Profit & Solutions Management Research Publication Series
Researched & Written by Deb (Debadip) Bandyopadhyay
Eli Lilly and Company is an American pharmaceutical company headquartered in Indianapolis, Indiana, with offices in 18 countries. Its products are sold in approximately 125 countries. The company was founded in 1876 by, and named after, Col. Eli Lilly, a pharmaceutical chemist and veteran of the American Civil War.
Lilly's notable achievements include being the first company to mass-produce the polio vaccine developed by Jonas Salk, and insulin. It was one of the first pharmaceutical companies to produce human insulin using recombinant DNA including Humulin (insulin medication), Humalog (insulin lispro), and the first approved biosimilar insulin product in the US, Basaglar (insulin glargine).
Lilly is currently the largest manufacturer of psychiatric medications and produces Prozac (fluoxetine), Dolophine (methadone), Cymbalta (duloxetine), and Zyprexa (olanzapine).
The company is ranked 123rd on the 2019 Fortune 500.[5] It is ranked 221st on the Forbes Global 2000 list of the largest public companies in the world[6] and 252nd on the Forbes list of America's Best Employers.
Eli Lilly is a full member of the Pharmaceutical Research and Manufacturers of America and the European Federation of Pharmaceutical Industries and Associations (EFPIA).
As of 1997, it was the largest corporation and the largest charitable benefactor in Indiana
The major manufacturing implications for companies like Eli Lilly and the global pharmaceutical industry. Based on the case of information several quantitative estimates of costs that enables the comparison between various options for manufacturing facilities. There are also substantial amounts of information that is qualitative, which suggests that Flexible facility is the best option for pharmaceutical companies such as Eli Lilly in the long run. For example, looking at the associated costs only, the total budget of building and operating a specialized pharmaceutical manufacturing plant for 15 years and more is approximately $140 million. However, in the case of a flexible manufacturing plant, given rig and construction, the approximate cost of operation is $295 million(Pisano & Rossi, 1994). Additionally, a manufacturing facility specifically optimized and designed for a certain group of products would result in the production of higher output yields, for example, 24 tons per year against 14.6 tons per annum for a flexible plant. Further, such a plant will enjoy economies of scale and produce products at a utilization rate of about 80% compared to a rate of 65% for flexible plants.
With regards to this information only, companies in the pharmaceutical industry would consider the dedicated facility option to be best, at least in the short run. However, the flexible installation choice, despite having lower short-term utilization and yields, it offers significant advantages in the long term. For example, less associated risk, possibly as a result of clinical trials and process redesign, help prove the merits of the drug, and ultimately get the drug to the market. This can be explicated by the fact that a flexible plant is more pliable. Further, the process of manufacturing drugs must does not need to be concluded until later on in the construction process(Gad, 2008). One crucial implication for companies like Eli Lilly, particularly in terms of sales, is the fact that they do not have to deal with the possibility of requiring a retro profit – an amount equal to the initial cost of developing a specialized plant, approximately $38 million. In fact, they also do not have to deal with the cost issues related to the possibility of releasing a product to the market a little sooner.
Further, for manufacturing companies in the pharmaceutical industry, investments in R&D, research and development are necessary for their prosperity and survival. Usually, developing a new drug takes between 10 and 15 years; there is a myriad of uncertainties as to whether or not such R&D projects eventually succeed.
The pros and cons of each decision of the two options considered by Eli Lilly’s management for the new facility design
Eli and Lilly Company has to decide which type of manufacturing plant to build; the available options are either to have a flexible or a specialized manufacturing plant. This is essential because it helps determine the operational costs, time –to-market for new products, flexibility in process control, and the capital investments required. In order to explain the pro and cons of these scenarios, each of these options are appraised in terms of their effect on their deduction in the cost of manufacturing, reduction in development lead-time, and their impact on production volumes, revenue, and profits. For both options, an approximate discount rate of 10% results in an assumed profit of $11,000 per kilogram for the flexible factory option and $10,000 per kilogram for the specialized scenario(Pisano & Rossi, 1994). However, each of the options has their advantages and disadvantages, which influence the decision of the management with regards to the option to take. In the case of the specialized plant option, there is an average delay of approximately six months. There is also a 90% reduction in the production volumes as a result of combined chance of drug blockbuster and drug failure. Assuming that Eli Lilly plans to roll out one new specialized facility, and three new drugs on a simultaneous schedule. This is the case of the flexible plant; except that all the facilities are delayed one year behind the flexible facilities in order to account for the slower finalization time of the processes.
If the company chooses to build a specialized facility for its products, there will be no decrease in the product development lead time. This is because, for each new product developed, there will be a new plant developed. In fact, the new facility will be built just for the particular type of product. A specialized factory has no flexibility in operations. However, in terms of the overall costs, specialized plants are advantageous. The cost of building specialized plants for three new products per annum is approximately $9.3 million for a total of 15 years(Pisano & Rossi, 1994). The available capacity of specialized plants is also fixed. In the initial years, the utilized capacity is not high, thus resulting in a lot of resource wastage. Compared to a flexible facility, dedicated facilities usually have higher output per rig. In addition, the utilization rate or capacity of specialized plants is higher. Deciding to build a specialized facility will not have a direct effect on revenue.
The option of a flexible facility for the three products on the pipeline will not result in a reduction in the development lead-time. However, for future products, there will be a substantial reduction in the development lead-time. Flexible factories suffer from under capacity once they reach the maximum capacity; in fact, they cannot handle any more production at that point. This results in a decrease in sales because the company cannot fulfil the demand due to insufficiency in production capacity and capability(Agalloco & Carleton, 2008). It is vital to indicate that, compared to specialized facilities, there is no loss related to wastage of the resources available. The fact that future products will come to the market at least one year earlier, there will be an increase in revenue.
The pros and cons of each decision of the two options considered by Eli Lilly’s management for the new facility design, Eli and Lilly Company has to decide which type of manufacturing plant to build; the available options are either to have a flexible or a specialized manufacturing plant.
This is essential because it helps determine the operational costs, time –to-market for new products, flexibility in process control, and the capital investments required. In order to explain the pro and cons of these scenarios, each of these options are appraised in terms of their effect on their deduction in the cost of manufacturing, reduction in development lead-time, and their impact on production volumes, revenue, and profits. For both options, an approximate discount rate of 10% results in an assumed profit of $11,000 per kilogram for the flexible factory option and $10,000 per kilogram for the specialized scenario(Pisano & Rossi, 1994). However, each of the options has their advantages and disadvantages, which influence the decision of the management with regards to the option to take. In the case of the specialized plant option, there is an average delay of approximately six months. There is also a 90% reduction in the production volumes as a result of combined chance of drug blockbuster and drug failure. Assuming that Eli Lilly plans to roll out one new specialized facility, and three new drugs on a simultaneous schedule. This is the case of the flexible plant; except that all the facilities are delayed one year behind the flexible facilities in order to account for the slower finalization time of the processes.
If the company chooses to build a specialized facility for its products, there will be no decrease in the product development lead time. This is because, for each new product developed, there will be a new plant developed. In fact, the new facility will be built just for the particular type of product. A specialized factory has no flexibility in operations. However, in terms of the overall costs, specialized plants are advantageous. The cost of building specialized plants for three new products per annum is approximately $9.3 million for a total of 15 years(Pisano & Rossi, 1994). The available capacity of specialized plants is also fixed. In the initial years, the utilized capacity is not high, thus resulting in a lot of resource wastage. Compared to a flexible facility, dedicated facilities usually have higher output per rig. In addition, the utilization rate or capacity of specialized plants is higher. Deciding to build a specialized facility will not have a direct effect on revenue.
Recommended facility design option for Eli Lilly. The option of a flexible facility for the three products on the pipeline will not result in a reduction in the development lead-time. However, for future products, there will be a substantial reduction in the development lead-time. Flexible factories suffer from under capacity once they reach the maximum capacity; in fact, they cannot handle any more production at that point. This results in a decrease in sales because the company cannot fulfil the demand due to insufficiency in production capacity and capability(Agalloco & Carleton, 2008). It is vital to indicate that, compared to specialized facilities, there is no loss related to wastage of the resources available. The fact that future products will come to the market at least one year earlier, there will be an increase in revenue.
Eli Lilly pharmaceutical company continues to be one of the top pharmaceutical companies in the world reinvesting the hugest percentage of its sales for R&D, research and development. Through this investment, Eli Lilly is reaping rewards with a pipeline of substantial drug offerings. For example, in 2001 alone, the company launched one new product and submitted four more to the FDA for approvals – this was a record for any company in the pharmaceutical industry at the time. Compared to other firms in the industry, Eli Lilly is not keen on the consolidation phenomena because of its core competency in managing strategic partnerships and alliances(Allen, 2012). Through active and meaningful associations, Eli Lilly has managed to expand its R&D efforts, which have allowed it to capitalize on the current advances in biotechnology. For the past five years, Eli Lilly’s financial performance, revenue and profitability have been stable compared to that of its major competitors.
References
Agalloco, J. P., & Carleton, F. J. (2008). Validation of Pharmaceutical Processes, Third Edition. (J. P. Agalloco & F. J. Carleton, Eds.) (3rd ed.). New York, NY: Informa Healthcare USA, Inc.
Allen, J. (2012). Eli Lilly: A Long-Term Growth Stock. Retrieved September 16, 2014, from http://seekingalpha.com/article/696451-eli-lilly-a-long-term-growth-stock
Gad, S. C. (2008). Pharmaceutical Manufacturing Handbook: Production and Processes. Hoboken, New Jersey: John Wiley & Sons, Inc.
Pisano, G., & Rossi, S. (1994). Eli Lilly and Company: The Flexible Facility Decision (1993). Harvard Business School, (April), 1–18.
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