Lilly Bucks Trend in Biotech Pursuit - WSJ.com

Lilly Bucks Trend in Biotech Pursuit - WSJ.com: "

As Competitors Buy Way In,
Signs Point to Payoff
From In-House Program

By AVERY JOHNSON
July 31, 2007; Page A10

Like almost every other old-line drug maker, Eli Lilly & Co. wants to get deeper into the lucrative game of selling expensive biotechnology medicines.

But unlike its competitors, Lilly isn't buying its way into biotechnology with large acquisitions. Instead, it has been trying to build a biotech-drug pipeline from within. The take-it-slow, in-house approach shows signs of paying off. But the company has yet to prove to many investors and others in the industry that it has become a major presence in biotech.

This year, half of Lilly's drugs entering human testing will be biotech drugs, up from less than 10% in 2001, the company said, though it won't disclose specifics. By 2011, Lilly has promised Wall Street that it will bring to market one new biotech product each year -- an ambitious target for a company that has invented only a handful of such products in its 130-year history. Lilly says it has invested $2.5 billion in its biotech drive in the past three years.

Venturing deeper into biotechnology carries risks. Biotech drugs -- large molecules made from living cells -- are more complicated to make than drugs made from traditional chemical compounds, known as small-molecule drugs. As a result, they can cost several hundred million dollars more to bring to market and require dedicated manufacturing lines.

That is also why they are so lucrative: their complexity has so far shielded them from generic competition and lets manufacturers charge higher prices, though that could change as Congress debates whether to create a way for the Food and Drug Administration to approve cheaper copies of biotech drugs. One plus is that their potential to hit disease targets more precisely often allows them to make it through labs more quickly and with fewer side effects.

Lilly, based in Indianapolis, made insulin out of pig tissue starting in 1923 and licensed the technology to make the first biotech drug, human insulin, from Genentech in 1982. But Lilly fell behind that biotech pioneer and until earlier this decade, its forays into biotechnology were haphazard. Five years ago, after the loss of marketing exclusivity on its best-selling antidepressant Prozac sent its stock tumbling, it deepened its commitment to the field. In its only major acquisition, in 2004 it bought Applied Molecular Evolution Inc., a company that makes technology to improve protein design, for $400 million. By contrast, AstraZeneca PLC, of London, just paid $15.6 billion for biotech company MedImmune Inc.

So far, the biotech push hasn't reversed Lilly's stock-market fortunes. Of the major drug companies, its share price declined the most last year, falling by 7.9%. The company has been beset by lawsuits that have tarnished the reputation of its best-selling schizophrenia drug Zyprexa, and pipeline hopefuls have stumbled. Zyprexa loses patent protection in 2011, and shortly thereafter Lilly stands to lose exclusivity on many other top drugs. Lilly's second-quarter profit, released last week, dropped 19% to $663.6 million from $822 million in the year-earlier period, largely because of acquisition-related charges. Revenue rose 20% to $4.63 billion from $3.87 billion.

Lilly spent an analyst meeting in December trying to get investors to buy into its biotech transformation. Most attendees, though, focused on its main blockbuster hopeful in late-stage human testing, a chemical compound to prevent blood clots called prasugrel.

"Lilly is the No. 5 biotech company [by sales], but it doesn't show up on people's lists," says John Lechleiter, Lilly's president and chief operating officer.

Barbara Ryan, an analyst who covers Lilly at Deutsche Bank AG, says "there's no magic wand that gets waved when a company is admitted to the biotech club. If more of Lilly's revenues were from biologics, then the market would view their earnings persistency as greater."

Aside from its large financial investment, part of which went to pay for a $560 million new biotech complex in Indianapolis, Lilly has had to meld two different scientific cultures: chemistry and biology. Biologists and chemists tend to take different approaches to developing products. Some old-line drug companies making the shift to biotechnology through acquisitions have kept their biologists separate from their chemists for fear of stifling the former's creativity and entrepreneurial spirit.

Lilly wanted the two sides to work together, thinking they could benefit from a joint approach to scientific challenges. "To differentiate ourselves, we need to integrate," says Sidney Taurel, Lilly's chief executive.

William Chin, vice president of discovery research, who runs Lilly's scientists on a day-to-day basis, says tensions can arise between the two groups over turf. "We're talking about biology and chemistry, two disciplines with their own history and world, so there's a natural pride and envy -- a Yankees and Red Sox sort of thing." He says several senior scientists probably wished the new biotech team would "go away."

To get the two groups to cooperate, Lilly created clusters of senior scientists with small- and large-molecule backgrounds, called "drug hunting" teams, and made them work together based on disease specialties. Lilly also changed its rewards system to praise scientists for cooperating, giving cash awards to groups that effectively "synergized," says Dr. Chin. It recently honored one group for working together on a new protein for diabetes by letting it present at an internal Lilly meeting called the "Grand Rounds."

One early skeptic of the strategy was Steven Paul, Lilly's chief of research and development. A psychiatrist by training, Dr. Paul admits he wasn't very interested in biotech drugs at first because the large, complex molecules can't usually pass through the blood-brain barrier. As a small-molecule researcher, his bias was toward drugs like Prozac, which helped define Lilly as a premier neuroscience center in the 1980s.

"Three or four years ago, I was getting depressed," says Dr. Paul, adding that he asked himself: "Do we have enough science to come up with the next generation" of neurological drugs?

But Dr. Paul's own lab surprisingly came up with a biotech drug for Alzheimer's that is thought to work by attaching to and clearing out disease-causing plaque. It is now one Lilly's of most advanced biotech projects, in the second of three phases of human testing, and has helped make Dr. Paul one of the biggest proponents of the company's biotech strategy.

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