Exclusive: Lilly CEO defends R&D spending

WASHINGTON Thu Jun 30, 2011 12:02am EDT

WASHINGTON (Reuters) - Eli Lilly and Co (LLY.N) is committed to spending what it takes to come up with innovative drugs over the long term, its chief executive said, even though the company's earnings are expected to tumble over the next three years.

"It would be a mistake for us to disinvest in any significant way in R&D," CEO John Lechleiter said in an interview.

"As a company that is focused on innovation and seeking new treatments and cures, it's important that we maintain a steady approach and a consistent approach in investing in R&D, and I'm confident it will pay off," Lechleiter told Reuters on the sidelines of the Bio International Convention in Washington.

In an earlier panel discussion at the convention, the CEO expressed surprise that other large drugmakers have recently taken hatchets to their research budgets in order to boost short-term profit for shareholders.

"I never thought I'd live to see this, but investors are actually thinking to cut R&D -- that's the hot topic of the day," he said. "This is kind of nuts, but this is what's being talked about."

Lechleiter, who began as a company chemist 32 years ago, can

be expected to defend its research spending when the drugmaker later today meets with hundreds of analysts and investors.

They will be keen to hear how profitability will be brought back on track as a handful of Lilly's biggest drugs face competition from cheaper generics.

Pfizer Inc (PFE.N) in February announced it would slash up to $2 billion of its R&D budget and eliminate thousands of research staff in order to make good on its earnings promises to shareholders.

Lechleiter declined to comment about specific rivals, but said large earnings-driven spending cuts can throw research organizations out of kilter.

"It's crazy; first of all, by definition this is a research and development-based industry," he said.

"We spend as an industry more on R&D, as a percentage of sales, than probably any other industry. These are long-term investments and it's important to maintain a thoughtful, consistent approach to investing in research. It's very difficult when you go through a lot of ups and downs.

"Ultimately what will make a difference for Lilly shareholders is our ability to launch valuable new medicines that will enable us to replace and grow our revenue base as we come out of these patent expirations," he said.

'NOT OUR DARKEST HOUR'

Lilly in April said its first-quarter global sales rose 6 percent to $5.84 billion, fueled by overseas sales of its prescription medicines.

But it predicted an earnings decline for the full-year of 9 to 12 percent, mindful that the company's $5 billion-a-year Zyprexa schizophrenia drug will be battered by cheaper generics beginning in October.

Its Gemzar cancer drug has lost half its sales to generics in the past year, and the company's top-selling antidepressant Cymbalta and Evista treatment for osteoporosis will face generics by 2014.

The drugs were considered major advances when they were introduced a decade ago or longer, burnishing Lilly's image as an innovator long after it introduced the first modern anti-depressant Prozac.

Although the company has failed to develop many big sellers in recent years, Lechleiter expressed confidence that many of the 70 company drugs now in human trials will succeed, restore earnings and prove Lilly's continuing research prowess.

"To offset some of the gloom that seems to hang over this industry, that this is our darkest hour, I think there's never been a time of greater opportunity."

(Editing by Muralikumar Anantharaman; Reuters Messaging: ransdell.pierson.reuters.com@reuters.net; 646-223-6034; ransdell.pierson@reuters.com))

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