Asia - 'The Biomedical Century'

'Here is a staggering fact," marvels John Lechleiter, the CEO and chairman of the drug maker Eli Lilly & Co. "In 1960 the average life expectancy in East Asia was 39. Thirty-nine! In 1990, 30 years later, it was 67. Think about that. Does that explain the Asian economic boom? I think it might go a long way."

Longer, healthier, more productive lives, and more of them; more workers; an expanding middle class; more opportunities for the formation of capital—this virtuous medical-economic cycle, as Mr. Lechleiter sees it, is helping to generate the equally staggering growth in China and elsewhere in the region. "Wealth follows health, and it ain't the other way around," he says earlier this week, as the dawn catches the lenses of his horn-rimmed glasses here in his office atop Lilly's sprawling research campus.

Mr. Lechleiter's thoughts are in Asia not merely because he just returned from a trans-Pacific trade summit, or because emerging markets make up an increasing share of the pharmaceutical industry's business. Amid fears of American decline, Mr. Lechleiter wonders, "What is it about this country, what do we need to do today not only to pull ourselves out of the vestiges or the grips of recession, but resume the strong economic growth that we need to provide the jobs that I reckon are our biggest current problem."

Mr. Lechleiter has a few reforms in mind. The corporate tax code contains "one of if not the highest marginal tax rates in the world" and nicks income earned abroad when it returns to the U.S. "We need to move to a territorial system, period. Yes, companies like Lilly have a lot of cash outside the U.S. The question isn't repatriation, the question is why that is happening in the first place. Those tens of millions of dollars, probably hundreds of millions of dollars depending on how you care to count, could be used to invest in this country and put people back to work."

More broadly, Mr. Lechleiter says, prosperity depends "on the free movement of capital and talent, human capital." More trade, for example, both foreign and domestic: He points out that Indiana is the country's third largest exporter of medical products, after California and Texas. Stronger intellectual property protection is another, as is more immigration: He thinks every advanced degree in math, science, engineering or technology should come with "a green card stapled to the diploma. . . . The fact is, we go to Harvard University and hire a Chinese scientist and we have to work damn hard to keep that person here. That's hurting this country."

But above all, Mr. Lechleiter explains, "There's no better investment that we can make than in biomedical research and in our health. This is not something that we're trying to steal away from someone else. This is not a nascent industry." Pounding his desk on each word—"America leads the world, okay?"

"I believe this will be the biomedical century," he continues. "We'll look back a hundred years from now and say the 20th century was the century of chemistry and physics, and the 21st century was the century of biomedicine."

Mr. Lechleiter adds that "The challenge or the opportunity we have is that never before has the science and our knowledge base been riper for exploitation." For most of the pharmaceutical industry's existence—since Civil War veteran Col. Eli Lilly began to improve on the patent medicines of the day—"it was akin to feeling your way around a dark room and trying to make sense of what's what. Suddenly the lights are on and we can see, aha: In a cell, this pathway and that pathway both contribute to, say, tumor formation."

Not only is there an ongoing revolution in genomics and systems biology, Mr. Lechleiter continues, we increasingly have the tools to make use of this basic research and commercialize it. "A process that used to take years and years and rely too much on serendipity and conjecture can now be accomplished in a period of time that looks closer to months and months." Researchers are more "mission driven and deliberate" and, with a biological target, can "come up with a viable clinical candidate, something that we could hope to take into human testing" faster and with more confidence than ever before.

"That's happening," he says. "It's happening within these walls, it's happening across the industry. It's the first evidence that we're gaining the sorts of productivity that people had hoped for or predicted based on this explosion of knowledge. . . . I'm telling you, behind the curtain bench-level discovery is changing for the better day in and day out."

Mr. Lechleiter's optimism runs against the growing laments that new drug development has stalled and progress against disease is slowing down. And it certainly runs against the markets, where pharma's P/E ratios—which anticipate profits growth—are historically low and trail most other consumer businesses. "People do tend to look at that and say, 'Lechleiter, if you're right, what's your stock multiple doing at eight then?'"

Some large part of the reason is the industry-wide "patent cliff," the intellectual-property expirations that expose the drugs of the 1990s heyday like Pfizer's cholesterol medicine Lipitor to generic, cheaper copies. "When you work in pharma, it's a little different from the fast-food industry," Dr. Lechleiter says, not a little sharply. "I can't just order up a replacement for the Big Mac and have it sitting there in the drive-thru the next day. There's an ebb and a flow that we can't always predict or control."

Lilly has responded by betting on "the biomedical resurgence" and investing in its drug pipeline, which contains 66 new molecules, 34 of them in the late-stage Phase II or III clinical trials. The company is also broadening its portfolio from traditional mainstays of neuroscience, oncology and diabetes. The list includes a potential experimental breakthrough for Alzheimer's that could flush out the brain plaques that contribute to the disease.

Mr. Lechleiter, who came to Lilly as an organic chemist in 1979 and became CEO in 2008, says the company is testing "whether innovation is sustainable over the long haul."

This strategy is in marked contrast to many of Lilly's peers, which may also help to explain those P/E ratios. Over the last decade, most of the industry has been slashing research and development in favor of M&A and megadeals; many of the blockbusters coming off-patent were created by companies that no longer exist. "One current challenge the industry faces is that the wave of consolidation really leaves only about a dozen multinational pharma companies that have global reach. That's it," says Mr. Lechleiter. (Down from 30 or more not so long ago.)

Fewer companies means fewer R&D departments, fewer scientists looking at the same problem from different angles, fewer teams capable of making the investments needed to run the regulatory gauntlet to get an idea into the pharmacy. While Mr. Lechleiter cautions that "far be it from me to criticize the direction any other company or any other enterprise has decided to take," note that he is the only big pharma CEO with a scientific background.

"There's an innovation ecosystem, and like any ecosystem it can get out of balance," as Mr. Lechleiter puts it. Another organism in need of adaptation is the Food and Drug Administration. "We can't have a 1950s or 1960s or 1970s regulatory system when we're doing 2011 or 2012 or 2020 science," he says. The number of therapies the FDA has approved over the last five years is the lowest "since I joined the company." He concedes that there's been "a very recent bit of an uptick" but says he's "hesitant to draw sweeping conclusions."

The FDA, he says, ought to be better prepared for what he calls "tailored" therapies. "Maybe in your type of cancer it's pathway A that's lit up, and maybe in my type of cancer, because we have different genetics, it's pathway B. Well, if we knew that, we could give you a type of drug that tackles pathway A, and I'd get a type of drug for pathway B. . . .

"One would think," he continues, "that you could screen patients in your clinical trials and enroll the people who are most likely to respond to begin with, maybe study smaller numbers of patients to show a treatment effect. If you've got the right population you're going to need fewer to see the effect versus studying it in everybody. And then, perhaps, gain some expedited path to make that medicine available to patients on terms that basically say this is only for people who have this type of cancer, measured by this test."

So what about drugs where the evidence is more ambiguous, where only some people respond for reasons that aren't fully understood? "This business reminds us everyday how profoundly ignorant we are," Mr. Lechleiter says. "I think we're likely to go for many years before we're able to always say, well, why is it that drug XYZ works in this patient but doesn't work in that patient."

Since "the need for better medicines that are more tailored and more specific will only increase," Mr. Lechleiter says that "we need a new partnership, carefully defined and wisely executed" between regulators and the regulated. Congress needs to reauthorize the FDA drug approval process by next year, and "we need policies in place that at least don't destroy this innovation ecosystem."

Mr. Lechleiter also worries about global price controls and says that if such controls come to the U.S., the likely artery will be the Medicare prescription drug benefit, which by some miracle avoided setting the fee schedules that apply to the rest of health care when it was created in 2003. The irony is that "if there's ever been a government program that's cost less and worked better than anybody envisioned, this might be it. The reason is that private competition is in the middle of it."

One liberal ambition is to suppress such competition through so-called "rebates" that are really back-door price controls, like many states impose through Medicaid. Mr. Lechleiter says that in one scenario Lilly modelled the industry stood to lose $135 billion over a decade. For Lilly, "that's a billion dollars to two billion a pop, so that's 70 to 130 new medicines that will never be developed."

The truth is that for all the political ructions about Soliris, Elaprase and the Avastins of the world, drugs account for about 10% to 12% of U.S. health-care spending, and seven of 10 prescriptions are for generics. "Medicines are a dime on the dollar and no matter how you look at it they're the bargain of the century," Mr. Lechleiter says. "Who knows, it may be the best investment we've ever made."

JOSEPH RAGO

Mr. Rago is a member of the Journal editorial board.

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