Lilly CEO: From lab coat to corner office

Dr. John Lechleiter, who will lead Lilly as CEO on April 1, started with the company nearly 30 years, developing agricultural chemicals in the lab.

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NEW YORK (CNNMoney.com) -- Eli Lilly & Co.'s incoming chief executive believes his background in the laboratory provides the formula needed to fill the drugmaker's dwindling pipeline.

"The sweet spot for me, in terms of knowledge of this business, is drug development," Dr. John Lechleiter said in a phone interview with CNNMoney.com.

Lechleiter is currently Lilly's chief operating officer. He takes the top spot April 1, replacing Sidney Taurel, who has led the company since 1998. Taurel joined Lilly as a marketing associate in 1971. But Lechleiter has a much different background, having started with Lilly as a chemist back in 1979.

Lechleiter inherits the biggest problem facing Big Pharma today: beefing up the pipeline in the face of disappearing blockbusters. And having been an industry insider for nearly 30 years, he understands as well as anyone it's like playing the lottery, with a fat pay-off but long odds.

"I think the biggest challenge facing the industry is bringing new drugs to the market," he said.

Not too many pharma CEOs once wore lab coats. Ian Wilcox, vice president of life sciences for the Hay Group, a consultant management firm that has provided data to Lilly, believes that Lechleiter's science background will prompt him to pour more money into research and development, which is the first step on getting a new drug to market.

"He's one of the few CEOs in pharma who knows what it takes to get a drug approved from new chemical entity all the way through to the FDA," said Wilcox. "He's innovative, and he understands the development at a fundamental level."

Indianapolis-based Lilly (LLY, Fortune 500) faces its next big blockbuster loss in 2010, when the first patent expires on Gemzar, a treatment for four types of cancer: lung, pancreatic, breast and ovarian. Another patent will provide partial protection until 2013. Gemzar sales grew 12% in 2007 to $1.6 billion, but once these patents start to run out, the drug will become vulnerable to generic competition and sales will begin to erode.

"Our goal is to really move this pipeline along in a way that will compensate us for at least some of the loss we'll experience in 2011 and, most importantly, position us for growth going into the next decade," said Lechleiter, referring to Lilly's first full year without Gemzar as a brand-name drug.

Lechleiter plans to keep investing 20% of Lilly's sales revenue back into R&D, which is a high percentage for the industry. Lilly already has 44 prospective drugs in its pipeline, a record for the company, with plans to enter 14 additional compounds in 2008.

Lilly faces another big loss in 2011, when the patent expires on the anti-psychotic Zyprexa, worth $4.8 billion in 2007 sales. The drugmaker hopes to recoup some of those losses with the experimental anti-clotting drug Effient, also known as prasugrel, which awaits a decision from the Food and Drug Administration.

But study results released last year painted a mixed picture of prasugrel as being more effective than Bristol-Myers Squibb's (BMY, Fortune 500) blockbuster Plavix, but worse in terms of bleeding. Both drugs carry hemophiliac-like side effects resulting from a thinning of the blood.

Lechleiter said the drug's benefits outweigh the risks for most people. But Lilly's study results caused some analysts to back off from previous blockbuster projections.

"The company is overly reliant on prasugrel," said Mike Krensavage, pharma analyst for the investment management firm Raymond James & Associates. "While the drug may very well work, there is a question of safety. I think Lilly needs to show [results] from a prospective clinical trial that proves that it's safe."

Lilly will reveal more information about prasugrel at the annual conference of the American College of Cardiology on March 29 in Chicago.

But even the most successful drugs can take a decade or more to get to market from the time they're discovered, and the process can cost hundreds of millions of dollars. And drug discovery is a risky proposition. The road to the FDA is littered with failed compounds.

Lechleiter doesn't plan to do all his drug research in-house. Like many other members of Big Pharma, Lilly is working to pad its pipeline by partnering with smaller companies that have discovered promising compounds, but lack the funding to continue research without outside help.

Lilly is also seeking to buy smaller companies outright. In the last year-and-a-half, the drugmaker has already bought ICOS, Hypnion and Ivy Animal Health.

Les Funtleyder, analyst for institutional trading firm Miller Tabak, said that allying with biotechs is the surest path for Lilly to get new drugs. That's how Lilly acquired prasugrel, by partnering with the Japanese company Daiichi Sankyo. And that's also how it got the successful diabetes treatment Byetta, by partnering with San Diego-based biotech Amylin Pharmaceuticals (AMLN).

Funtleyder said a recession could make it difficult for small biotechs to go public. That would make an acquisition from Big Pharma appear all the more attractive to them. He said that acquiring biotechs - and therefore new drugs - could be the best way for Lilly to lift its stock price, which has declined 11% over the last year.

If Lechleiter can produce a few new drugs, then "the share price should take care of itself," said Funtleyder.

Funtleyder and Krensavage do not own Lilly shares and their firms do not conduct business with the company.