The headliner in the strategic shift is the sale of Lilly’s 600,000 sq. ft. Greenfield Laboratories facility in Indiana, which carries out preclinical toxicology and other early-stage drug discovery work, to Covance for $50m. The CRO also gets guarantees of $1.6bn in drug development contracts over the next 10 years.
Lilly is following a path that is already well-trodden in pharmaceutical manufacturing but less common in R&D. Faced with surplus capacity many drugmakers have elected to sell off plants, either to management buyout teams or established contract manufacturers, and often with legacy contracts thrown in.
The Lilly/Covance deal is one of the first large-scale examples of this type of facility sale in early-stage drug development – a function which until recently was jealously guarded within the walls of big pharma companies.
Under the terms of the agreement, 260 Lilly employees who work in non-Good Laboratory Practice (GLP) toxicology, in vivo pharmacology, quality control laboratory and imaging services will be offered jobs at Covance, which said it plans to invest in upgrading the site and will “double or even triple” the workforce.
The Greenfields site benefits from close proximity with Covance’s central laboratory unit in Indianapolis, and the contract between the two firms also covers central lab as well as clinical pharmacology, GLP toxicology studies, and clinical Phase II-IV services.
"Today's announcement represents an innovative approach to the R&D productivity challenges our pharmaceutical clients are facing," said Joe Herring, Covance’s chairman and CEO, noting that it marks a conversion from the traditional fully-integrated pharmaceutical company (FIPCO) model to a fully-integrated pharmaceutical network (FIPNET). He added it was the most significant development at the firm since it went public 11 years ago, and "carves a new path to growth for both Covance and the CRO industry.”
Meanwhile, by outsourcing a lot of these functions, Lilly stands to gain a more efficient drug development platform and inject some flexibility into its fixed-cost infrastructure, as well as remove the cost and overheads of running the campus.
The Greenfield site had been operating at less than 50 per cent capacity, according to president and CEO John Lechleiter, so it made sense to allow the surplus to be used for other Covance clients. Covance intends to take over the campus in early October, and expects to start enrolling non-Lilly clients in 2009, adding upside potential to that $1.6bn contract.
Lilly has committed to conducting additional Phase I trials with Covance it may have to close the Lilly Center for Medical Science in Indianapolis as its workload will be “substantially reduced.” The group's 48 employees can apply for roles within Lilly or receive severance.
New services at a bargain price
Interestingly, the acquisition of Greenfields brings new specialised capabilities to Covance that are not currently in the CRO’s portfolio. Non-GLP toxicology is one example, as is in vivo pharmacology and non-clinical imaging, said Herring on a conference call.
The Greenfields in vivo pharmacology group uses a model that is predictive of human disease, said Herring, while the non-GLP toxicology group carries out fast, small studies done earlier in the discovery and candidate screening and selection process. “These studies are rarely outsourced as proximity and quick turnaround are key considerations,” said Herring.
Non-clinical imaging using MRI, PET scans, ultrasound and optical and thermal imaging technologies, applied early in the drug development process, can provide additional data to help make decisions about whether to continue a project, he added.
“This asset transfer has accelerated our plans to enter these specialty market segments,” said Herring, with the huge advantage of an ‘anchor’ client and existing expertise and infrastructure.
“These couldn’t come at a better time,” he added, noting that entering these areas is very high fixed-cost investment that Covance had been working toward for some years.
The latest also gives a clear example of the benefits of scale in the outsourcing sector. By virtue of its broad range of drug development services and long-term working relationship with Lilly Covance was able to tie in the company’s business for the next 10 years.
That translates to an increase in Lilly’s business from $60m in 2007 and estimated $70m in 2008 to around $160m a year for the next 10 years.
Covance’s latest deal comes on the heels of its Chinese joint venture with WuXi in the area of preclinical drug development, such as GLP toxicology, drug metabolism and bioanalytical chemistry services, which represented another concerted push into the early-stage development segment.
Quintiles, i3 also in on it
Meanwhile, Covance is not the only CRO to benefit from Lilly’s strategic shift in direction. Lilly also said it will transfer its clinical trial monitoring work in the US and Puerto Rico to Quintiles and the majority of its data management work in the United States to i3, a full-service, global clinical research organization.
Approximately 265 Lilly employees, some of them based outside Indianapolis, will be affected by these changes. Lilly has new positions for about half of these employees; the remaining impacted employees will receive a competitive severance package from Lilly and can also pursue employment opportunities with Quintiles or i3.
As part of the restructuring, Lilly also plans to move its animal health division, known as Elanco, from the Greenfield site where it is based, to a new, expanded headquarters by early 2010. More than 350 Elanco employees will move to that unit’s new global headquarters when construction is complete.
· Meanwhile, Lilly has established an arrangement with TPG-Axon Capital and NovaQuest - the partnering group of Quintiles Transnational - for the Phase III development of the company's two lead molecules for Alzheimer's disease. Lilly said the arrangement will provide it with “greater flexibility to direct internal resources to advance additional molecules in its pipeline.”