Eli Lilly & Company

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Eli Lilly & Company

307 E. McCarty Street
Indianapolis, Indiana 46285
U.S.A.
(317) 261-2000

Public Company
Incorporated: January 17, 1901
Employees: 28,000
Sales: $3.710 billion
Market Value: $13.210 billion
Stock Index: New York Basle Geneva Zurich

Although Eli Lilly & Company has in recent years been embroiled in controversy and been the target of numerous lawsuits related to its products, the Indianapolis-based giant is still among the leaders in the pharmaceutical industry. In a Fortune magazine survey of corporate performance, Lilly moved from seventh to sixth place in the industry’s rankings during 1986. And despite involvement in more than one allegedly unscrupulous drug promotional campaign, the company remains one of the most profitable manufacturers of ethical drugs in the world.

Lilly manufactures human health, agricultural, and cosmetic products in 18 plants and facilities in the United States, including its Indianapolis headquarters, and in 32 plants in 28 countries around the world. The company’s products are sold in more than 130 countries. Lilly commands more than 300 wholesale distribution outlets and employs about 1,300 salaried sales representatives in the United States, and at least as many abroad.

Despite these huge domestic and international operations, Lilly jealously guards its American heartland values and wields significant influence in its native city. For instance, in 1971 Forbes magazine prepared a company profile, but because Lilly did not want the article published, an Indianapolis newspaper refused to sell Forbes photographs of the Lilly family.

Much of this community loyalty stems from Lilly’s long history of paternalism and generosity. In 1876 Colonel Eli Lilly, a Civil War veteran, acquired a laboratory in Indianapolis and began to manufacture drugs. The business established itself successfully with the innovation of gelatin-coated capsules, and it wasn’t long before Colonel Lilly used company profits to benefit the community. He donated money to build a children’s hospital and chaired a committee that helped indigents during the financial panic of 1893.

This civic consciousness was inherited by the second generation of Lilly management. During the Depression, the Colonel’s grandson, Eli Lilly, refused to lay off any employees. Instead, he had them help with general maintenance of the facility until they could return to their normal jobs.

Lilly established the Lilly Endowment to provide financial support for educational institutions. The family donated $5 million worth of rare books to Indiana University, and later donated a coin collection worth $5.5 million to the Smithsonian Institution. The foundation also funded new buildings, music schools, student centers, and laboratories in every college and university in Indiana and in several around the country.

Lilly also laid the foundations for its reputation for marketing ingenuity in those early years. After the 1906 San Francisco earthquake Lilly did not wait for requests for medicine to arrive; the company sent as much of its stock as it could to the disaster area. Since then the ready availability of Lilly’s products has been central to its marketing strategy. That and aggressive advertising campaigns, plus its large, eager sales force, have been the keys to its marketing success.

Besides being a pioneer in pharmaceutical marketing, Lilly has been notable for its development of many important drugs. In the 1920’s the company developed insulin from a hormone extracted from the pancreas of pigs. Today Lilly is the leading manufacturer of insulin, commanding at least 75% of the American market. Later in the decade the company produced a liver extract for the treatment of pernicious anemia. In the 1930’s Lilly laboratories synthesized barbituric acids, essential to the production of drugs used in surgery and obstetrics. In 1955 Lilly manufactured 60% of the Salk polio vaccine. But the company’s greatest contribution to human health has been in production of penicillins and other antibiotics that revolutionized the treatment of disease.

Throughout this era of innovation and expansion, and up until recently, Lilly’s management remained a constant. Every president and almost every member of the board of directors was either a direct descendant of Colonel Lilly or a native of the Midwest, if not of Indiana. After the Colonel’s death in 1898, his son, Josiah Lilly, ran the company for the next 34 years. He was succeeded by son Eli and later by Josiah Jr. During the 16-year presidency of Eli Lilly, sales rose from $13 million in 1932 to $117 million in!948. After Eli relinquished his executive powers to his brother, he became the titular chairman of the company. Upon his death at age 91, he had lived to see the company reach $1 billion in sales.

Josiah Jr.’s presidency marked the last reign of a direct family descendant. Richard Wood, the current chief executive officer, is only the second of six presidents to be an “outsider.” He was, of course, born and raised in Indiana and is a longtime Lilly employee.

Not only is the company’s clannishness evident in the executive branch, it is also apparent in Lilly’s management style. In 1971, of the $4 billion worth of company stock, members and descendants of the Lilly family owned $1 billion of that stock, while the Lilly Endowment (controlled by the family) owned $900 million worth. Furthermore, the foundation has resisted making large disbursements, and it was not until the 1969 Tax Reform Act that the foundation was forced to loosen its 25% hold on stock. Yet in 1979 the foundation continued to hold 18.6% of company shares.

Lilly’s conservative management paralleled its outspoken ideology. During the 1960’s the Lilly endowment professed a specific political mission. The foundation was to support an understanding of “anti-communism, free enterprise, [and] limited government.”

Despite what some have called an anachronistic approach to business, no one can dispute Lilly’s financial success. In the 1970’s, while the rest of the drug industry was depressed, Lilly doubled in size. When the pharmaceutical business was hit hard by competition from generic drugs that flooded the marketplace after the expiration of patents for drugs discovered in the 1950’s and ’60s, Lilly diversified into agricultural chemicals, animal-health products, medical instruments, and beauty-care products.

Meanwhile, Lilly increased its expenditure on research and development of pharmaceuticals, spending $235 million in those areas in 1981 alone. The immediate result was three new drugs: Ceclor, an oral cephalosporin antibiotic; Dobutrex, a heart-failure treatment; and Mandol, an injectable cephalosporin effective against a broad spectrum of hospital-acquired infections. The release of the new cephalosporins represented a significant step for Lilly. The company had always been dominant in the antibiotic market, but competition from Merck, SmithKline, and foreign drug companies threatened Lilly’s supremacy. With the new drugs, the company was able to recapture hegemony of the cephalosporin market; of the $3.27 billion in company sales in 1985, $1.05 billion was from the sale of antibiotics.

A similar success story resulted after the company bought Elizabeth Arden for $38 million in 1971. At first glance, the purchase of the beauty-care company seemed an unwise move. Elizabeth Arden had been a money loser and continued to lose money for five years after Lilly acquired it. Lilly management seemed to have no idea of the intense competition in the beauty industry. But, in an unusual move, Lilly hired outsiders to fill its subsidiary’s top executive positions, and by 1982 Elizabeth Arden’s sales were up 90% from 1978, with profits doubling to nearly $30 million.

The introduction of several new drugs in the late 1970’s increased Lilly’s sales and challenged the market boundaries of competing products. Lilly released Nalfon, an anti-inflammatory drug, to compete with Merck’s number-one-selling Indocin. In addition, the company introduced Cinobac, an antibacterial agent used to treat urinary-tract infections; Eldisine, a treatment for childhood leukemia; Moxam, a potent new antibiotic licensed from Shionogi, a Japanese drug company; and Benoxaprofen, an antiarthritic introduced in the United Kingdom. Moreover, using groundbreaking recombinant DNA technology, Lilly was among the first to produce human insulin from bacteria. This breakthrough promised to protect Lilly’s majority share of the insulin market.

The initial flurry over the possible hazardous side effects of a popular analgesic called Darvon seemed to have subsided. Critics had charged that the drug was both ineffective and had the dangerous potential for abuse, but Lilly mounted an educational campaign on proper use of the drug and continued to hold 80% of the prescription analgesic market. Darvon generated annual sales of $100 million.

With a 19% increase in sales in 1978, a 24% return on equity, and impressive results from President Wood’s foreign-market campaign, Lilly’s prospects seemed excellent. Then, however, company growth began to fall short of projected figures.

In 1982, a miscalculation of inventory and expected sales caused Lilly to produce far more Treflan (a soybean herbicide) than it could sell. With the patents expiring on Treflan and two animal products, and with the overproduction of Treflan, income from agricultural products suddenly did not look as promising as it once had.

Furthermore, profits from Moxam had to be shared with Shionogi, the Japanese partner in the joint venture. And the patent on Keflin, an injectable cephalosporin that had been generating $100 million in sales, expired in November 1982.

Lilly’s diversification into medical instruments through the acquisition of I VAC Corporation, a manufacturer of vital-signs-monitoring systems and intravenous-fluid-infusion equipment, and Cardiac Pacemaker, a manufacturer of heart pacemakers, cost Lilly $286 million in stock, a significant investment with an unknown potential for profits. And since the combined assets of its medical instrument subsidiaries and Elizabeth Arden represented only 20% of the entire company, their projected profits were not expected to have a substantial effect on company profits as a whole.

Of more concern, however, was the re-emerging specter of Darvon’s addictive qualities. Ralph Nader’s consumer-advocacy group demanded a ban on Darvon because of its alleged associations with suicides, overdoses, and misuse by addicts. Joseph Califano, the U.S. Secretary of Health, Education and Welfare, harshly criticized the sincerity of Lilly’s educational campaign. He went so far as to recommend that Darvon and other propoxyphene products not be prescribed “unless there really isn’t an alternative, and then only with care.” The FDA charged that Lilly’s educational campaign actually amounted to ingenious marketing. (Lilly sales representatives not only gave doctors educational material that emphasized the drug’s positive attributes, they also conveniently left samples.)

To the company’s dismay, Darvon was not the only drug to cause a controversy. Oraflex, the American version of Benoxaprofen, was withdrawn from the market in August 1982. Only one month after the FDA approved Oraflex, a British medical journal documented five cases of death due to jaundice in patients taking the drug. The FDA accused Lilly of suppressing “unfavorable research findings.” Initial warnings about the possibility of inconsequential side effects were later amended to include the threat of jaundice, but only after the company had already applied for FDA approval.

At a time when drug-regulation reform would have allowed companies to interpret the results of their own lab tests, the Oraflex controversy represented a major disaster. Furthermore, publicity for the drug, which was projected to be a $100 million seller (prescriptions for Oraflex increased by 194,000 in just one month), had been unwittingly distorted. Reports from outside the company had falsely claimed that the drug could cure arthritis.

On August 21,1985, the Oraflex controversy culminated when the U.S. Justice Department filed criminal charges against Lilly and Dr. William Ian H. Shedden, the former vice-president and chief medical officer of Lilly Research Laboratories. The Justice Department accused the defendants of failing to inform the government about four deaths and six illnesses related to Oraflex. Lilly pleaded guilty to 25 criminal counts that resulted in a $25,000 fine. Shedden pleaded no contest to 15 criminal counts and was fined $15,000. All 40 counts were misdemeanors; there was no charge against Lilly of intentional deception.

Lilly has also been cited as a defendant in a lawsuit filed agains drug manufacturers and distributors of diethylstilbestrol (DES). The drug, which was prescribed to pregnant women during the 1940’s and 1950’s to prevent miscarriages, caused vaginal cancer and related problems in their children. Lilly was the first and largest manufacturer of DES, and it is estimated that 40% of the drug came from Lilly production facilities. In 1981 a court ordered the company to pay $500,000 in damages to one plaintiff, and in 1985 Lilly was ordered to pay $400,000 to the first male seeking damages in a DES-related case. Other claims are asking for damages totaling in the billions of dollars.

Of all Lilly’s projected successes, human insulin manufactured using recombinant DNA technology has the greatest potential. Although recombinant techniques remain costly because of their infancy, manufacturing will eventually be on a much larger scale than that of traditional methods of obtaining insulin. The 1986 acquisition of Hybritech, a genetic engineering company, emphasizes Lilly’s commitment to the future of biotechnology.

That commitment, plus its aggressive marketing techniques, small army of sales representatives, and efficient wholesale distribution network, should keep Lilly near the top of the pharmaceutical industry.

Principal Subsidiaries

Eli Lilly International Corp.; Elizabeth Arden, Inc.; Bethco Fragrances, Inc.; Philip Kingsley Products, Inc.; ELCO Management Corp.; Cardiac Pacemakers, Inc.; Physio-Control Corp.; I VAC Corp.; Advanced Cardiovascular Systems, Inc. The company also lists subsidiaries in the following countries: Australia, Austria, Belgium, Brazil, Bermuda, Canada, Denmark, England, France, Finland, Guatemala, Italy, Japan, Korea, Malaysia, Mexico, The Netherlands, Spain, Sweden, Switzerland, Taiwan, Venezuela, and West Germany.