Eli Lilly and Company:Drug Development Strategy
Assignment One
RSM494: Technological Strategy

2/16/2012
Antora Sanchari Ahmed
997292139
Professor Terry Amburgey

TABLE OF CONTENTS

Executive Summary………………………………………………………………………..3

Market Analysis……………………………………………………………………………4

Industry Analysis………………………………………………………………………….5

Product and Process Analysis…………………………………………………………….7

Company Strategy………………………………………………………………………...9

Recommendations………………………………………………………………………..11

Conclusion………………………………………………………………………………..13
Cost/ Profit Structure: Pharmaceutical companies usually have high failure rates of new drug discoveries. There is a high cost of developing a drug that passes clinical trials and therefore there are substantial sunk costs involved. However, once approved, the returns are very high in the short amount of time the drug is patented. This is the blockbuster revenue model for pharmaceutical industries which is the dependence on the sales of a relatively small number of ‘blockbuster’ drugs.
According to Exhibit 2, only one out of 10 drugs reaching clinical trials make it to the market, which is a 10% chance.
“In summary then the cost structure of the pharmaceutical firm is characterised by economies of scale and scope, high sunk costs and relatively low marginal costs of production. High sunk costs arise from the combination of high R&D costs and high failure rates. Economies of scale and scope favour larger firms with diversified development projects. Returns from approved drugs are highly skewed but sufficient given favourable demand conditions (eg relatively inelastic prices) to provide pharmaceutical companies with at least above average profitability.”
To cope with this huge cost and to decrease time to market, mergers and acquisitions are a common trend in order to increase economies of scale. A lot of firms are also incorporating technologies like genetic engineering, combinatorial chemistry and high throughput screening in their processes.