Bianca Sharma, a representative from Eli Lilly, is evaluating three options for developing a new migraine drug: Option A involves rushing a barebones drug to market; Option B focuses on improving the drug through further research; Option C involves partnerships to strengthen Eli Lilly's drug development process. While Options A and B each have merits, Option C would leverage alliances to integrate capabilities, signal commitment to new technologies, and diversify risk, positioning Eli Lilly best for long-term success in the migraine market and beyond.

2. DESCRIBING PROBLEM AND GIVING CONTEXT

3. BIANCA SHARMA, ELI LILLY

16. Hey, not fair!! This is
embarrassing. I think I am
going to cry.

28. IS THERE A MARKET?
(Does it even make sense to do any one of these options
or should Bianca make a case for the firm to take up
something else? – void choice / null option)

29. Therapeutic Category – CNS increasing most in absolute terms

30. Only 10% of migraineurs are treated
by Sumatriptan, which leaves
immense opportunity in the market

31. Only 55% of migraineurs sought
medical treatment, and of these,
only half were correctly identified as
migraine

32. - At least one-fifth of the world’s
population suffer from a
neurological or psychiatric
disorder at one point in their
lifetime
- A depressive patient spends up
to $25 a week for a daily Prozac
regimen
- CNS market had 1994 worldwide
sales of $11.1 billion (80%
originating in G7 nations)
- Imitrex enjoyed almost 75% of
the acute migraine market, with
projected 1996 annual sales of
$800 million (up from $250
million in 1993).

33. THE DIFFERENT OPTIONS

34. First to market with a better product:
Feedback loop will be quicker.
OPTION-A: PHANTOM

35. OPTION-A: PHANTOM
Leaves resources for iteration:
Gives better flexibility, arguably.

36. OPTION-A: PHANTOM
“Only 28% felt reduction in cost compared to sumatriptan was
important”:
Excellent opportunity to rollout a better (not yet perfect) product.

37. OPTION-A: PHANTOM
Eli Lilly needs a blockbuster quick.

38. OPTION-A: PHANTOM
First 3 drugs introduced for a class – control 80% of market
share.

39. OPTION-A: PHANTOM
All these factors point to reasons why Eli Lilly needs to
concentrate on having a strategy around the Minimum Winning
Game that Burgelman and Siegel discuss.

40. OPTION-A: PHANTOM
Based on Gallup polls, about 40% of non-consulters could be
motivated to seek treatment:
Resources may need to be used for marketing till the better
product is ready to hit the market so that there is exposure to a
larger market. Eli Lilly must think about how best to leverage
and/or even think about creating a product-market fit.

41. OPTION-B: IRONMAN
Option-B gives a better chance to improve on the product and
not send a product into the market that is barebones (sorry -
Phantom comic makers) and may have adverse affects on the
company’s brands and future trust on its products.

42. OPTION-B: IRONMAN
The time spent on research will help get more info on current
finding and make Eli Lilly better at a new technology important
in the industry.

43. OPTION-B: IRONMAN
Combinatorial chemistry does not replace the wisdom or
experience of conventional chemists – Stephen Kaldor and his
group have made good breakthroughs. This speaks to how Eli
Lilly’s intellectual resources are skilled enough to handle a
complex new technology that requires a lot of expertise.

44. OPTION-B: IRONMAN
Market will only reward innovation – no longer useful to make
incremental improvements. This makes it essential for Eli Lilly to
come up with a differentiated product to help reverse some
disappointing trends on its balance sheet that have not reflected
well on the stock market.

45. OPTION-B: IRONMAN
Testing of new compounds demonstrated improvements while
lacking adverse effects. This gives an example of success and
effectiveness of use of combinatorial chemistry to research on
the extracted lead migraine compound.

46. OPTION-B: IRONMAN
With the success of a previous drug Prozac, which was also in
the CNS category, Eli Lilly may be renowned among doctors
recommending drugs for the CNS category. There is brand
equity that can be leveraged on having hold of an implicit
science and/or technology that Eli Lilly has a strength in.

47. OPTION-B: IRONMAN
“The greater the number of compounds generated through
combinatorial chemistry, the greater the demand placed on
screening” – The focus of this option on the 1f serotonin
receptor subtype helps address this issue and bring more
efficiency to the process.

48. OPTION-C: POWERPUFF GIRLS
This option enables Eli Lilly to get large amounts of information
on the technology of combinatorial chemistry for all the steps of
drug discovery and not only after a lead compound has been
narrowed down on. This will in the long-term give Eli Lilly a
stronger core competency in the two technologies –
combinatorial chemistry and high-throughput screening.

49. OPTION-C: POWERPUFF GIRLS
This gives Eli Lilly a better chance to work with Sphinx and not
only migrate way of doing things but also may be develop new
processes that may be better than the sum of the two existing
ones.
Disruptive innovation on process side adds more to the
technological competency as it is hard to reengineer and
develop it despite huge investments by a competitor.

50. OPTION-C: POWERPUFF GIRLS
Moving ahead with new technology also signals to firms with the
same mindset about a powerful presence (have resources) in
the industry that may look to make a strategic alliance or an
acquisition.
David Teece talks about how a firm can leverage bundling of a
variety of complimentary assets to strengthen its position in the
market. Eli Lilly has been able to achieve similar feats with
Sphinx (high-throughput screening process) and Synaptic
(cloning 1f serotonin receptor subtype).

51. OPTION-C: POWERPUFF GIRLS
Moreover, this will help Eli Lilly in its aspiration to achieve
vertical integration in its drug development process.
The more acquisitions it makes and alliances it forms and brings
capabilities in-house, the easier it will be for vertical integration.
It can also look at further forward and backward integration
then. At times, just having the option of entering into such
spheres to create new markets and economies of scale/scope
can be very valuable and yet not covered in calculations.

52. OPTION-C: POWERPUFF GIRLS
Finally, nothing is sure shot even with the significant discovery
of the 1f receptor. The industry is cruel in terms of the ratio of
the number of products that are worked on and the number that
finally make it to market.
Thus, it makes sense to avoid putting all eggs in one basket and
research all types of expertise such as – cardiovascular, cancer,
central nervous system (CNS) etc.

53. NARROWING DOWN ON FINAL DECISION

54. While all options have their strengths and weaknesses, there are three
things that we should consider while making this decision:
- Eli Lilly’s Resources: This company can wait for its next blockbuster, but it
needs to develop this technology as its core competency for sure.
- The probability of the compound that is being concentrated on right now
to fail and render all or most of the effort to bring it to market through
testing and validations is significant to say the least.
- The option or decision that will leverage Eli Lilly’s alliances and
acquisitions to the most will help retrieve some of the premiums paid for
such collaborations. These benefits are again not covered in our
calculations.

55. Cashflows of different options:
T=0
(now)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Option-A 40 100 170 250 400 400 400 400 200 0 0 0
Option-B 10 55 117.5 190 287.5 400 400 400 350 150 0 0
Option-C 0 20 70 135 210 325 400 400 400 300 100 0
Comparison of NPV and Option
Values:
Cash Flows Expenses NPV Option Value
Option-A / Phantom $1,181.16 $885.87 295.29 -
Option-B / Ironman $1,079 $788 291.00 326.11
Option-C / Powerpuff Girls $959 $681 278.00 353.73
* MBA Man has explained this in the Appendix
Option-C / Powerpuff Girls is also the one to take if we look at our conservative numbers

56. - Phantom (Option-A) cannot fly and thus you render it
very vulnerable to the enemy or competition.
- Ironman (Option-B) needs to come back to base
repeatedly for executing upgrades. This doesn’t help
the firm concentrate on developing its pipeline when
Eli Lilly is busy concentrating its efforts on one. You
don’t want to end up like Ironman’s company – which
comes close to bankruptcy again and again.
- Powerpuff Girls (Option-C) can work on 3 issues –
multiplicity factor.
TO END:

57. Didn’t think superheroes could solve your MBA Case Analysis, did you!!

58. Thank you. Bye and Take Care 

59. Cashflows of different options:
T=0
(now)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Option-A 40 100 170 250 400 400 400 400 200 0 0 0
Option-B 10 55 117.5 190 287.5 400 400 400 350 150 0 0
Option-C 0 20 70 135 210 325 400 400 400 300 100 0
Comparison of NPV and Option Values:
Cash Flows Expenses NPV Option Value
Option-A / Phantom $1,181.16 $885.87 295.29 -
Option-B / Ironman $1,079 $788 291.00 326.11
Option-C / Powerpuff Girls $959 $681 278.00 353.73
Appendix-A

60. Option-B / Ironman Option-C / Powerpuff Girls
Input Data Input Data
Stock Price now (P) $1,079 Stock Price now (P) $959
Exercise Price of Option (EX) $788 Exercise Price of Option (EX) $681
Number of periods to Exercise in years (t) 0.75 Number of periods to Exercise in years (t) 1.5
Compounded Risk-Free Interest Rate (rf) 5.00% Compounded Risk-Free Interest Rate (rf) 5.00%
Standard Deviation (annualized σ) 27.00% Standard Deviation (annualized σ) 34.00%
Output Data Output Data
Present Value of Exercise Price (PV(EX)) 758.9972 Present Value of Exercise Price (PV(EX)) 631.7933
σ∗τ⊥.5 0.2338 σ∗τ⊥.5 0.4164
d1 1.6214 d1 1.2104
d2 1.3876 d2 0.794
Delta N(d1) Normal Cumulative Density Function 0.9475 Delta N(d1) Normal Cumulative Density Function 0.8869
Bank Loan N(d2)*PV(EX) 696.2798 Bank Loan N(d2)*PV(EX) 496.8422
Value of Call 326.1107 Value of Call 353.7316
Value of Put 6.1079 Value of Put 26.5249
Call Option as % of Cash Flows 30% Call Option as % of Cash Flows 37%
Appendix-B

61. Inputs Required for Valuing Real Value Options:
Stock Price now (P) Present Value of a Project's Operating Assets to be acquired
Exercise Price of Option (EX) Expenditure required to acquire the project's assets
Number of periods to Exercise in years (t) Length of time the decision may be deferred
Compounded Risk-Free Interest Rate (rf) Time Value of Money
Standard Deviation (annualized σ) Riskiness of the Project's Assets
Appendix-C

62. ASSUMPTIONS:
1) If we look at Net Income of 1286 on 5712, this is roughly 22%.
We assume that if the product is going to bring majority sales and will
be the blockbuster, it will return a higher average - 25%
2) Similarly, as Option-B and Option-C will have economies of scale and
thus reduce operating cost, we associate expenses on 100 units of
revenue incrementally for the three options.
Option-A: 75%, Option-B: 73% and Option-C: 71%
3) With strict pricing mechanism in the industry, we have assumed that
the product will be priced similarly after coming to market on all three
options.
4) The revenue or cash flows have been assumed same. The time of
occurrence has shifted 9 months for Option-B and 18 months for
Option-C. This means that Option-B got revenues of 3 months for
the product for the first year - estimates for which were 40 and so
amrtizing this - we get 10 million.
5) Growth and fall of revenue has been estimated by studying the
estimates given by Eli Lilly at peak of product, and the performance
of comparative industry products such as Sumatriptan.
Appendix-D