Lilly's Lechleiter isn't budging from stand-alone $5B R&D strategy--yet

Eli Lilly CEO John Lechleiter

Over the past few months there has been a growing chorus of discontent focused on Eli Lilly's ($LLY) grim track record in late-stage drug development, topped by the recent Phase III failure of ramucirumab in breast cancer. Some analysts wanted to know what Lilly's Plan B is, given the fresh wave of generic competition that's about to hit its biggest franchise. What happens if Lilly's current crop of late-stage drugs--frequently touted at the top as one of the biggest and best in the industry--fails to deliver soon?

CEO John Lechleiter, though, is sticking with Plan A, for now.

"I think that we're beginning to see the light at the end of the tunnel here," Lechleiter told The Wall Street Journal's Peter Loftus. "There's no question sticking to this strategy takes measured courage because you can never really prove to anyone that the way you view your pipeline is the correct way, versus the way skeptics might look at it."

One of those skeptics, though, could point out that the way you prove you're right about your strategy is to deliver on new product approvals and boost revenue. For Lilly, the last two years have been highlighted by the loss of its franchise for Zyprexa and the looming generic competition for Cymbalta and Evista. It's also seen a string of major pipeline failures, from the Phase III defeat of solanezumab for Alzheimer's to the flop of pomaglumetad methionil for schizophrenia. The company made a rare acquisition of Amyvid, an imaging agent for Alzheimer's, but Medicare won't reimburse for it. And key R&D strategies for drugs like ramucirumab flubbed major endpoints.

Lilly's Lechleiter asserts that ramucirumab for stomach cancer can still do well, despite weak data. But the company's case will likely come down to diabetes, where dulaglutide and empagliflozin show promise. And if the last line on diabetes doesn't hold up and deliver solid approvals followed by blockbuster revenue, even Lechleiter will have to turn to Plan B: A major restructuring and a new direction in R&D.

Eventually, with "unexpected pipeline failures, we'd have to reduce operating expenses including cutting back on R&D," Lechleiter tells the WSJ.

Lilly is one of the last holdouts of the Great Restructuring in Big Pharma. As companies like AstraZeneca ($AZN), Pfizer ($PFE), Roche's ($RHHBY) pRED and now Merck ($MRK) chose to retool under new management in the face of poor R&D efforts, cutting budgets while refocusing on external collaborations and bolt-on deals, Lechleiter vowed that Lilly could buck the trend and make it largely on the back of its own pipeline and internal efforts. But the company has also been criticized for being insulated and resistant to change as its R&D expenses have surged to about 23% of revenue, costing more than $5 billion.

Something is going to have to give, soon. One more big clinical setback could be more than Eli Lilly's current executive team can stand, or Wall Street will tolerate.

- here's the feature from The Wall Street Journal (sub. req.)

Special Reports: The top Phase III R&D setbacks of 2013 - Ramucirumab | Biopharma's Top R&D Spenders: 2012 - Eli Lilly