On corporate growth cycles, part 2

Last week, I discussed Apple and how the iPhone has shifted to being a cash cow that they can use to invest in other products and potential growth areas.

Correctly identifying when it’s time to pivot and emphasize a different product is hard.

I was generously given a tour and some time with part of the marketing team at Eli Lilly a few years ago, as part of my MBA. While there, we discussed the effect that patents have on the pharmaceutical (drug) industry. Eli Lilly can invent a drug and patent it. This patent protects their invention – no one else can manufacture this drug for 20 years from the date of patenting. Now, the drug can’t immediately be sold, so they don’t get 20 years of sales. It still needs to go through all of it’s testing and FDA approval, which can take up to a decade.

For Eli Lilly, that means that a) they patent many drugs which never make it to market because they don’t make it through all of the testing phases, and b) they have to carefully time product releases so that they always have a couple of drugs which are being sold and under patent. Today, let’s look at part b more closely.

Once a drug’s patent expires, sales drop dramatically. At that time, generic versions of the drug can be sold by other companies, and the sales price and volume of sales of the non-generic drop. So, a drug company has an ~10 year window where they can introduce a new drug, get doctors to use it, and make a healthy profit selling the drug. (We can debate the ethics of drug pricing and patents at some other point; there are large expenses incurred while developing a drug, so they need high prices and sales volume to survive.)

For Eli Lilly, this means that they have built-in product life cycles which are extremely clear. They know exactly how long a product can be profitable, and exactly when they need to start re-investing in R&D to get a new product. Instead of a typical growth curve, their growth curve needs to be compressed – quickly growing at release, dropping off nearly completely when the patent expires.

This is opposite of Apple, where potential growth of a product is hard to measure. An interesting contrast – both mostly B2C companies, one with heavy regulation, one with very little regulation.