Group 2

Answers That Matter

j Eli Lilly and Company

Eli Lilly and Company

By Group 2
Akash Singh Garvit Agarwal
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Gyan Prakash Jai Mohan Singh Sood Ramya Ramakrishnan

Introduction

Colonel Lilly, founder Eli Lilly Eli Lilly and Company has been in business more than 132 years. The global, research-based company was founded in May 1876 by Colonel Eli Lilly in Indianapolis, in the Midwestern section of the United States. A 38-year-old pharmaceutical chemist and a veteran of the U.S. Civil War, Colonel Lilly was frustrated by the poorly prepared, often ineffective medicines of his day. Consequently, he made these commitments to himself and to society: - He would found a company that manufactured pharmaceutical products of the highest possible quality. - His company would develop only medicines that would be dispensed at the suggestion of physicians rather than by eloquent sideshow hucksters. - Lilly pharmaceuticals would be based on the best science of the day.

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Major Drugs

Prozac, the first major introduction in a new class of drugs for treatment of clinical depression. Zyprexa, now the world's top-selling antipsychotic for the treatment of schizophrenia Humulin insulin identical to that produced by the human body Ceclor, a member of the cephalosporin family, was eventually became the world's top-selling oral antibiotic

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Demand Function

The demand for Eli Lilly is a function of the following factors

A. Population Size of the country (Larger the population, higher the demand) B. Income levels in the country (Higher the income levels, higher the demand) C. Lifestyle of people ( as they may lead to change in disease patterns, and demand for new medicines to combat lifestyle related diseases) D. Demand for health care services by the Patients (Larger demand for health care services will lead to higher demand for medicines) E. Doctors Recommendations, which in turn are influenced by the Pharmaceutical Companies ( More the doctors recommend the companys medicines, more the demand) F. Geographical and climatic conditions prevalent in the region ( Influences the demand for particular drugs) G. Awareness and acceptance of modern drugs by the society ( More the society accepts the usage of modern medicine, larger the demand for drugs) H. Infrastructure spending by the government, as it enables them to tap rural market (As the market grows, demands also increases) Eli Lilly Page 4

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I. Advertising and Sales Promotion ( People are at times influenced by advertisings when the buy drugs especially when they have not seen to a doctor)

Demand function for Eli Lilly

D = f (A, B, C, D, E, F, G, H, I)

Effect of Doctors Recommendation on demand for Eli Lilly

Eli Lillys Demand Curve Overall

Revenue Functionnecessaries any change in

price leads to relatively a very small change in price Eli Lilly

As most of its medicines are

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Business Segments Eli Lilly's business is split into two major divisions: Pharmaceuticals and Animal Health. The Pharmaceutical division is responsible for the majority of revenue generation for the company. For FY 2010, Eli Lilly reported total sales of $23 billion and net income of $5 billion. Eli Lilly's best-selling product, Zyprexa is a treatment for schizophrenia, bipolar disorder, and other psychological disorders. Brief Description of the Various Segments from which Eli Lilly generates revenue Neurology (45% of 2010 Sales) Eli Lilly's best-selling product, Zyprexa is a treatment for schizophrenia, bipolar disorder, and other psychological disorders. It has also been used off-label for depression and dementia. Zyprexa loses its patent protection in 2011. Cymbalta is a treatment for depression, anxiety, and pain management for diabetics. The product's patent expires in 2013. Endrocrinology (28% of 2010 Sales) Humalog is an insulin analog used for managing diabetes. Humalog's patent expires in 2013. Evista is an osteoporosis drug approved only for postmenopausal women. Evista's patent expires in 2014. Humulin is another insulin analog used for managing diabetes, but has fewer sales than Humalog. Oncology (16% of 2010 Sales) Gemzar is a chemotherapy drug for lung cancer, pancreatic cancer, and breast cancer. Like many other chemotherapy drugs, the drug also stops the division of healthy cells, leading to severe side effects. Gemzar began to face generic competition in 2009. Alimta is a lung and chest cancer drug. Alimta's patent expires in 2016. Cardiovascular (10% of 2010 Sales) With a longer therapeutic window than Pfizer's Viagra, Cialis is the longest-lasting erectile dysfunction drug on the market. Cialis' patent expires in 2016. Animal Health (6% of 2010 Sales) Lilly's animal health division operates independently of its main pharmaceutical business.

Research and Development ($4.9B in 2010) Eli Lilly's future revenues depend on gaining approvals for their drug molecules from their product pipelines from the FDA. The majority of the company's pipeline is comprised of potential cancer treating compounds, however there are also candidates for the treatment of diabetes, alzheimer's, depression, and schizophrenia in late-stage clinical trials.

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Revenue for Eli Lilly would be Revenue = Quantity of drugs sold * their respective Prices So, Revenue = f (Quantity sold, Price) As Eli Lillys goods are necessaries, the company faces an inelastic demand curve and it can increase its prices without much loss in quantity sold. Also even if prices fall, the quantity demanded will not increase considerably.

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Cost Function

The cost function of Eli Lilly can be defined as follows

Cost = f (R&D, Sc, Lb, Pt, Mfg, Mktg)

Where, R&D Sc Lb Pt Mfg Mktg Research and Development Scientists Lab and related factors Patents Manufacturing Marketing

Exploring the Cost Variables

1: Research and Development Research and development is one of the most important cost factor of a pharmaceutical company principally due to the fact that majority of their products are intensive in terms of the formulation and the scientific specification that goes into their product. No pharmaceutical company can launch a product without sufficient research and groundwork being put in the development of the product. However, the cost of R&D of a particular item in a product line might become negligible

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Group 2 over a period of time, in the event of it being a successful product surviving for a period of time long enough to absorb the costs of research and development.

2: Scientists The major labour costs associated with the pharmaceutical industry lies in acquiring talent, providing for their knowledge updation and retention of such talent. This cost of back-office labor is probably the next in priority with respect to cost factors. However, unlike R&D the cost f scientists is not a onetime/ non-recurring cost. Hence it would be classified under variable or semi-variable cost factors, assuming the cost function is being generated for a particular product.

3: Lab and Related Factors Fixed cost factor of Eli Lilly include the laboratory and technology input outlay. The expenditure that the company incurs would be classified under Capital Expenditure. Consequently it is a long-term expenditure, meant to be absorbed over a period of time. Lab and technology expenses would be classified under fixed costs, whose per-unit costs can be expected to reduce with increase in production and diversification to newer product lines and variations. The possibility of change in technology, technology becoming obsolete, government regulations prohibiting the use of certain technology might alter the currents costs associated with production. It may be classified under semivariable or contingent costs of the business.

4: Patents Every product that the company has researched and developed has to be protected from being poached by competitive firms. Hence patenting is imperative for every product that the company develops. In certain countries, this cost can be bifurcated into product patent and process patent. It is majorly a one-time expenditure, and may be classified under fixed non-recurring expenditure. However the corresponding income generated from patents is relatively short-lived as compared to the benefits derived from the other costs, owing to the fact that patents are not non-terminating intellectual property rights. That is to say that after the expiry of the patent, the firm cannot draw the

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Group 2 patent benefits anymore, even though it had incurred the initial cost of developing the product/ process.

5: Manufacturing The next process in the functioning of a pharmaceutical company is the mass manufacturing of the product. A classic case manufacturing front will include primary cost components like: i. Cost of production centre/ lease-rentals: The expenses incurred with respect to acquiring or leasing the manufacturing facility ii. Staffing: The expenses associated with procuring trained staff to handle the equipments in the facility, and training them in handling and maintaining hygiene. iii. Equipment: Cost of procuring manufacturing, processing and storage equipments. iv. Maintenance of equipment: The expenses incurred in maintaining, sterilizing and ensuring appropriate use of the equipments v. General precautionary measures/ initiatives: Safety and hygiene initiative to be undertaken in ensuring that the efficiency of product is maintained vi. Disposal of wastes/Emissions: Ensuring that the waste is properly disposed off without causing avoidable harm to the environment vii. Acquiring approvals and clearances from regulatory agencies: Certain regulatory agencies including the government charge for granting of approval to manufacture the product. viii.Special taxes, duties: The manufacture of certain drugs may attract duties associated with certain acts (Drug User Fee Act for instance), and this may also include carbon-print tax, considering the modern-day usage of technology-intensive manufacturing methods ix. Testing expenses (pre-manufacturing costs): The expenses that the company incurs with regards to testing the drug before proceeding to commercial manufacture. x. Cost of ingredients: Another major cost that the manufacturing front would incur would be the cost of ingredients. Being sensitive to time, climate and aspects like these, the company can also be expected to incur substantial costs on logistics, including transport, storage, and location. Hence implementation of best inventory practices may not be technically possible. 6: Marketing Marketing, for pharmaceutical companies is primarily by targeting doctors and health-care institutes. Hence the marketing efforts are relatively restricted to a smaller target audience. Eli Lilly Page 11

Group 2 Consequently, the intensity of the marketing efforts have to be high, in order to get a better success rate. This also means that samples given are directly proportional to the marketing efforts, assuming a situation of sales- representatives with significant level of integrity. Hence marketing efforts of Eli Lilly may be comprised into costs on representatives, samples, logistics and marketing tactics to cope with competitive products/firms.

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High

Profit Function

Tech nolog y Used

Profits = Total Revenue Total Cost

Profit for a firm is dependent on the revenues generated by the firm. So Eli Lillys profit is based on its total revenue which is the total sales of its drugs. More specialized form of drugs enables Eli Lilly to charge higher prices which in turn enhances its profit function. Also those drugs which have a patent can make additional profits. Profit function for Eli Lilly can be calculated through -

Low

Profit = f (Revenue)
Low High

Profits Generated

Utility Function

It is completely dependent on the customer satisfaction Mathematically Utility Function is derived as follows:

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C1 the customer is absolutely satisfied; c2 customer is dissatisfied; x1 P(occurrence of c1); x2 P(occurrence of c2) Utility function = u(c1, c2, x1, x2) = x1*v(c1) + x2*v(c2); v(c1) the weights given for the occurrence of the probability

In the case of Eli Lilly the factors affecting the Utility Function are Government action(s) against business Availability of medicines Length of time business has been operating. Complaint volume filed for business of this size. Response to complaint(s) filed against business. Resolution of complaint(s) filed against business.

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