Lilly's new CEO a drug-biz rarity - a scientist

(Fortune) -- Eli Lilly's soon-to-be CEO John Lechleiter is an anomaly. As Lechleiter himself put it in a press conference on Tuesday: "Who would've thought that a kid who joined the company in 1979 as an organic chemist, wearing his whites, would be standing here today?"

The slightly flip remark spotlights a truth about today's drug industry: few top executives have ever toiled in a research lab. Instead, the vast majority of chief executives in the drug business made their way to the top by way of the sales and marketing department. That lack of scientific sensibility, many believe, places most Big Pharma CEOs at a distinct disadvantage when making R&D decisions.

In choosing Lechleiter, Eli Lilly (LLY, Fortune 500) is bucking a trend and setting itself apart from industry peers. With a trained chemist at the helm, Lilly may have an ever-so-slight, but important edge over its industry peers. Lilly has always had a unique way of doing things. It is one of the smaller drugmakers in the sector; with $15.6 billion in sales in 2006 it was less than a third the size of industry leaderPfizer (PFE, Fortune 500), which had $48.3 billion. And based in Indianapolis, the company is geographically separate from the East Coast-centered Big Pharma and the West Coast's Big Biotech.

Lilly can't escape the realities of the business, of course. It faces slowing growth due to patent expirations and generic price competition - just like other drugmakers. Lilly's solutions, however, are often somewhat different. In the late '90s, for instance, when the company faced Prozac's 2001 patent expiry, the company might have been expected to cut back on research expenses. Instead, management increased R&D spending to an industry-leading 19% of revenues, at a time when the average drugmaker reinvested just under 15% of sales into its lab activities.

Those investments are beginning to pay off. Last week, Lilly's current CEO Sidney Taurel told investors that the company aims to launch six new drugs by the end of 2011. That's the same year that the company's top-sellers Zyprexa (a $4.7 billion antipsychotic) and Cymbalta (a $1.3 billion antidepressant) begin to lose patent protection.

That's the legacy that - Lechleiter, 54, a 28-year veteran at Lilly - will inherit. He received a doctorate in organic chemistry at Harvard, before starting at Lilly as a chemist. Lechleiter later moved into management, holding the company's COO position since late 2005.

But he has remained grounded in his former calling. "Knowledge of science is source of comfort and certainty," Lechleiter told the business press yesterday. "It's not an unknown for me. I operate from a base of knowledge."

Of course, there are some other scientists at the top of drug firms. Pfizer's CEO Jeffrey Kindler is a lawyer who served as the company's general counsel before being tapped as an heir-apparent. Merck's (MRK, Fortune 500) chief executive Richard Clark was the company's head of manufacturing for many years.

Still, a basis of knowledge should serve Lechleiter well, says Patricia Danzon, a professor of healthcare management at Univ. of Pennsylvania's Wharton School. "The key decisions about where to place research investments are being made very high up. To have someone who understands the science at a profound level has to be an advantage," says Danzon. "The industry is certainly turning away from a strategy of high-powered marketing. That's no longer the way to salvation. Getting back to basics and focusing on internal R&D is the way to survive."

Lechleiter needs all the help he can get. In an effort to lower the overall cost of ushering an experimental drug through the various stages of research, outgoing CEO Taurel recently set in motion plans to outsource nearly half of Lilly's research and development to partners in India and China by 2010. Lechleiter will need to make critical decisions about which projects to outsource while choosing partners who are able to handle the workload.

Lechleiter's legacy will depend on how he orchestrates this major shift in Lilly's research operation. Gary Pisano, a professor of business administration at Harvard Business School has worked with Lilly on a consulting basis and has become familiar with Lechleiter. Pisano says of incoming CEO: "He understands the technology and has a feel for what's happening. He can think about the technical challenges in a nuanced way." Most importantly, says Pisano, Lechleiter "has lived in a researcher's shoes and has a real belief that over the long term, it's to the company's advantage to be excellent at research."

If there's one caveat about Lilly's choice for a new CEO, it's that as a career-long Lilly employee, he may not be capable of making radical changes. "It's good to have someone who understands the mechanics of development." says Cheryl Buxton a managing director of Korn/Ferry International executive search firm, who helps drugmakers and biotechs locate talent. "But wouldn't it also be true that, in general, the industry could use a fresh pair of eyes? The worry is that if you have a scientist who's worked his way up the ladder, do you really have a new way of doing things. If I were on Lilly's board, I would be challenging the new CEO: What are you going to do that's different?"