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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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March 21, 2012

Lilly Tries to Make It Up in China

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Posted by Derek

Eli Lilly is a drug company with a lot of problems - check out this chart for their patent expiration woes, which are probably the worst in the industry. But they're trying to make it up overseas, as this news shows:

CEO John Lechleiter wants Lilly to be the fastest-growing pharma company in China. To accomplish this goal, he will concentrate on diabetes and cancer over the next 5 years as the company introduces more than a dozen drugs to the market, according to a Bloomberg report.

The drugmaker has made major strides in China and has doubled its sales force there. Its efforts seem to have paid off: Sales in China grew 25% last year--that's faster than the industry average. And with diabetes rates rising there, Lilly might have an edge with its diabetes portfolio.

A lot of companies (and not just in the drug industry) are hoping for the Chinese market to save them, and in some cases, it'll happen. But since all our assets in pharma are wasting ones (patent expirations!), it doesn't do you much long-term good if you're not discovering new drugs quickly enough. Then again, "long term" has a different definition these days - "next couple of years" is probably about as good as any CEO in the business can hope for, and perhaps the China sales can cushion the blows a bit for Lilly. But I still think that it only moves them from "in hideous trouble" to "in very bad trouble".

Comments (12) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. ayatollah_of_the_outcomes on March 21, 2012 8:26 AM writes...

Agree. With the average US CEO's tenure at 4 years, this growth via larger markets makes short-term sense. Doesn't address the basic problem that drug discovery is a crapshoot despite some very smart minds working at it. OTOH, only a fool would not take the path they are advocating, given the situation.

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2. anon2 on March 21, 2012 9:00 AM writes...

....strategy has not solved the problem for other companies, at least not yet, where increased sales / income from emerging markets has not been even close to making up for declines from more traditional areas.....

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3. Biotechtranslated on March 21, 2012 9:18 AM writes...

"Emerging markets" are the latest flavor of the week in biopharma and its not all bunk, but it also has some serious limitations:

Pros:
- huge markets whose populations are seeing rapid increases in their standard of living and will likely demand the "latest and greatest" therapies
- In many of these markets, the drug supply is not as solid as the developed markets so consumers will often pay more for a branded agent rather than go with a generic (i.e. being off patent doesn't mean you lose all your market share)

Cons:
- The gov'ts of these emerging markets look to the developed markets and say "holy crap, we can't afford to spend what they spend on healthcare, so let's put some controls in place to keep prices low" (i.e. what China is hinting at doing)
- Many emerging markets are far from being either free-markets or democracies. If you introduce a drug that is too expensive, there is nothing stopping the gov't from saying "no" and issuing a compulsory license and yanking 100% of your market share

The big issue that I see is that you may be able to report "200% increase in revenue" in an emerging market, but we all know that revenue isn't the goal, profits are. When you get a 70-90% margin on your products in the US and then sell them in China for at a 20% margin, that doesn't do much to impress the shareholders.

I think there are a lot of opportunities for growth in the emerging markets, but it is no panacea for pharma's dwindling profits.

Mike

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4. anon2 on March 21, 2012 10:08 AM writes...

#3: Taking your comments further, using today's "baseline" for sales and/or profits, a 200% increase year to year in third world countries from a small starting baseline is still a small increase in real terms It does not make up today for 5% loss from traditional areas of sales starting from a much, much higher baseline of reference. I always find such attempt to manipulate year to year corporate numbers both amusing (yes, fool some of the people all of the time) and frustrating (misleading).

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5. simpl on March 21, 2012 11:43 AM writes...

Wouldn't the powers running developed countries rather use the extra revenue coming from new customers to reduce their own costs, rather than keeping the developers or producers alive? Thus, if the market for a $30 000 p.a. cancer drug expands tenfold, they might expect their costs to drop to $3 000 p.a.

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6. Hap on March 21, 2012 2:45 PM writes...

Doesn't pharma's margin need to be high because their costs to develop a drug are really high? If you sell a lot of low margin stuff, you can make enough money to get by, particularly when the cost to develop it isn't high, but that might not work with drugs that cost a lot to find and validate (and in some cases to make). In addition, the costs of doing business in China are increasing enough that unless companies can find better ways to make drugs, the "Outsource or die" push will end with "Die".

I don't know how much xenophobia feeds into my thoughts, but the manipulation of rare earth prices doesn't make me warm and fuzzy thinking about the potential for manipulation of the future drug market, either.

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7. Anonymous on March 21, 2012 6:28 PM writes...

The Rare Earths manipulations over the last 20 years should give every pharma CEO great pause. The trend is entirely analogous. But then, our CEO won't be around in 4 years, so why should he care? It seems to be OK now for CEOs to drive their companies into the ground, or pumped up for acquisition, because CEOs and their cronies are just so very special and f-ing brilliant.

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8. eugene on March 22, 2012 4:52 AM writes...

What is this 'Rare Earths manipulation'?

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9. Tom Womack on March 22, 2012 6:02 AM writes...

Rare earths: the biggest neodymium mine in the world is in Inner Mongolia. Rare earths appear associated with thorium, so the purification process produces things that get classified as radioactive waste, so doing rare-earth separation in countries with more aggressive environmental regulation than China is very expensive. This means Chinese rare-earth-oxide used to be vastly cheaper than rare-earth-oxide from anywhere else.

Recently, China has imposed quite large tariffs on selling raw neodymium oxide. Their goal is that companies wanting to build cars whose motors use huge NdFeB magnets should build the cars in China rather than exporting the neodymium oxide and doing all the value-added steps somewhere outside China.

That doesn't strike me as a completely unreasonable governmental position to have, but it's decidedly annoying for companies that have built big magnet factories in Japan or Germany in the assumption of an endless supply of cheap Chinese neodymium oxide.

The rare earths all appear associated - there's a slight distinction between the lighter and the heavier ones because they get concentrated by ion exchange in different kinds of clay, but Inner Mongolia has both kinds - so substitute any other lanthanide for neodymium in the note above; dysprosium is used to replace some of the neodymium for certain magnet applications including cars

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10. Anon on March 22, 2012 8:30 AM writes...

Saying from the old West (well, maybe more recent):

If you want to do business, you have to have the merchandise. You can't do business from an empty wagon.

Hey, let's lay off some more medicinal chemists!

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11. Hap on March 22, 2012 9:49 AM writes...

9: I thought that China had sold the rare earth metals cheap and in large supply, effectively driving other mines out of business. The export quota of the rare earths was then decreased to preserve the natural resource (though that appears disingenuous with respect to the initial decision to dump - I don't know whether internal users were subject to similar quota decreases). Is this incorrect?

Resources have been implements of national policy for...ever, so it's not that China would be alone in this regard - but putting all of your drug discovery eggs in the basket of someone who may 1) not be going where you are going and 2) may want the eggs for themselves (either for strategic or individual purposes) might require some thought of backup plans.

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12. eugene on March 22, 2012 5:17 PM writes...

Thanks Tom. I'm going to go with your explanation on this one. (Since it's the only one so far... I imagine Hap is also right that mines in other places closed down due to cheap Chinese stuff before the Chinsese decided to adopt the tariffs) Why do motors need large magnets anyways? Oh well, doesn't matter.

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