Eli Lilly CEO banking on new drug pipeline

There are some life experiences few will ever have. And as the oldest of nine children and CEO of a Fortune 500 company,
John Lechleiter has a couple under his belt.

As Eli Lilly and Co.’s chairman and CEO, Lechleiter brings some of
his childhood lessons to bear in leading the major drug company, which is based in Indianapolis.

At the moment,
the Harvard-trained chemist is trying to rally support on Wall Street. Management has raised Lilly’s 2009 profit outlook twice
since July, yet analysts still say the company’s future is far from secure.

They question whether Lilly can fill
a gaping revenue hole that will open in a few years when drugs that currently account for more than half of Lilly sales lose
patent protection.

Where’s the new revenue going to come from? Analysts see bigger competitors like Pfizer and
Merck making huge acquisitions to add new revenue sources. Meanwhile, Lilly stakes its future on its own pipeline of drugs
in development, which is only now emerging from a roughly four-year drought with the launch of the blood thinner Effient in
August.

But Lechleiter says Lilly’s pipeline has helped it rebound from significant patent losses three times during
his 30-year career at the company. He’s betting there will be a fourth, due in part to a reorganization announced last month
that aims to speed up drug development.

Some of Lechleiter’s resolve also traces back to his father, who supported
a large family while enduring the ups and downs of the automobile industry at his Louisville car dealership.

Lechleiter
sat for a recent interview in Lilly’s Heritage Hall museum, which highlights the company’s 133-year history. Here are some
excerpts.

Q. Lilly touts more than 60 drugs under development, but the approval process has grown tougher, generic
competition is intense and many analysts doubt the strength of your pipeline. Why do you have so much faith?

A.
I wish we could order up innovation and smooth out the inevitable ups and downs that patent expirations yield. We can’t always
do that.

I think what we’re trying to do instead is focus on running the business the right way — through
what we know is going to be a challenging period — and then do everything in our power to speed up the progression through
the pipeline of those drugs that we reckon are going to make a difference early in the next decade.

Q. You’re facing
patent expirations for your two best-selling drugs, the antipsychotic Zyprexa and the antidepressant Cymbalta, and other blockbusters.
You think your pipeline can replace what they generate?

A. We haven’t given specific guidance about what we think
we will or won’t replace out of that. I think the point would be [whether we] can we launch new products that we think are
capable of growing into products that have substantial enough revenue to help us offset these losses.

We have products
like the cancer treatment Alimta, like our insulin franchise and some other things that we know will also be growing. There
are still significant growth opportunities in Japan, which is our second largest market. I think there’s a whole mix of things
that we hope to put into play.

Q. What do you mean when you say the industry’s historical approach to drug development
is broken?

A. I think as we look at simply the research and development investment curve, where investment’s going
up sharply and the numbers of new drugs are coming down, I think one has to say this is a model that’s not sustainable.

Something’s got to change.

Q. Lilly purchased biotech ImClone Systems a year ago for $6.5 billion. Since
then, the industry has seen deals with price tags that dwarf that. You say large-scale deals buy time. Why are they bad for
Lilly?

A. We don’t see a compelling case that would indicate these large combinations have created sustained value
for shareholders at the bottom line. At the end of the day, if you put one plus one together, that new enterprise has got
to generate twice as much innovation to sustain itself, roughly speaking, and I don’t think anybody’s figured out how do all
of our businesses become more innovative.

I think Lilly has sufficient critical mass and the financial wherewithal
to address how to become more innovative as we are. The byproducts of these large combinations are always a lot of disruption
and a lot of distraction for what can be an extended period of time.

Q. You’ve mentioned you wouldn’t mind shopping
for another deal. What would be the ceiling for a purchase price and where do you stand in this search?

A. We’re
looking at opportunities that are going to be smaller than the ImClone acquisition.

Even after the ImClone deal,
we remain in a strong financial position, and we have the wherewithal to do additional deals, but we’re going to approach
that very, very thoughtfully.

Q. Are biotechs still attractive?

A. Yes, I think there are lots of opportunities,
and it’s not all mergers and acquisitions. At any one time, we have a lot of discussions going on about licensing opportunities
or partnerships of some kind.

Q. You’re juggling a lot right now, not unlike your parents. They raised nine children
in a three-bedroom house. What did you learn from them that helped shape you in your current role?

A. I remember
when the car industry really turned down in the 70s. I don’t think my dad told me everything, but I mean the domestic auto
industry during the oil shock in the 70s was just absolutely on its knees and then struggled again in the early 80s.

You know, he never gave up. They kept their dealership open, and he found a way to provide for us all. You succeed by continuing
to show up. You work hard, you do the right thing.

My determination with this company is no less than that.

Q. You walk to work every morning, using different routes, why?

A. I know I need more exercise than I probably
get. I work out a couple times a week, but I’m not a workout guy. I walk mainly because it’s fun. In the morning it allows
me to collect my thoughts. Walking home in the afternoon is therapeutic because you basically can walk off the stress of the
day a little bit.

Q. The health care reform debate must be a key topic you’re thinking about. You’ve said you’re
disappointed the word innovation never comes up in discussions. What do you mean?

A. Innovation can actually help
us ease the cost burden, improve quality and give people the kind of access that they need. We’ve got to have a system that
furthers and encourages innovation in all respects, or we’re going to be forever rationing care and essentially not progressing
the degree to which we can expect to have healthier, longer lives.

Q. Lilly’s stock price is down more than 30
percent since your first day in 2008. Obviously the recession played a role, but what do you tell average investors?

A. It’s easier for me to talk about our performance than the stock price, but let me try to answer your question this way:
Lilly from a performance point of view — in terms of our volume-driven sales growth, cost management and taking market
share with key products — is performing quarter to quarter very well in my tenure and was doing so before my tenure.

I think as long as we’re executing well on a succinct strategy and meeting our own internal milestones, then I think
the stock price eventually will catch up.