1.

In 1991, the pharmaceutical market began to change due to a variety of factors. Price flexibility
was diminishing, innovation rate was slowing, competition within drug classes and from generic
substitutes was growing. These changes caused the pharmaceutical stock prices to drop by 35%
between 1991 and mid-1993. The cost of manufacturing pharmaceuticals was also increasing
from 10% in the 1980s to 20% in the 1990s and were expected to increase to 60% by 2000. This
was caused due to FDA regulations regarding product purity and EPA regulations regarding
pollution control and waste treatment. The increasingly complex molecules being synthesized
needed increasingly expensive process technology for large scale manufacturing. HMOs and
other managed care networks accounted for almost 64% of pharmaceutical purchases in 1992.
These networks could demand discounts of over 60% from pharmaceutical companies since they
bought most drugs in bulk. This drastically reduced pricing flexibility.
Drug margins were pressured by increased competition from pharmaceutical companies since
most companies were working on similar compounds. This made some therapeutic classes more
crowded with potential substitutes. The first drug of its kind to hit the market normally set the
market price and enjoyed a period of exclusivity before competing products were launched. This
period of exclusivity was getting smaller. In the late 1970s and 1980s, most drugs enjoyed a
period of exclusivity of almost 5 years before other companies jumped in with a new product.
That window has been cut in half. The competing drugs were often discounted to attract market
shares which resulted in reduced prices across all products in the therapeutic class.
In order to keep up with the competition the management of Lilly set a goal of 50% reduction in
product development lead time and 25% reduction in manufacturing costs. In order to reduce
development lead time the production facilities needed to be designed while the product was stil
early in development despite the fact that rushed finalization of facilities might lead to poorer
yields.
2.
Lilly has used several types of facilities for new products in the past. Plants were considered
specialized as they were only dedicated to the products they were designed for. In order to meet
Lillys new goals of faster product speed to management, it was needed to build flexible
manufacturing plants that could accommodate any of Lillys products. In the past time to build
manufacturing plants had delayed the launch of new products. Specialized plants were a risk
because they would remain idle if a drug did not receive regulatory approval on time or would
need to be retrofitted if the drug was not approved.
The First option for Lilly was to design and build a single specialized facility for 3 new products.
All three would remain in the facility throughout their 15 year lives. Building cost for the facility
was estimated to be 37.5 million dollars. Operating costs were 6.8 million dollars per year. Since
specialized facilities used equipment and procedures tailored to the product, a rig of specialized
capacity could produce 20000 kg of product a year. Product per unit of capacity would be high,
averaging 16000 kg per rig at 80% utilization. The specialization would result in high yield. Thus

to meet initial volume requirements for the 3 products, the flexible facility would need 1.5 rigs of
capacity.
The second option was to build a single flexible facility. Building cost of the flexible facility
would be $150 million and operating costs would be $9.48 million per year. A rig of flexible
capacity could only produce a maximum of 7500 kg a year. The difference in production rates
between specialized and flexible facilities was exacerbated by the difference in utilization rates.
As opposed to the 80% utilization rate of a specialized facility, flexible facilities had a utilization
rate of only 65%, so a rig of flexible capacity could only produce 4875 kg per year. Thus to meet
initial volume requirements for the 3 products, the flexible facility would need 3 rigs of capacity.
The flexible plant could produce betazine and clorazine for their entire lives. However the
demand for Alfatine was expected to exceed the capacity of the flexible plant by 2001 at which
point several options were available for the continued production of Alfatine. Production could
be moved to a specialized 1 rig plant, wither newly built or retrofitted, or kept in the flexible
plant depending on actual demand and yield.
Despite the problems associated with low yield and utilization, flexible plants offered several
advantages. Processes for making new products no longer had to finalized early in the concept
and design phase of construction. The process could be worked on longer without worrying
about delaying product launch. Another advantage was reduced lead time associated with
product development. While the Alfatine, Clorazine and Betazine would not get to market any
sooner with the flexible facility, new products would reach the market a year earlier. Flexible
plants also offered low risk because, in the event of one of the drugs not being approved, the
capacity could simply be used for another new drug.