GLOBAL pharmaceutical companies are facing headwinds as patent expirations allow generic drug manufacturers to duplicate many top-grossing medicines.

Eli Lilly & Co, known for its portfolio of diabetes, central nervous system and cancer treatments, reported a 53 percent plunge in first-quarter profit after losing patent protection for its best-selling anti-depressant Cymbalta and its osteoporosis drug Evista in the United States.

John C. Lechleiter, chairman, president and chief executive officer of the Indianapolis-based pharmaceutical giant, said Lilly will be able to step out of the shadow of patent losses next year as it beefs up research and development of new drugs.

Despite its sales slide, Lilly will continue its “robust” investment pace in China, Lechleiter said. He joined the company in 1979 and has served as president and CEO since 2008. He became chairman in 2009.

Q: How does Lilly cope with patent expiration?

A: Since 2011, Lilly has lost patent protection for many major products in the United States: Zyprexa in October 2011, Cymbalta late last year and Evista recently. This means we have taken a significant hit to top-line revenue. Once you lose patents in the US, generic medicines follow quickly.

We saw this coming. I became CEO in 2008, and I was certainly clear about where we would head. Unfortunately, our pipeline then had not caught up with expiration of patents. So we did what I think was the best strategy at that time, which was to invest in our pipeline. In 2004 and 2005, we had only about seven or eight medicines in total, in Phase II and Phase III trials. Today we have 12 molecules in Phase III, or the submission stage, and 25 more in Phase II. We are also preparing to launch new medicines this year.

Due to the loss of revenue from patent expiration, we also have to address our cost structure. So in 2009, we announced a plan to make significant cost reduction by the end of 2011. We reduced our employee headcount globally by over 5,000 people and took more than US$1 billion out of our cost structure.

Q: In addition to research and development of original drugs, you have recently also expanded your investment in generic drugs. One example is your working with Jiangsu-based Novast Laboratories Ltd on generic medicine. Is this a shift of strategy?

A: Our business, by and large, is going to remain centered on innovative new medicines. That’s the core of what we do. However, in individual markets, we believe it may make sense to be able to offer a more complete portfolio of medicines in a particular therapy category. Thus, generic medicines would complement our innovative medicine. But this doesn’t represent a shift of our strategy, and it does not represent a shift in approach to deal with this pipeline gap that I mentioned.

Q: Foreign drug makers have been criticized for price-gouging in China. Also, the government has said it plans to reduce the price gap between brand-name drugs and generic drugs. How do you view those issues?

A: I believe there has to be a balance. There is certainly a role for low-cost generic drugs. Even in the US today, roughly 80 percent of all medicines prescribed are generics. At the same time, we know that for most types of diseases, we still don’t have all the answers we need. That’s why it’s important that we maintain our focus on discovering and developing innovative medicines, and on those medicines being reimbursed at prices that reflect the value they bring to patients and the health-care system. In some cases, they offset hospital costs, get patients back to work and enable people to live longer, better lives. We also obviously invest significant amounts of money, US$5 billion or so this year, in research and development. We take a great deal of risks also to cover the 10 to 15 years it takes to bring medicines to market.

Pricing has to be a consideration of different factors. As health-care reform continues in China, we hope the value of innovative medicines is appreciated and rewarded alongside efforts to ensure that high-quality, lower-cost generic medicines are also available to Chinese patients.

Q: Lilly set up a venture fund in 2007, mainly to invest in China’s biopharmaceutical industry. What do you think is the outlook for that industry?

A: China will develop its own biopharmaceutical industry. This is clearly a government goal outlined in the 12th Five-Year Plan. As institutions in China mature and develop —and by that I mean intellectual property protection, regulatory policies and regulatory guidance — and as the government continues its efforts to ensure that companies like Lilly can work with partners in China, I believe the groundwork will be solid for a vibrant and successful biopharmaceutical industry in China. That’s why we decided to act as an investor back in 2007.

The primary purpose of this venture fund was not return on investment. The primary reason for starting Lilly Asian Ventures was to enable us to participate in the growth and development of certain Chinese companies. The companies we’ve invested in have also become our partners, for example, in the early stages of research and development and in drug supply and distribution. Typically, we’re looking at companies that we believe can be No. 1 or No. 2 among like competitors in China, or companies that offer expertise or specific skills or opportunities that make them unique for Lilly.

Q: What are the major concerns for foreign pharmaceutical companies operating in China?

A: We face challenges in many markets. I think the unique aspect of China is that the country continues to develop and change so rapidly.

One challenge we face here is ensuring that we are able to register our drugs in a timely way. Today, we estimate there is a gap about eight years between the time medicines are available in Western markets and the time the same medicines are available in China. That’s a pretty significant lag. We are in discussions with Chinese authorities to try to improve the system of clinical testing and registration to give people in China access to  medicines in a more timely way.

The second major challenge here is intellectual property protection. Our business depends on intellectual property protection of our molecule and our technology to enable us to take the long trip to spend sums of money over many years to bring new medicines to patients. We believe a lot of progress has been made in China. There needs to be more reforms and measures that enable us to be confident that we can not only gain intellectual property protection but have adequate enforcement as well. This is important not only for multinational companies like Lilly, but also important for Chinese companies as China aims to build its own biopharmaceutical industry and develop Chinese global companies.

The third challenge I would mention is the lag time for reimbursement. We have seen, in some cases, delays in getting drugs onto the National Drug Reimbursement List and through the provincial drug reimbursement listing process. We would like to see this reimbursement list updated more frequently so that once a drug gets approved, people in China are able to gain access to reimbursement.

The last area where we face challenges is the business environment. Health-care reform will continue to dramatically change the way in which healthcare is provided. Patients in China have already witnessed significant change since 2009. I think it’s important for Lilly — and for any pharmaceutical company — to stay in touch with how reform is taking shape, particularly in hospitals and reforms that are related to how drugs are reimbursed in China. I expect there will be significant changes in coming years.