Eli Lilly_Group 2_Sec B

8/3/2019 Eli Lilly_Group 2_Sec B

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By Group 2

Akash Singh

Garvit Agarwal

Eli Lilly Page 1

Eli Lilly and

CompanyEli Lilly and Company

Answers That Matter


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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 newmedicines to combat lifestyle related diseases)

D. Demand for health care services by the Patients (Larger demand for health care serviceswill 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 forparticular drugs)

G. Awareness and acceptance of modern drugs by the society ( More the society accepts theusage of modern medicine, larger the demand for drugs)

H. Infrastructure spending by the government, as it enables them to tap rural market (As themarket grows, demands also increases)

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

Demand function for Eli Lilly

Revenue Function

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Effect of Doctors Recommendation on demand

for Eli Lilly

D = f (A, B, C, D, E, F,

G, H, I)

Eli Lillys Demand Curve -

Overall

As most of its medicines are

necessaries any change in

price leads to relatively a

very small change in price


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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 expiresin 2014. Humulin is another insulin analog used for managing diabetes, but has fewer sales thanHumalog.

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 sideeffects. Gemzar began to face generic competition in 2009. Alimta is a lung and chest cancerdrug. 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 erectiledysfunction 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 theirproduct pipelines from the FDA. The majority of the company's pipeline is comprised of potentialcancer treating compounds, however there are also candidates for the treatment ofdiabetes,alzheimer's, depression, and schizophrenia in late-stage clinical trials.

Eli Lilly Page 6
http://www.wikinvest.com/wiki/Antipsychotic_drug_markethttp://www.wikinvest.com/wiki/Diabeteshttp://www.wikinvest.com/wiki/Osteoporosishttp://www.wikinvest.com/wiki/Diabeteshttp://www.wikinvest.com/wiki/Incidence_of_Cancerhttp://www.wikinvest.com/wiki/Incidence_of_Cancerhttp://www.wikinvest.com/wiki/Pfizer_(PFE)http://www.wikinvest.com/wiki/Erectile_dysfunctionhttp://www.wikinvest.com/wiki/Erectile_dysfunctionhttp://www.wikinvest.com/wiki/Diabetes_drug_markethttp://www.wikinvest.com/stock/Eli_Lilly_and_Company_(LLY)?action=edit&section=8http://www.wikinvest.com/stock/Eli_Lilly_and_Company_(LLY)?action=edit&section=7http://www.wikinvest.com/stock/Eli_Lilly_and_Company_(LLY)?action=edit&section=6http://www.wikinvest.com/stock/Eli_Lilly_and_Company_(LLY)?action=edit&section=5http://www.wikinvest.com/stock/Eli_Lilly_and_Company_(LLY)?action=edit&section=4http://www.wikinvest.com/stock/Eli_Lilly_and_Company_(LLY)?action=edit&section=3http://www.wikinvest.com/wiki/Diabeteshttp://www.wikinvest.com/wiki/Osteoporosishttp://www.wikinvest.com/wiki/Diabeteshttp://www.wikinvest.com/wiki/Incidence_of_Cancerhttp://www.wikinvest.com/wiki/Incidence_of_Cancerhttp://www.wikinvest.com/wiki/Pfizer_(PFE)http://www.wikinvest.com/wiki/Erectile_dysfunctionhttp://www.wikinvest.com/wiki/Erectile_dysfunctionhttp://www.wikinvest.com/wiki/Diabetes_drug_markethttp://www.wikinvest.com/wiki/Antipsychotic_drug_market


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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 Research and Development

Sc Scientists

Lb Lab and related factors

Pt Patents

Mfg Manufacturing

Mktg 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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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 semi-

variable or contingent costs of the business.

4: Patents

Every product that the company has researched and developed has to be protected from beingpoached 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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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.

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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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Profit Function

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 -

Profit = f (Revenue)

Utility Function

It is completely dependent on the customer satisfaction

Mathematically Utility Function is derived as follows:

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High

Tech

nolog

y

Used

Low Profits GeneratedHigh


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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 forthe 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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Documents

Eli Lilly_Group 2_Sec B