Or the K-to-12 education system in this country; if it doesn’t improve in science and math, it’s going to undermine our competitiveness even further. There are primary elements and secondary elements, but I think patent data protection, regulation, market access and market-based pricing are probably, from a policy domain, the areas that represent the biggest levers, where we will need to continue to do the most work.

We see some progress in Japan, the second biggest drug market in the world.  It recently ended its traditional approach of cutting prices every two years for new innovative products. So now we have the hope that there will be greater price stability in Japan for new patented products as they’re introduced, which is a tremendous incentive for us to invest more there. The government  also recognizes that  a lot of medicines approved outside of Japan have never been approved in Japan, so they want to close that drug lag. Specifically, they’ve said their regulatory system needs to become timelier, consistent, predictable, and science based. Dr. Hondo, the official  who runs Japan’s registration authority,  has hired more reviewers, review times are now more predictable, faster, more thorough, better communication with the companies.  This is real progress.  What’s happened as a result is that Japan is getting more medicines in a time frame that’s more consistent with the rest of the world.  The lesson is what  happens when you look at these levers I’m talking about, and make the changes required. You see more clinical trials taking place  in Japan and more new drugs are being approved, many of which are already on the market elsewhere. So reforms can  work.

BC: On Lilly. Do you have any thoughts on research work with academic institutions in terms of the value of those relationships?

JL: The traditional model of academic industry collaboration is evolving and that’s a good thing. Companies and academic institutions are taking different approaches. I think we have to recognize that t academic institutions have different cultures, and different approaches that they want to pursue consistent with their own mission.  This is a refreshing contrast from the  traditional quid pro quo:  here’s a certain amount of money, you do a certain amount of work, and we’ll see if we like what comes out or not. Through our open innovation platform, Lilly is partnering with over 200 universities, research institutes and biotechs around the world, to open our laboratories up as a way of testing molecules that these institutions synthesized or developed. A range of screens provide confidential data t that remains the intellectual property of the submitter. What we ask for is the first right to negotiate a deal, and we’ve struck several of these already, so this is one way that we are establishing a fairly broad connection with academic labs around the world. Other companies have chosen to do broader and higher-dollar cost partnerships.  Likewise, I think the tightening of funding at the NIH has caused academic institutions to think more positively about the merits of doing things with us, in  new ways.

BC: With respect to outsourcing, what are the core functions that shouldn’t be outsourced, if any?

JL: At Lilly, what’s most important is to maintain a strong in-house research enterprise.  Even if we partner and collaborate with universities or other research partners around the world, we must maintain a critical mass of world class scientists who are really expert in the therapeutic areas we intend to focus on. In development, we’ve shown in the last decade that we can bring partners in to many different parts of the cycle. Again, I think we aim to retain a core base of functionality where, beyond a given project, we will understand not only how the processes works – this is that embedded knowledge that is so important in this industry – but also to understand how we can improve on that and really drive improvement over time.

BC: What’s Lilly’s most exciting product stream? Is there a transformative therapeutic target for the company?

JL: The key therapeutic areas of focus remain neuroscience, diabetes and cancer. We also have a very promising program in autoimmune disease, and a presence still in bone disorders and bone and muscular/skeletal disease. I think we’re very competitive across a whole number of different kinds of targets, and today we have twelve molecules in phase 3 that are good representatives of all of these therapeutic areas, and 11 of those were discovered in our laboratories. That’s an indication of  what we think is a new upsurge in productivity.