Elililly

INDUSTRY OVERVIEW

The market size of pharmaceutical industry in 1993 totaled $191billion worldwide.

Top 15 competitors accounted for more than one third of the industry sales. US pharmaceutical industry is one of the fastest growing sectors in the US economy. It grew at a CAGR of 18% from 1982 to 1992 but this growth rate was expected to fall down to 8-12%. Eli Lilly was one of the four largest companies in the US. Among the most critical activities for pharmaceutical companies was the discovery and development of novel therapeutic compounds.

The number of uncertainties involved ranged from approval by the FDA to the amount of the new drug that would be required for the market. The pharmaceutical products were sold to hospitals, HMOs, retail pharmacies and physicians. Volumes were declining but still the pharmaceutical companies were able to maintain revenue and earnings growth by raising prices. Average gross margins in products ranged from 70-85% in the US. During the 90s, the industry started facing pressure due to the following factors:

1. Rising costs: Even though average amounts invested in R&D had increased, from $1.1billion in 1975 to approximately $12.6billion in 1992 the number of novel drugs launched during this period had risen only slightly. Also, the cost to develop a new drug had increased to $359 million in 1992 from $120billion 5 years earlier. The reasons for rising costs were:

a. FDA regulations concerning product quality.

b. EPA regulations concerning pollution control and waste treatment facilities.

c. Increased potency of drugs which required costly containment facilities.

d. Development of more complex molecules required more advanced production technology.

e. Under utilization of facilities.

2. Pricing Inflexibility:

a. Government intervention in 1993 which led to caps on price increases and caps on reimbursement for Medicare and Medicaid.

b. Growth of managed care providers like HMOs which bought in bulk and were