Eli Lilly has signed an innovative R&D deal with the major contract research organisation Covance which it says will increase productivity and reduce drug development costs.

Under the terms of the agreement, Covance is to buy and operate Lilly’s Greenfield Laboratories 450-acre facility in Indiana. It will make an upfront payment of $50 million, offering work to about 260 Lilly employees, and the two companies are also signing a 10-year service agreement worth $1.6 billion. An additional 225 Lilly staff currently based in Greenfield will move to sites in Indianapolis.

The deal is an extension of the firm’s existing strategic collaboration, whereby Covance currently conducts preclinical toxicology and early-stage clinical work for Lilly. It will now assume responsibility for the latter's toxicology testing as well as expanded early-stage clinical studies, plus Phase II/III trial support.

Lilly chief executive John Lechleiter said these actions are necessary steps to help the firm compete “in a very challenging marketplace”. He added that "Covance has proven it can help accelerate drug development timelines and improve efficiencies with Lilly" and the deal "will help us make our fixed-cost infrastructure more flexible."

His counterpart at Covance, Joe Herring, said that the expanded agreement “creates a new strategic paradigm at a time when the pharmaceutical industry needs to challenge traditional thinking in order to improve its R&D productivity”. He added that the firm will invest in the Greenfield facility and maximise its capacity by conducting “substantial work with Lilly and bring in new work from other pharmaceutical and biotechnology clients”.

In addition to the Covance deal, Lilly said it will transfer its clinical trial monitoring work in the USA and Puerto Rico to Quintiles Transnational Corp, “the world's largest pharmaceutical services company”. It is also shifting the majority of its data management work in the USA to another CRO, i3.

The firm said that some 265 employees will be affected by these changes, though Lilly has new positions for about half of them. All of these deals will involve “asset impairment and restructuring charges that likely will be significant”, the company said, though “it is premature to estimate the size or timing of these charges at this time”.

Dr Lechleiter concluded by saying that “what we call Years YZ – the period beginning in late 2011 when patents for several medicines begin to expire – requires a thorough transformation of our company that includes reduced cycle times and lower R&D costs".

Analysts reacted well to the deal and Eric Coldwell at Robert W Baird & Co issued a research note saying that "our initial take is extremely positive". He noted that the transaction “accelerates a trend of major pharmas reducing internal capacity and outsourcing CROs, in order to save time and money in drug development, improve overall infrastructure efficiency and remain competitive in a challenging pharmaceutical environment”.