07 041 Resilience PDF

07-041
April 30, 2007
Eli Lillys Project Resilience: Anticipating the Future of the

Pharmaceutical Industry
Rebecca M. Henderson
It was early May 2004, and Peter Johnson found himself looking forward to the Senior Management
Forum that he was scheduled to moderate at the end of the month. As the Executive Director of
Corporate Strategic Planning at Eli Lilly and Company (Lilly), it was his job to support the
companys senior team in the kinds of in depth strategic discussions that were fundamental to
maintaining Lillys leadership position in the rapidly evolving pharmaceutical industry. Nearly
twelve months before, in response to the widespread perception that the industry was facing an
unprecedented set of challenges, Peter had been asked to undertake a comprehensive review of how
the industry was likely to evolve and whether Lilly should consider making significant changes in
core strategy and/or its business model as a result.
In response, Peter had pulled together a cross functional team of high profile people from across the
company to look at the key environmental uncertainties facing the industry, and to answer the
question, What might Lilly need to do to compete in the future? The team calling itself Project
Resilience after Gary Hamels article The Quest for Resilience had divided its work into three
interrelated phases: scenario planning, business model evaluation, and core capabilities assessment.
How might the future evolve? How could Lilly compete? What should Lilly do?
Alternative
Capabilities Competitive Alternatives Recommen-
Scenarios Business
Required Dynamics for Lilly dations
Models
The first two phases had taken months of work, but were now largely complete. Peter was fairly
confident that the team had a good sense of the different directions in which the industry was likely to
This case was prepared by Rebecca M. Henderson. Professor Henderson is the Eastman Kodak Leaders for Manufacturing
Professor of Management.
Copyright 2007, Rebecca M. Henderson. This work is licensed under the Creative Commons Attribution-Noncommercial-No
Derivative Works 3.0 Unported License. To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/3.0/
or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA.
ELI LILLYS PROJECT RESILIENCE: ANTICIPATING THE FUTURE OF THE PHARMACEUTICAL INDUSTRY
evolve, and of the ways in which Lilly and its competitors might be able to compete under the
different scenarios that the team had described. Now, however, the team was grappling with the last,
and toughest phase what should Lilly do? They needed to come up with some concrete
recommendations for Lillys senior management as to which business models the firm should explore
and how Lilly should develop new capabilities to position the firm for the future. Peter sighed as he
turned back to his desk. It was going to be a long night.
Turmoil in the Pharmaceutical Industry?

On the surface, the global pharmaceutical industry appeared to be in robust health. Global sales for
the industry were approximately $550 billion in 2004 (Table A). About 42% of this total could be
attributed to members of PhRMA, the Pharmaceutical Research and Manufacturers of America, a
group that included the majority of all U.S. firms. Net incomes were also very robust, and in general
pharmaceutical stocks had performed well since the stock market crash of 2000.
Table A 2004 Worldwide Pharmaceutical Sales by Region
Sales (US$
Region billions) % Growth vs. 2003 % Share
Total Worldwide Market $550.0 7% 100.0%
North America (U.S. & Canada) $248.0 8% 45.1%
European Union $144.0 6% 26.2%
Japan $5.8 2% 1.7%
China $9.5 28% 1.7%
All Other $90.5 NA 16.5%
Source: MedAd News, May, 2005.
At the same time the industry was coming under significant pressure on a variety of fronts. Most
noticeably, there was some evidence that the research productivity of the industry was declining.
Measuring pharmaceutical research productivity is notoriously difficult, since it can take as long as
10-12 years to bring a new drug to market and the number of drugs released in any given year reflects
investments and actions made over many years. Nevertheless it appeared that while real research
spending in the industry was accelerating dramatically, outputat least as crudely measured by the
number of new drugs introduced every yearwas falling (Exhibit 1). For example, the cost of
discovering, developing and launching a drug which was roughly $318 million in 1990 1 topped $1.7
billion in 2003. 2 Meanwhile, one in 13 drugs in the preclinical development stage reached the market
1
Bruce Rasmussen, Implications of the Business Strategies of Pharmaceutical Companies for Industry Developments in Australia, Working Paper No. 1,
Center for Strategic Economic Studies, Victoria University of Technology, March. 2002.
2
Drug Development Costs Hits $1.7 billion, DrugResearcher.com, December 8, 2003.
April 30, 2007 2

compared to one in eight from 1995-2000. 3 In turn, the industry was witnessing the emergence of
smaller, more nimble companies which specialized in particular therapeutic areas and which, due to
limited financial resources, built their pipelines by relying on products and molecules that were
already available in the marketplace. 4 Simultaneously, advances in tools such as genetics and
genomics had led to waves of entry by small, specialized biotech firms. While these firms had yet
to yield significant returns to their investors according to some observers, aggregate returns to the
venture capital that had been invested in the industry were barely positiveaccording to the Boston
Consulting Group, while they represented only 3% of the drug industrys total R&D spending, 67%
of the drugs in clinical trials in 2003 were from small biotech companies. 5
Industry growth was also under attack. In 2004, the global pharmaceutical market grew only 7%,
marking the first time the industry had not reached double digit growth since 1995, 6 and over the next
five years $40 billion of branded pharmaceuticals were expected to lose patent protection. 7 These
trends were placing significant financial pressures on large pharmaceutical companies like Lilly.
Average pharmaceutical revenues for a large firm were on the order of $10 billion/year, and their
valuations implied that the equity markets were expecting them to grow on the order of 10% a year.
Since the typical successful new product yielded revenues of around $300-$400 million a year, each
company required roughly two to three new launches annually to meet expectations. Unfortunately,
while success rates varied dramatically across companies, on average the large firms were introducing
major products at a rate of roughly one every two years.
At the same time, the conventional technologies of drug discovery were being challenged by an
explosion of new science. Advances in genomics and genetics, imaging technology and fields such as
protein chemistry, molecular biology and cellular mechanics were opening up promising new areas of
enquiry. Some scientists were calling for an entirely new field of systems biology. In January 2003,
for example, MITs Computational and Systems Biology Initiative held its first conference, attracting
300 participants.
There was also some evidence that scientific advances and the pressure on the industry were causing
a move away from large, primary care blockbuster products. The heart of the Fully Integrated
Pharmaceutical Company (FIPCO) model in which each company had its own discovery,
development, manufacturing, sales and marketing functions for the majority of products in its
pipeline, the blockbuster model relied on the development and distribution of a small number of drugs
that could achieve global sales in excess of $1 billion annually by focusing on very large markets.
3
Drug Development Costs Hits $1.7 billion, DrugResearcher.com, December 8, 2003.
4
Celia M. Henry, Morphing the Model, Chemical and Engineering News, March 7, 2005.
5
Catherine Arnst, The Waning of the Blockbuster Drug, BusinessWeek, October 18, 2004.
6
Michael Rosen, Though Pharma Growth Slides, Blockbusters Reach New Records, Wisconsin Technology Network, June 6, 2005.
7
Evolving Generic Competition Global Competitive Intelligence report, Jan 2004.
April 30, 2007 3

(See Exhibit 2 for a list of some blockbuster drugs.) In 2001, 35 blockbuster drugs accounted for on
average 46% of the top 10 pharmaceutical companies sales. 8 (Exhibit 3.)
The success of the blockbuster model depended on achieving large returns from a small number of
drugs in order to pay for the high cost of drug discovery and development. An aggressive sales and
marketing strategy was paramount. The larger pharmaceutical companies relied on their 10,000 to
15,000 person sales forces to get products into the hands of doctors. At the same time, since the Food
and Drug Administration (FDA) had eased direct-to-consumer (DTC) regulations in 1997,
pharmaceutical companies were attempting to reach consumers through television and Internet
advertising. Mercks VIOXX and Pfizers Celebrex, a new class of prescription strength pain killers,
were the first to ride this wave. In 2000, Mercks DTC budget for VIOXX reached $161 million, $40
million more than PepsiCo spent marketing its Pepsi product. 9 Within a year of being launched,
VIOXX and Celebrex together had captured 40% of the market from traditional anti-inflammatories
like ibuprofen. 10
Financially, the blockbuster model made pharmaceutical companies share price particularly
vulnerable. In 2001, Mercks announcement that sales of several of its blockbuster drugs would not
meet expectations and that there was a 12-month gap in the blockbuster pipeline was met with a 15%
reduction in the companys share price. 11 Revenue for VIOXX, however, topped $2.6 billion that
same year, a 44% increase over 2000. When Merck withdrew VIOXX from the market in September
2004, because of concerns about patient safety, Mercks stock lost nearly 25% of its value.
As in other industries, there was also a new and growing trend towards developing more
personalized products and services. The success of Genentechs drug Herceptin had made this
approach particularly salient. Herceptin was approved in 1998 for the treatment of metastatic breast
cancer. For patients with the appropriate genotype (something that could be determined with the aid
of an appropriate diagnostic test known as the HercepTest), Herceptin appeared to perform
significantly better than common alternative treatments; for other women the drug performed no
better than the standard treatment. The drug, therefore, served a smaller market than a more
conventional therapy, by some estimates 15% to 20% of breast cancer patients. 12 Herceptin, which
would not have reached the market without an accompanying diagnostic test enabling doctors to
identify patients whose gene type made them eligible for the therapy, was one example of the
synergies that could be created between a therapeutic and a diagnostic. 13
8
9
Stephen P. Bradley and James Weber, The Pharmaceutical Industry: Challenges in the Next Century, Harvard Business School Case No. 703-489.
10
Barry Meier, Medicine Fueled by Marketing Intensified Trouble for Pain Pills, The New York Times, December 19, 2004.
11
12
Matthew Bell, Unraveling the Pharmaceutical Industry, Arthur D. Little, 2002.
13
Theranostics: Guiding Therapy, Med Ad News, December 1, 2004.
April 30, 2007 4

While Herceptin appeared to have been quite financially successful for its developer, Genentech (a
full course of treatment is currently priced at about $70,000, and in 2006 total revenues from
Herceptin were $1.2 billion), many industry observers were concerned that many personalized
drugs were likely to be much less financially attractive than conventional blockbuster drugs. The
trend of using biomarkers and diagnostics to better segment patient populations would inevitably
result in fewer patients for a given therapy. Furthermore, many researchers were beginning to realize
that complex illnesses such as cancer and cardiovascular diseases, required drugs that hit more than
one target simultaneously. 14
There were also concerns that the conventional blockbuster FIPCO model was at risk due to further
changes in the pharmaceutical marketplace. Here, two trends in particular were key. The first was
the impact of patent expirations, as generic competition was continuing to raise the competitive
hurdle for branded prescription (or Rx) products, especially in large and crowded primary care
markets. The $40 billion of branded pharmaceuticals that were expected to lose patent protection in
the next five years would, for example, create significant competition for new drugs. The second was
the increasing saturation of the main selling channel for the blockbuster FIPCO modelthe sales
representative detailing individual physiciansresulting in declining returns on investments in this
channel. Both physicians and payers were objecting with increasing volubility to the promotional
practices required by the blockbuster FIPCO model.
The industry was also coming under increasing political pressure. Health care expenditures as a
percentage of GDP were rising dramatically, and pharmaceutical costs which were sometimes not
fully reimbursed by either federal or private health plans were becoming increasingly visible. (See
Exhibit 4.) At the same time, some of the practices of the industry were coming under scrutiny. For
example, in The Truth about Drug Companies Marcia Angell who had been Editor in Chief at the
New England Journal of Medicine made the following claims:
The pharmaceutical industry claims to be innovative, but only a small fraction of its drugs
are truly new: most are simply variations on older drugs.
Contrary to popular belief, big drug companies spend far less on research and development
than on marketing.
The pharmaceutical industry has an iron grip on Congress and the White House. It has the
largest lobby in Washington and contributes heavily to political campaigns.
Drug companies promote diseases to match their drugs. Millions of normal Americans have
to come to believe that they have dubious or exaggerated ailments like generalized anxiety
disorder.
Drug companies have enormous influence over what doctors are taught about drugs and
what they prescribe.
14
Simon Frantz, Playing Dirty, Nature, October 13, 2005.
April 30, 2007 5

Drug companies have substantial control over clinical trials of their drugs. There is good
reason to believe that much of the company supported research on prescription drugs is
biased as a result.
These kinds of claims were hotly contested by the pharmaceutical companies themselves, but they
nonetheless signaled a potentially troubling erosion of public support for the industry.
Yet another threat on the horizon was the possibility of aggressive entry from India and China.
Companies such as Ranbaxy Laboratories had set their sights on becoming International research-
based pharmaceutical companies and by some estimates, Chinese pharmaceutical firms sold over
$19 billion worth of product in 2002.
Eli Lilly: More than 125 years of history

Eli Lilly and Company was founded in May 1876 by Colonel Eli Lilly in Indianapolis, Indiana. 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. (Lilly was the first pharmaceutical company to ask physicians and hospitals
to give feedback on the efficacy and safety of its products. 15 )
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.
Eventually, Colonel Lillys son, Josiah K. Lilly Sr., and two grandsons, Eli Lilly and Josiah K. Lilly
Jr., each served as president of the company. Each contributed a distinctive approach to management,
and together, these management styles established a corporate culture in which Lilly employees were
viewed as the companys most valuable assets, a belief that the company claimed was still the
cornerstone of its corporate philosophy. While some analysts had speculated that Lillys location in
Indianapolis put it at something of a disadvantage, the company believed that its strong Midwestern
roots and deep history gave it a unique competitive advantage. The company described its values as:
Respect for people, which includes our concern for the interests of all people worldwide who touch
or are touched by our company: customers, employees, shareholders, partners, suppliers, and
communities;
Integrity that embraces the very highest standards of honesty, ethical behavior and exemplary moral
character;
15
Margaret L. Eaton, Developing and Marketing a Blockbuster Drug: Lessons from Eli Lillys Experience with Prozac, Stanford Graduate School of
Business Case No. BME-6.
April 30, 2007 6

Excellence that is reflected in our continuous search for new ways to improve the performance of our
business to become the best at what we do.
With 2004 revenues of $13.9 billion, 42,000 employees worldwide and medicines marketed in 142
countries, Lilly was one of the worlds 20 largest pharmaceutical companies. (Exhibit 5 gives key
financial information for the firm.) The company, which prided itself on its strong record of science-
based research productivity, spent more on R&D as a percentage of sales (21%) than any other major
pharmaceutical company. (GSK spent 15% and Merck 14%. 16 ) It had major research and
development facilities in nine countries and conducted clinical trials in more than 60 countries.
Lillys four therapeutic areas included neurosciences (44% of revenue), endocrinology (31%),
oncology (10%) and cardiovascular (5%). 17 Zyprexa, a treatment for schizophrenia, bipolar mania
and bipolar maintenance, accounted for 32% of Lillys revenue topping $4.4 billion. Several lawsuits
brought during 2004 contesting the validity of Zyprexas patent and some of Lillys marketing and
sales efforts surrounding the drug caused the companys stock price to fall 19% during the year.
Lilly was one of the only major pharmaceutical companies not caught up in the merger and
acquisition activity of the late 1980s and 1990s. (See Exhibit 6.) The company was able to safeguard
its independence by looking internally for core capabilities it could develop and exploit including
improving speed to market, leveraging existing products, narrowing its R&D focus from eight to five
therapeutic areas, spinning off its non-core medical device and diagnostic businesses, and creating
multi-functional, product-focused teams (known internally as heavyweight product development
teams) which focused exclusively on the development of a single compound. This included all
activities related to drug discovery, manufacturing, sales, marketing and distribution. 18
Meanwhile, sales of the companys blockbuster anti-depressant Prozac, which topped $2.8 billion in
1996 (43% of revenue) despite bad press and lawsuits, enabled the company to heavily invest in new
product development, further safeguarding its independence. These efforts appeared to pay off. In
2002, two years after Prozacs patent expiration, Lilly was immersed in the most productive new drug
launch in its 127-year history and in 2004 Lilly launched five new products, of which three were
first in class or the first drugs to reach the market exploiting a particular mechanism of action.
First-in-class drugs tended to be more difficult to manage than already established therapeutic classes
due to the fact that knowledge about the disease, drug and market was far less certain. 19 (Exhibit 7
shows major introductions by year for the period 1983-2004.)
16
Jeff Swiatek, Eli Lilly Looking for Forumula to Cut Drug Costs, The Indianapolis Star, October 18, 2004.
17
Animal Health and other pharmaceuticals made up the remaining 7% of revenue.
18
Matthew C. Verlinden, Eli Lilly: The Evista Project, Harvard Business School, Case No. 699-016.
19
Margaret L. Eaton, Developing and Marketing a Blockbuster Drug: Lessons from Eli Lillys Experience with Prozac, Stanford Graduate School of
Business Case No. BME-6.
April 30, 2007 7

Building the Scenarios for Project Resilience

Scenario planning is a disciplined method for thinking about the future and its inherent uncertainties.
Peter Schwartz, president of the Global Business Network and a leading expert on scenario planning,
calls scenarios stories about how the world might turn out tomorrow, and adds that the purpose of
scenario planning is not an accurate picture of tomorrow, but better decisions about the future. 20 To
accomplish this, scenario planning creates a number of different future worlds that are both plausible
and also sufficiently differentiated so as to enable decision makers to compare and contrast them and
their strategic implications.
For Project Resilience, the working team created four scenarios for the future of the research-based
pharmaceutical industry that were set in 2020, approximately 15 years away. Given the industrys
long R&D cycles, the team decided that 15 years was enough time to allow Lillys senior managers to
imagine future worlds that were substantially different from the current industry environment.
The team also decided to focus their scenarios on the U.S. market, both because of its overriding size
and importance to the sales and profits of the pharmaceutical industry, (in 2004, more than 50% of
Lillys sales were in the U.S., and some industry observers speculated that the U.S. market accounted
for a disproportionate share of profits for every major pharmaceutical firm) and also because the
external environment in the U.S., which for many years had been relatively stable and supportive of
the industrys business model, was becoming increasingly turbulent. If the pharmaceutical business
model was going to be forced to change, the team reasoned, it would be because of what happened in
the U.S. market. Understanding how this market might evolve was a critical first step in assessing
future strategic options for the industry in general and for Lilly in particular.
The scenarios were developed by first selecting the two most critical and uncertain of the many
external factors (called, in the language of scenario planning, driving forces) that could impact the
future evolution of the pharmaceutical industry. The project team tested a number of possible driving
forces before ultimately selecting R&D Output and Rx Purchase and Prescribing Decisions as the
two forces to use for their scenario planning exercise. They reviewed their choice with both senior
Lilly colleagues and outside consultants who were well versed in both scenario planning and the
pharmaceutical industry environment.
These two driving forces became the scenario axes, with each end of an axis representing opposite
outcomes of the driving force that the axis describes (see Figure 1). For example, one end of the
R&D Output axis represents R&D output that produces breakthrough innovation, while the other
end represents output resulting in incremental innovation.
20
For more on scenario planning, see, fro example, Peter Schwartzs book The Art of the Long View (Currency: 1996).
April 30, 2007 8

Figure 1
R&D Output Breakthrough innovation

Rationing Innovation Haves and Have-nots
Tight formularies and utilization controls HSAs in widespread use; patients pay out-of-pocket for
Innovation rationed to patients judged most likely to many Rx drugs
benefit; Middle class and rich can supplement employer HSA
Restrictions on off-label prescribing by MDs contributions (pre-tax and after tax) to ensure access to
Right drug to right patient thru accepted treatment new therapies; poorer consumers cannot
algorithms developed by credible thought leaders Increased consumer price sensitivity and access inequities
Companies must demonstrate big improvements over create pricing pressures on new therapies
current therapies to obtain price premium for new products At same time, very expensive biotech products covered
Products in new therapy areas most likely to command thru high-deductible catastrophic insurance plans, so pricing
price premiums pressure on these products is less acute
Rx Purchase and Prescribing Decisions
Centralized (public or private) Individual (patient/prescriber focus)
Payers Rule Price Sensitive Patients

Employers continue to pass ever larger share of healthcare
Rx prices regulated by govt (price ceilings) costs onto employees, so patients are price sensitive
Very tight formularies and utilization controls Most seniors still have significant out-of-pocket drug costs
Even with price regulation, companies must offer big Heavy use of generics, OTC products (FDA speeds Rx to
discounts to play on formularies OTC switching in many categories) and alternative medicines
Restrictions on promotional spending and programs Small share of population willing to pay premium for branded
FDA focus on safety increases cost of clinical trials products based on heavy DTC marketing efforts; most not
Massive pharma industry consolidation Companies focus on NILEX and promotional efforts to drive
sales
Incremental Innovation
The axes were defined as follows:
Vertical Axis: R&D Output (measures both quantity and quality of industry innovation)
Breakthrough Innovation: Pharmaceutical industry R&D is very productive, with 40-50 NMEs
submitted annually for regulatory approval. Many of these NMEs
New Molecular Entities (>30%) offer major advances in safety,
efficacy, and/or customization (tailored therapeutics) vs. currently
available therapies. (By contrast, the industry currently produces
about 20 NMEs per year, with approximately 15% receiving priority
consideration from the FDA.)
Incremental Innovation: Pharmaceutical industry R&D productivity remains stagnant, with

about 20 NMEs submitted annually for regulatory review. Most of
these NMEs (approximately 90%) do not represent significant
advances in safety, efficacy or customization (tailored
therapeutics) vs. currently available therapies.
April 30, 2007 9

Horizontal Axis: Rx Purchase and Prescribing Decisions

Individual Decision Making: The decision about which Rx therapy will be used is determined
primarily through interactions between individual patients, who are
paying most of the cost of their medicines, and prescribers.
Centralized Decision Making: The decision about which Rx therapy will be used is determined
primarily by the government health system or by a consolidated
group of private insurers who are paying most of the costs of Rx
drugs.
Putting the two axes together defined four future worlds: Haves and Have-nots, Price Sensitive
Patients, Payers Rule and Rationing Innovation. The team then spent a considerable amount of
time thinking through what each of these worlds was likely to look like. Abbreviated versions of
their descriptions follow below:
Scenario 1: Have and Have-Nots

In this scenario, consumers are paying out-of-pocket for most of the cost of their prescription (Rx)
drugs, either because their insurance plans have limited or capped coverage of Rx drugs, or because
they have switched to Health Savings Accounts (HSAs) that give them pre-tax dollars to spend
directly on healthcare products and services. Many fewer people are uninsured, as HSAs and limited-
contribution plans are more affordable for small business owners, although they are often not able to
be as generous in their HSA contributions as larger employers. Since patients are paying more out of
pocket, they are more sensitive to the costs of Rx drugs. They also aggressively search out
information sources to help them understand the range of therapeutic choices open to them to discuss
with their doctors.
After many years of false starts, the pharmaceutical industry is using advances in genomics,
proteomics, IT and other technologies to both increase R&D output (40-50 new NMEs annually), and
to produce a range of new products that represent clear and significant improvements over currently
available therapies. Deeper knowledge of the genetics of disease, and the development of
sophisticated and relatively cheap diagnostic tools, has led to the creation of more customized
therapeutic alternatives in some key therapeutic categories.
The new products are more expensive than existing therapies, as companies seek to recoup the ever-
growing costs of R&D, even though pharmaceutical companies realize that patients are paying out-of-
pocket for a substantial portion of these costs. These new products are available globally at prices
roughly equivalent to those charged in the U.S. The increased efficacy of the products, and the
ability to focus their use on patient segments most likely to benefit from them, means that government
payers in many countries are willing to pay the premium demanded by manufacturers.
April 30, 2007 10

In the U.S., patients with more generous insurance plans, or with personal resources to supplement
employer contributions to HSAs, willingly purchase the new products to improve their health
outcomes. But patients with fewer resources are often unwilling or unable to buy such products. As
more blockbuster products become generic, these patients have wider treatment options, but there is
still a rancorous political debate about access to new therapies.
Scenario 2: Price Sensitive Patients

In this scenario, employers respond to continuing increases in healthcare and pharmaceutical costs by
pushing an ever-greater share of these costs onto employees. Thus, employees are paying out-of-
pocket for more than half of their Rx drug costs. As a result, they are much more sensitive to the price
of Rx drugs than had previously been the case. Outside the U.S., the industrys relative lack of
productivity means that it continues to face severe pricing pressures and access restrictions in
countries with government-financed healthcare systems.
The pharmaceutical industry has been largely unable to translate advances in genomics, proteomics,
and other technologies into new products that represent clear and significant improvements over
currently available therapies. The industry is generating only about 10-15 NMEs annually, and most
of these new products generally rely on the same targets as existing therapies and produce only
modest or incremental improvements in safety and efficacy. Customized therapies are generally
limited to oncology and a few other specialized disease states. Although experts continue to debate
whether the industrys R&D productivity decline is a cyclical or structural problem, there is no clear
evidence that the promise of the new technologies is going to be fulfilled anytime soon.
Scenario 3: Payers Rule

In this scenario, the Center for Medicaid and Medicare Services (CMS) sets the price of Rx drugs for
both Medicare and Medicaid, and establishes tight utilization controls to control growth in Rx
demand. In the private sector, health insurers continue to consolidate to achieve growth, having lost
the possibility of expanding business by gaining access to the Medicare population. The government
expands Medicaid eligibility in order to enable many more low-income Americans to afford health
insurance. Four national Pharmacy Benefit Management firms (PBMs) dominate the private Rx
benefit market and use their market clout (as well as the governments price precedents) to drive
down Rx drugs and strictly control Rx utilization.
The pharmaceutical industry has been largely unable to translate advances in genomics, proteomics,
and other technologies into new products that represent clear and significant improvements over
currently available therapies. The industry is generating only about 10-15 NMEs annually, and most
of these new products generally rely on the same targets as existing therapies and produce only
modest or incremental improvements in safety and efficacy.
April 30, 2007 11

Since the industry is producing relatively little important innovation, the focus of the FDA is on
safety, so new products must establish that they are at least as safe as current therapies before they
receive marketing approval. Clinical trials are generally larger and longer, unless a product can be
shown to be responsive to an important unmet medical need.
Outside the U.S., the industrys relative lack of productivity means that it continues to face severe
pricing pressures and access restrictions in countries with government-financed healthcare systems.
Scenario 4: Rationing Innovation

In this scenario, pharmaceutical benefits are provided to both working age employees and the
Medicare population by a small group of consolidated private health insurance plans. Pharmaceutical
prices are not directly regulated, but the payers use market dominance both to strictly control the Rx
utilization decisions of prescribers and to leverage this control to obtain large discounts and rebates
from manufacturers seeking access to the patients managed by these payers. Although CMS (the
Center for Medicaid and Medicare Services) does not directly provide the Medicare Rx benefit, it
does control benefit design and utilization policy through its regulatory authority.
After many years of false starts, the pharmaceutical industry is using advances in genomics,
proteomics, IT and other technologies to both increase R&D output (40-50 new NMEs annually), and
to produce a range of new products that represent clear and significant improvements over currently
available therapies. Deeper knowledge of the genetics of disease, and the development of
sophisticated and relatively cheap diagnostic tools, has led to the creation of more customized
therapeutic alternatives in some key therapeutic categories.
These new products are available globally only at prices roughly equivalent to those charged in the
U.S. The increased efficacy of the products, and the ability to focus their use on patient segments
most likely to benefit from them, means that government payers in many countries are willing to pay
the premium demanded by manufacturers.
Alternative Business Models

The team then turned its attention to exploring the alternative business models that Lilly might
consider adopting in order to compete in these quite different worlds. Business models can be defined
on several different dimensions of strategic choice, including: 1. Lines of business in which the
company operates; 2. Elements of the value chain the company owns and their configuration; 3.
Focus/scope of the business. 4. Role of size/scale in competition; and, 5. Key capabilities necessary
to create a competitive advantage. Exhibit 8 lists six archetypal pharmaceutical industry models the
team considered, each of which differs on several dimensions from Lillys current blockbuster
model:
April 30, 2007 12

1. Vertical Firm R&D Disintegrated Model
A company running the Vertical Firm R&D business model is not fully integrated across the value
chain, but instead is a research organization focused solely on discovering large numbers of high
quality NMEs.
Firms that operate under this model believe the majority of value is created during the discovery of a
novel NME. They capture value by licensing their candidate molecules to the best possible partner
for commercialization. Revenues are generated through upfront licensing fees, milestone payments
and royalties on product sales. These firms have world-class capabilities in identifying the best
possible partner, in capturing the maximal value in the candidate molecule, and in managing the
partner relationship for the long-term.
Value is delivered to the shareholders through running an efficient organization focused on R&D
productivity. Since revenues are limited to a royalty stream (perhaps only 15-20% of a products
sales), expenses must be controlled to deliver a reasonable return to the shareholders. Product
discovery and development costs must be tightly managed and a projects probability of technical
success must be carefully monitored to decrease the investments in dry holes. Product cycle times
must be short and project teams extremely flexible, so the firm is capable of generating a wealth of
licensable candidates each year.
2. Low Cost Innovative FIPCO
As its name suggests, the Low Cost Innovative FIPCO model puts cost at the center of every decision
made by the firm. Relative to todays FIPCO model, the cost structure of such a firm would be on
average 40-50% lower, with sales and marketing expenses probably reduced even further to allow for
disproportionate investments in discovery and development. This firm succeeds not by cost-cutting
but by making decisions in a completely different framework with costs at its core.
A company adopting the Low Cost Innovative FIPCO model relies on external pricing signals to
drive its sourcing of services along the entire value chain and aggressively uses sophisticated IT tools
to create a global network of suppliers who can provide those services at the lowest possible price.
The firm is rigorous about outsourcing all non-core work. The firms cost structure begins to look
like that of an Indian pharmaceutical manufacturer, with professional salaries a tenth to a fifth of the
U.S. level and a majority of clinical trials executed outside of the U.S. in the lowest cost locations.
For this model to work, the U.S. regulatory authorities will need to change some of their policies,
particularly around accepting data generated in other countries.
April 30, 2007 13

3. Niche, High value FIPCO
The Niche High Value FIPCO is built around discovering, developing and commercializing drugs in
conjunction with companion diagnostics or IT based tools to help guide the new therapies to patient
subpopulations with the highest expected benefit. This approach recognizes that evolving science is
exploiting deeper understanding of molecular pathology, yielding biomarkers that have been used to
subdivide blockbuster spaces into more rational, mechanistically sound disease definitions.
The NHVF model requires a more focused and scientifically sophisticated sales and marketing
organization. Medical and marketing must be tightly linked so that the parameters of the market
segment that the new project and its biomarker/diagnostic can be understood as early in the
development life cycle as possible and appropriate marketing strategies and messages developed.
New capabilities and relationships need to be built around alliances to develop and commercialize
companion diagnostics and product support tools. Sales forces, likely not the large primary care sales
forces of today, will have to develop the capability and experience to sell a targeted therapy with a
companion diagnostic. Competitive messages surrounding the impact of products on biomarkers will
become common in this model.
4. Health Care Conglomerate
This firm provides all the central buyer needs through a diversified portfolio of companies. While the
Vertical Firm B2B looks to provide the central buyer all of its pharmaceutical needs, the Healthcare
Conglomerate looks to provide all other necessary goods to the central buyer through one-stop
shopping. This could include some pharmaceuticals, but also medical devices, medical equipment,
hospital products, patient disposables, etc. A broader product portfolio may produce new bundling
options to aid in negotiations with the central buyer. The conglomerate would look to leverage
channel management capabilities, particularly logistics and supply chain management, across several
business lines. Financially, if pharmaceutical earnings are low, investing in alternative lines of
business and becoming a conglomerate may be attractive from a shareholder perspective.
5. Services Firm (Disease management)
The services firm is focused on reducing the overall healthcare costs of the central buyer. The firm
would contract with central organizations to manage either high-risk patients for a particular disease
or the top 20% high-cost patients under management. The goal is to manage their total healthcare via
exercise, nutrition, diagnostic monitoring and perhaps drug therapy, and reduce cost in the overall
system. The firm would need to prove that its protocols generate health outcomes that reduce cost.
Revenues would be generated by capturing a portion of the cost savings. A services-based model has
the appeal of providing total customer solutions, while managing overall healthcare costs; a noble
effort in todays environment.
April 30, 2007 14

Framing Concrete Recommendations

As Peter reviewed the various scenarios and the business models that the team had considered, he
wondered what his recommendations should be. The four industry scenarios seemed plausible
enough, but had the team in fact settled on the right axes? Were there other scenarios he should alert
the senior team to? And if these were the right scenarios, should he recommend that Lilly pick one as
the most plausible, and base its strategy on that one? Which one, was, in fact, the most plausible? Or
should the firm position itself for every possible future?
What kind of business model should the firm consider as it evaluated how the industry was likely to
change? Was every business model viable in every possible world, or were some better suited to one
scenario over another? Which did Lilly have the capabilities to adopt? What were competitors likely
to do, faced with the same challenges? Most critically, what should Peter recommend that Lilly do,
given the apparently robust strength of the current model? Should he, for example, recommend that
Lilly set up an independent business unit to experiment with the new model? Should he recommend
that Lilly announce the new strategic direction of the firm today and transition the whole firm
immediately? Was something else more appropriate?
Peter felt excited as he turned back to his desk. This was his opportunity to contribute significantly to
strategic thinking and to action inside Lilly. How should he frame the issues? What should he
recommend?
April 30, 2007 15

Exhibit 1 Trends in Pharmaceutical Productivity
35000 60
30000
50
25000
R&D Spending, $bn
40
NDAs approved
20000
30
15000
20
10000
5000 10
0 0
1965 1970 1975 1980 1985 1990 1995 2000 2005
Time
Source: NIH, FDA, PHRMA
April 30, 2007 16

Exhibit 2 Top 27 Blockbuster Drugs, 2004
Drug/Company Disease Sales (in US$

billions)
Lipitor (Pfizer) Cholesterol $10.86

Zocor (Merck) Cholesterol $5.20
Advair/Seretide (GlaxoKlineSmith) Asthma $4.50
Norvasc (Pfizer) Hypertension $4.46
Zyprexa (Eli Lilly) Schizophrenia $4.42
Nexium (AstraZeneca) Gastrointestinal disorders $3.88
Procrit/Eprex (Johnson & Johnson) Anemia $3.59

Zoloft (Pfizer) Depression $3.36
Effexor (Wyeth) Depression $3.35
Plavix (Bristol-Myers Squibb) Thrombosis $3.33
Celebrex (Pfizer) Arthritis $3.30
Fosamax (Merck) Osteoporosis $3.16
Diovan/Co-Diovan (Novartis) Hypertension $3.09
Risperdal (Johnson & Johnson) Schizophrenia $3.05
Cozaar/Hyzaar (Merck) Hypertension $2.82
Neurontin (Pfizer) Seizures $2.72
Pravachol (Bristol-Myers Squibb) Cholesterol $2.64
Singulair (Merck) Asthma $2.62
Epogen (Amgen) Anemia $2.60
Prevacid (TAP Pharmaceuticals) Gastrointestinal disorders $2.59
Aranesp (Amgen) Anemia $2.47
Lovenox/Clexane (Sanofi-Aventis) Deep-vein Thrombosis $2.37
Remicade (Johnson & Johnson) Arthritis $2.15
Plavix/Iscover (Sanofi-Aventis) Thrombosis $2.11
Duragesic (Johnson & Johnson) Pain $2.08
Avandia/Avandament (GlaxoSmithKline) Diabetes (Type II) $2.04
Seroquel (AstraZeneca) Schizophrenia $2.08
Total $88.29
Source: Michael Rosen, Though Pharma Growth Slides, Blockbusters Reach New Record, Wisconsin Technology Network,
June 6, 2005; Abby Christopher, Blockbuster Patent Expirations Bring a Shift in Business Models, Pharmacy Times, October
2006.
April 30, 2007 17

Exhibit 3 Blockbuster Sales by Pharmaceutical Company, 2001
Company Pharma Sales Blockbuster Sales Blockbuster Ratio Number of

$ billions Blockbuster Drugs
Pfizer $26.8 $18.2 68.20% 7

GlaxoSmithKline $24.8 $9.4 37.80% 6
Merck $21.4 $16.6 77.60% 7
Bristol-Myer Squibb $17.1 $4.6 26.70% 3
AstraZeneca $16.5 $9.2 55.90% 2
Johnson & Johnson $14.9 $5.5 37.30% 2
Aventis $13.5 $2.9 21.20% 2

Novartis $12.0 $2.2 18.40% 2
Pharmacia $11.9 $3.1 26.00% 1
Eli Lilly $11.5 $6.1 52.50% 3
Total Top 10 $170.4 $77.7 45.60% 35
Source: Bruce Rasmussen, Implications of the Business Strategies of Pharmaceutical Companies for Industry Developments in Australia, Working Paper No.
1, Center for Strategic Economic Studies, Victoria University of Technology, March. 2002.
Exhibit 4 U.S. Drug Expenditure as % of Health Care Expenditures
Source: US Statistical Abstract, PHRMA
April 30, 2007 18

Exhibit 5 Eli Lilly Key Financial Data
Consolidated Statements of Income Year Ended December 31

2004 2003 2002
Net sales $13,857.9 $12,582.5 $11,077.5
Cost of sales 3,223.9 2,675.1 2,176.5
Research and development 2,691.1 2,350.2 2,149.3
Marketing and administrative 4,284.2 4,055.4 3,424.0
Acquired-in-process research and development 392.2 -- 84.0
Asset impairments, restructuring, other charges 603.0 382.2 --
Interest expense 51.6 61.0 79.7
Other income-net (330.0)_______(203.1)_____ (293.7)

10,916.0 9,320.8____ 7,619.8_
Income before income taxes 2,941.9 3,261.7 3,457.7
Income taxes (Note 11) 1,131.8_____ 700.9_______ 748.8
Net income $1,810.1_____ $2,560.8___ $2,707.9
Earnings per share-basic (Note 10) $1.67____ $2.38_______ $2.51
Earnings per share-diluted (Note 10) $1.66_____ $2.37_______ $2.50
April 30, 2007 19

December 31 2004 2003
Assets
Current Assets
Cash and cash equivalents $ 5,365.3 $ 2,756.3
Short-term equivalents 2,099.1 957.0
Accounts receivable, net of allowances of $66.1 (2004) and
$69.3 (2003) 2,058.7 1,864.9
Other receivables 494.3 477.6
Inventories 2,291.6 1,963.0
Deferred income taxes (Note 11) 255.3 500.6
Prepaid expenses ___271.5_____ __ 249.5
Total current assets 12,835.8 8,768.9
Other Assets
Prepaid pension (Note 12) 2,253.8 1,613.3
Investments (Note 5) 561.4 3,374.6
Sundry (Note 8) 1,665.1____ _ 1,392.5
4,480.3 6,380.4
Property and Equipment, net _7,550.9__ _ __ 6,539.0

$24,867.0_ __ $21,688.3
Liabilities and Shareholders Equity

Current Liabilities
Short-term borrowings (Note 6) $ 2,020.6 $ 196.5
Accounts payable 648.6 875.9
Employee compensation 471.6 387.4
Sales rebates and discounts 475.3 488.9
Dividends payable 414.4 398.3
Income taxes payable (Note 11) 1,703.9 1,749.8
Other current liabilities (Note 8) _ 1,859.3 ______ 1,464.0
Total current liabilities 7,593.7 5,560.8
Other Liabilities
Long-term debt (Note 6) 4,491.9 4,687.8
Deferred income taxes (Note 11) 620.4 386.1
Other noncurrent liabilities (Note 8) _ 1,241.1_ __1,288.8
6,353.4 6,362.7
April 30, 2007 20

Commitments and contingencies (Note 13) -- --
Shareholders Equity (Notes 7 and 9)

Common stock-no par value
Authorized shares: 3,200,000,000
Issued shares: 1,132,884,801 (2004) and 1,124,677,097 (2003) 708.0 702.3
Additional paid-in capital 3,119.4 2,610.0
Retained earnings 9,724.6 9,470.4
Employee benefit trust (2,635.0) (2,635.0)
Deferred costs-ESOP (111.9) (118.6)
Accumulated other comprehensive income (loss) (Note 14) __ 218.6______ (160.1)
11,023.7 9,869.0
Less cost of common stock in treasury

2004-942,677 shares
2003-951,578 shares __ 103.8_______ 104.2
10,919.9______9,764.8
$24,867.0___ $21,688.3
(See notes to consolidated financial statements)
Source: Eli Lilly, 2004 Annual report
Exhibit 6 M&A Activity among Top 10 Pharmaceutical Companies
Transaction Value
Year Acquirer Target (US$ billions)
1989 Beecham Group PLC SmithKline Beckman Corp. $7.9
Bristol-Myers Co. Squibb Corp. $12.1
1995 Glaxo Holdings PLC Wellcome PLC $14.3
1996 Sandoz AG Ciba-Giegy AG $30.1
1999 ZENECA Group PLC Astra AB $34.6
2000 Pfizer Warner-Lambert Co. $89.2
Glaxo Wellcome SmithKline Beecham $75.0
2001 Johnson & Johnson ALZA Corp. $11.1
Bristol-Myers Squibb
Co. Dupont Pharmaceuticals Co. $7.8
2003 Pfizer Inc. Pharmacia Corp. $59.5
April 30, 2007 21

Source: The Pharmaceutical Industry: Challenges in the New Century, HBS Case No. 703-489; Securities Data Company;
Thomson Financial.
Exhibit 7 Eli Lilly Major Marketed Products, 2004
2004 Cymbalta for major depressive disorder

for diabetic peripheral neuropathic pain (2004)
(co-promoted with Quintiles Transnational Corp. in the U.S., and with
Boehringer Ingelheim elsewhere in the world, except Japan)
Alimta for malignant pleural mesothelioma
For second-line treatment of non-small-cell lung cancer (2004)
Symbyax for bipolar depression
Yentreve for stress urinary incontinence (not approved in the U.S.)
(co-promoted with Boehringer Ingelheim in major markets, except Japan)
2003 Cialis for erectile dysfunction
(developed in a joint venture with ICOS Corp.; co-promoted by Lilly ICOS
in North America and Europe and by Lilly elsewhere)
Strattera for attention-deficit hyperactivity disorder in children, adolescents, and
adults
2002 Forteo for treatment of men and postmenopausal women with osteoporosis who
are at high risk for a fracture
2001 Xigris for adult severe sepsis patients at high risk of death
1999 Actos for type 2 diabetes
(co-promoted with Takeda Chemical Industries, Ltd.)
1998 Evista for prevention of osteoporosis in postmenopausal women
For treatment of osteoporosis in postmenopausal women (1999)
1996 Zyprexa for schizophrenia
for acute bipolar mania (2000), Zyprexa Zydis tablet (2000)
for schizophrenia maintenance (2001)
as combination therapy with lithium or valproate for acute bipolar mania
(2002)
for bipolar maintenance (2003)
Rapid-acting IntraMuscular formulation (2004
Zyprexa granules (2004; launched in Japan only)
Humalog for treatment of type 1 and type 2 diabetes
Humalog mixtures (1999)
1995 Gemzar for non-small-cell lung cancer
for pancreatic cancer (1996)
for bladder cancer (2000 not approved in the U.S.)
for metastatic breast cancer (2003)
April 30, 2007 22

for recurrent ovarian cancer (2004); not approved in the U.S.)

ReoPro for prevention of cardiac ischemic complications in patients undergoing
coronary intervention, such as angioplasty
For unstable angina associated with stent procedure (1997)
(developed by Centocor and marketed by Lilly, except in Japan)
1987 Humatrope for growth failure caused by pediatric growth hormone deficiency
for replacement therapy for adult growth hormone deficiency (1995)
for short stature caused by Turner syndrome (1997)
for idiopathic short stature (2003
1983 Humulin for type 1 and 2 diabetes
New Drug Applications Under Review by the U.S. Food and Drug Administration
Exenatide for type 2 diabetes
(co-developing with Amylin Pharmaceuticals, Inc.)
Drug Candidates in Late-Stage Investigation
Arxxant
(ruboxistaurin) for diabetic microvascular complications
Prasugrel for acute coronary syndrome
(co-developing with Sankyo Company, Ltd.)
Arzoxifene for prevention and treatment of osteoporosis, and for reducing risk of
breast cancer
Selected Drug Candidates in Mid-Stage Investigation
Enzastaurin for glioblastoma, a type of brain tumor; non-Hodgkinss lymphoma; and

other cancers
Inhaled insulin for non-injectable delivery of insulin
(co-developing with Alkermes, Inc.)
Factor Xa inhibitor for prevention of deep vein thrombosis
Pruvanserin
(5-HT2A antagonist) for insomnia
Naveglitazar for type 2 diabetes
Gama-secretase
Inhibitor for slowing the progression of Alzheimers disease
PPAR alpha agonist for reducing the progression of atherosclerosis
Source: Eli Lilly, 2004 Annual Report.
April 30, 2007 23

Exhibit 8 Alternative Business Models
Technical Service- Proliferation

Blockbuster Low Cost business Conglomerate Disintegrated of Products
Model Model Model Model Model Model
Develop products Develop innovative Manage the total Maximize value by Focus business on Develop many
for large patient products using cost patient using leveraging the highest value, products targeted at
populations using as a primary protocols focused on economies of scope part of the value specific patients that
revenue potential as decision-making reducing total and reducing risk via chain and dominate are highly effective
main criteria criteria healthcare costs diversification the competition and valued
Business Lines Human Human Human Multiple business Human Human

pharmaceuticals pharmaceuticals healthcare lines pharmaceuticals pharmaceuticals
Services-based
R&D or S&M
Value Chain Fully Integrated Fully Integrated Sales & Fully Integrated Fully Integrated
(not both)
Marketing
Focused TAs Focused TAs
Broad TAs Focused areas of Broad TAs
Scope Specialty Broad Specialty
PC customers human health PC customers
customers customers
Important to Important up to
Important up to Important up to Scale is not
Scale manage large pt Scale is important critical mass pt
critical mass pt critical mass pt critical
populations (for S&M)
Constant flow of Constant flow of Designing Decisive company Large flow of Large flow of
potential products low cost products programs that buying/ selling potential products potential products
Key Capabilities in R&D generate healthcare decisions (R&D model)
Low cost Flexible
Quality manufacturing savings Formula to External focus on manufacturing
manufacturing Defining Negotiating evaluate companies disruptive Targeting and
Defining customer value contracts with for buying-selling technologies marketing to
customer value in Out-licensing insurers Decentralized (R&D) specific patient
marketplace high cost management of Defining and populations
Partnering to products business units acquiring customer Partnering to
access external Portfolio value (S&M develop
innovation management model) blockbuster
based on low cost In-licensing compounds
attributes (S&M) or out-
licensing (R&D)
products
April 30, 2007 24

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07-041

April 30, 2007

Eli Lillys Project Resilience: Anticipating the Future of the

Turmoil in the Pharmaceutical Industry?

Table A 2004 Worldwide Pharmaceutical Sales by Region

Source: MedAd News, May, 2005.

April 30, 2007 2

April 30, 2007 3

April 30, 2007 4

April 30, 2007 5

Eli Lilly: More than 125 years of history

Lilly pharmaceuticals would be based on the best science of the day.

April 30, 2007 6

April 30, 2007 7

Building the Scenarios for Project Resilience

April 30, 2007 8

R&D Output Breakthrough innovation

Payers Rule Price Sensitive Patients

The axes were defined as follows:

Incremental Innovation: Pharmaceutical industry R&D productivity remains stagnant, with

April 30, 2007 9

Horizontal Axis: Rx Purchase and Prescribing Decisions

Scenario 1: Have and Have-Nots

April 30, 2007 10

Scenario 2: Price Sensitive Patients

Scenario 3: Payers Rule

April 30, 2007 11

Scenario 4: Rationing Innovation

Alternative Business Models

April 30, 2007 12

1. Vertical Firm R&D Disintegrated Model

2. Low Cost Innovative FIPCO

April 30, 2007 13

3. Niche, High value FIPCO

4. Health Care Conglomerate

5. Services Firm (Disease management)

April 30, 2007 14

Framing Concrete Recommendations

April 30, 2007 15

Exhibit 1 Trends in Pharmaceutical Productivity

Source: NIH, FDA, PHRMA

April 30, 2007 16

Exhibit 2 Top 27 Blockbuster Drugs, 2004

Drug/Company Disease Sales (in US$

Lipitor (Pfizer) Cholesterol $10.86

Procrit/Eprex (Johnson & Johnson) Anemia $3.59

April 30, 2007 17

Exhibit 3 Blockbuster Sales by Pharmaceutical Company, 2001

Company Pharma Sales Blockbuster Sales Blockbuster Ratio Number of

Pfizer $26.8 $18.2 68.20% 7

Aventis $13.5 $2.9 21.20% 2

Exhibit 4 U.S. Drug Expenditure as % of Health Care Expenditures

Source: US Statistical Abstract, PHRMA

April 30, 2007 18

Exhibit 5 Eli Lilly Key Financial Data

Consolidated Statements of Income Year Ended December 31

Net sales $13,857.9 $12,582.5 $11,077.5

Cost of sales 3,223.9 2,675.1 2,176.5

Research and development 2,691.1 2,350.2 2,149.3

Marketing and administrative 4,284.2 4,055.4 3,424.0

Acquired-in-process research and development 392.2 -- 84.0

Asset impairments, restructuring, other charges 603.0 382.2 --

Interest expense 51.6 61.0 79.7

Other income-net (330.0)___(203.1)_ (293.7)

Income taxes (Note 11) 1,131.8_ 700.9___ 748.8

Net income $1,810.1___ $2,560.8_ $2,707.9

Earnings per share-basic (Note 10) $1.67 $2.38___ $2.51

Earnings per share-diluted (Note 10) $1.66_ $2.37___ $2.50