Lilly Corporate Center
Eli Lilly and Company creates and delivers innovative medicines that enable people to live longer, healthier and more active lives.
Eli Lilly and Company discovers, develops, manufactures, and markets ethical drugs (those requiring a doctor's prescription) for a wide variety of human ailments. It has research and production facilities in many nations, and its products are sold in 159 countries. It introduced the world's first commercial insulin in the 1920s, and in 2002 was the leading producer of products for those with diabetes. Its best-selling antidepressant, Prozac, continues to be a controversial drug, even though it lost its U.S. patent protection in 2001. Like many other large corporations, Lilly has numerous collaborations or joint ventures with other firms. As a major player in the pharmaceutical industry, Lilly has faced many controversies such as the high cost and advertising of prescription drugs. The company's subsidiary Elanco Animal Health sells animal health products in over 100 countries.
Lilly's Origins and Community Commitments: 1870s-1960s
Despite its huge domestic and international operations, Lilly continued to maintain a close allegiance to the U.S. Midwest and wielded significant influence in its native city. For instance, in 1971 Forbes magazine prepared a profile of the company, 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 stemmed from Lilly's long history of paternalism and generosity. In 1876, Colonel Eli Lilly, a Civil War veteran, built a laboratory in Indianapolis and began to manufacture ethical drugs. The business established itself successfully with the innovation of high-quality gelatin-coated capsules, and it was not long before Colonel Lilly was able to serve Indianapolis in a variety of ways. He served as president of the Commercial Club to help in the development of the city and chaired a committee to help the indigent during the financial panic of 1893. He also donated his own personal funds to build a children's hospital in memory of his 13-year-old daughter who died of diphtheria.
This civic consciousness was inherited by the second and third 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.
The Lilly family in 1937 established the Lilly Endowment to provide financial support for educational, cultural, and religious institutions. The family donated $5 million worth of rare books to Indiana University, and later the Smithsonian Institution acquired a family coin collection worth $5.5 million. The endowment also funded new buildings, music schools, student centers, and laboratories in most colleges and universities in Indiana and in several other states.
Lilly also laid the foundations for its reputation for marketing ingenuity in those early years. After the 1906 San Francisco earthquake, the company sent as much of its stock as it could to the disaster area at the request of sales personnel and wholesalers. Since then the ready availability of Lilly's products was central to its marketing strategy. That and aggressive advertising campaigns, plus its large, eager sales force, have been the keys to its marketing success. Its sales marketing department was formally established around 1922.
Besides being a pioneer in pharmaceutical marketing, Lilly was known for its development of many important drugs. In the 1920s, Lilly began selling the world's first commercially available insulin that would benefit millions with diabetes. In the years ahead it would remain the leading manufacturer of insulin, commanding at least 75 percent of the U.S. market in the early 1990s.
In the 1920s, the company produced a liver extract for the treatment of pernicious anemia. In the 1930s, Lilly laboratories synthesized barbituric acids, essential to the production of drugs used in surgery and obstetrics. In 1955 Lilly manufactured 60 percent of the Salk polio vaccine. But the company's greatest contribution to human health was in production of penicillins and other antibiotics that revolutionized the treatment of disease.
Throughout this era of innovation and expansion and up until the late 1980s, 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 1948. After Eli relinquished his executive powers to his brother, he became the titular chairperson of the company. Upon his death at age 91, he had lived to see the company reach $1 billion in sales.
Business in the 1970s and 1980s
Josiah, Jr.'s presidency marked the last reign of a direct family descendant, followed by presidents Beesley, Beck, Wood, and Lake. Richard Wood, who advanced to the CEO position in 1973, was the third of seven company presidents to be an "outsider." He was, of course, born and raised in Indiana and was a longtime Lilly employee.
In 1971 members and descendants of the Lilly family owned $1 billion of the $4 billion in company stock, while the Lilly Endowment (controlled by the family) owned another $900 million. Furthermore, the endowment resisted making large disbursements, and it was not until the 1969 Tax Reform Act that the endowment was forced to loosen its 25 percent hold on stock. Still, in 1979 the endowment continued to hold 18.6 percent of company shares.
Lilly's conservative management paralleled the outspoken ideology of the Lilly Endowment, although the company and the endowment were separate and distinct organizations. During the 1960s, the Lilly Endowment professed a specific political mission. It supported anticommunism, free enterprise, and limited government. Despite what some have called an anachronistic approach to business, no one can dispute Lilly's financial success.
While the rest of the drug industry in the 1970s 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 1950s and 1960s, 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 percent from 1978, with profits doubling to nearly $30 million.
The introduction of several new drugs in the late 1970s and early 1980s increased Lilly's sales and challenged the market boundaries of competing products. Lilly released Nalfon, an anti-inflammatory drug, to compete with Merck's top 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, the company in 1982 introduced Humulin, the first healthcare product made from recombinant DNA technology. This breakthrough promised to protect Lilly's majority share of the insulin market.
During this time, 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 introduced in 1957 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 percent of the prescription analgesic market. Darvon generated annual sales of $100 million.
With a 19 percent increase in sales in 1978, a 24 percent return on equity, and impressive results from 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. In addition, 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 IVAC Corporation, a manufacturer of systems that monitored vital signs and equipment for intravenous fluid infusion, and Cardiac Pacemaker, a manufacturer of heart pacemakers, cost Lilly $286 million in stock, a significant investment with an unknown potential for profits. Also, since the combined assets of its medical instrument subsidiaries and Elizabeth Arden represented only 20 percent of the entire company, their projected profits were not expected to have a substantial effect on company profits as a whole. Elizabeth Arden was, in fact, later sold to Fabergé, Inc. for $657 million in 1987.
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 and went so far as to recommend that Darvon and other propoxyphene products not be prescribed unless there really was no alternative, and then only with care. The FDA charged that Lilly's educational campaign actually amounted to ingenious marketing in that Lilly sales representatives not only gave doctors educational material that emphasized the drug's positive attributes but also conveniently left samples. The result of this litigation was that Darvon was not removed from the market, and it was proven safe and effective when used as directed.
To the company's dismay, Darvon was not the only drug to cause a controversy. Oraflex, the U.S. 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. Package inserts were amended to recommend a reduced dosage for elderly patients.
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, which 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 was cited as a defendant in a lawsuit filed against drug manufacturers and distributors of diethylstilbestrol (DES). The drug, which was prescribed to pregnant women during the 1940s and 1950s to prevent miscarriages, caused vaginal cancer and related problems in the children of the patients. Lilly was the first and largest manufacturer of DES, and it was estimated that 40 percent 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 asked for damages totaling in the billions of dollars.
In the early 1980s Lilly continued acquiring manufacturers of medical devices and diagnostic equipment. Lilly added both Physio-Control Corp. and Advanced Cardiovascular Systems Inc. through share exchanges in 1980 and 1984, respectively. Hybritech, a California diagnostic products company, was purchased for $350 million in 1986. Lilly added Devices for Vascular Intervention, Inc., and Pacific Biotech, Inc., in 1989 and 1990, respectively. These companies (along with Origin Medsystems, a 1992 acquisition) constituted Lilly's Medical Devices and Diagnostics Division, which contributed about 20 percent of the pharmaceutical corporation's annual revenues in the early 1990s. Heart Rhythm Technologies, Inc. was acquired in 1992. But even this new business interest had its problems, not the least of which was intense competition from Abbott Laboratories.
While Wood concentrated on these domestic acquisitions, Lilly's competitors had expanded internationally, where two-thirds of the world's pharmaceutical market awaited. Although Lilly's top two drugs, Ceclor (an antibiotic) and Prozac (an antidepressant introduced in 1987) were highly profitable, the company's $1 billion annual investment in research and development did not yield any new blockbuster breakthroughs.
The 1990s and the New Millennium
By the beginning of the decade, the company's star antidepressant Prozac had become a major medical, legal, and social controversy. Many reported relief from the sufferings of depression. About two million individuals worldwide had taken the drug by the summer of 1990. However, some said Prozac caused them to become suicidal. Lawsuits were filed and some politicians argued that their opponents were unstable because they took Prozac. Those who thought they were hurt by Prozac formed support groups in several states, while Lilly and the FDA continued to defend the drug's usefulness and safety. Eventually several books were written about the pros and cons of using drugs such as Prozac to treat depression and other mental illnesses.
In 1991, Wood abdicated Lilly's chief executive office and chose Vaughn D. Bryson, a longtime executive, as his successor. Lilly's employees reportedly appreciated Bryson's management style, which was much less formal than that of his predecessor. Unfortunately for Bryson, however, patent expirations, a dearth of new drugs, and general volatility in the pharmaceutical industry combined to thwart his stint at the top. The company lost over 30 percent of its market value during his 18-month tenure. Worse, the corporation recorded the first quarterly loss in its history in the fall of 1992. Wood, who had retained Lilly's chairmanship, orchestrated a boardroom revolt to oust his protégé in 1993.
In June of that year, Randall Tobias was selected CEO and chairperson. Unlike all his predecessors, Tobias was recruited from outside Lilly's employee roster. The former vice-chairman of American Telephone and Telegraph Co. had served on Lilly's board since 1986 and was by his own admission inexperienced in pharmaceuticals. Nonetheless, after just six months at Lilly's helm, Tobias announced a reorganization of the venerable drug company.
His plan included divestment of the profitable, but distractive, Medical Device and Diagnostics Division, through which he hoped to raise $550 million. A cost-reduction program included the elimination of 4,000 employees through early retirement. Tobias planned to use these savings to acquire the distributors needed in a pharmaceutical industry that was increasingly influenced by budget-conscious managed care organizations. In line with this focus, Lilly announced its plan to acquire PCS Health Systems Inc., America's largest pharmacy benefit manager, from McKesson Corp. for $4 billion in mid-1994. Tobias, who had orchestrated AT&T's overseas expansion, also worked to expand Lilly's international sales from their 1993 level of about 39 percent of total revenues.
Tobias's plan also focused Lilly's research and development on five broad disease categories: central nervous system diseases, endocrine diseases (including diabetes and osteoporosis), infectious diseases, cancer, and cardiovascular diseases. In line with these strategic imperatives, Lilly in 1995 released Lys-Pro, a new type of insulin for the treatment of diabetes, in 1995, and Zyprexa (olanzapine), indicated for schizophrenia, in 1996.
In 1996 the FDA approved Lilly's Gemzar as the nation's first drug to treat pancreatic cancer. Two years later the FDA approved using Gemzar for nonsmall-cell lung cancer. According to the company's web site, in 2002 over 85 countries had approved Gemzar and almost 80 percent of U.S. patients with pancreatic cancer used Gemzar.
In 1997 the FDA authorized using Evista to help prevent osteoporosis in postmenopausal women. Evista sales in 2000 of $552 million made it one of the company's major products. Other new products were Humalog, a human insulin analog, and ReoPro, a cardiovascular product discovered and developed by Centocor.
After the U.S. Food and Drug Administration in 1997 eased rules on mass media advertising for prescription drugs, Lilly and others in the pharmaceutical industry increased their spending on TV spots. Lilly spent $7 million in direct-to-consumer (DTC) promotionals in 1999. The following year $46.5 million was spent, mostly for Prozac as the end of its patent protection neared.
Although the evidence was not conclusive, television ads in particular were linked to increasing consumer sales, but perhaps with a hidden cost. "The issues raised by DTC advertising are serious," said health policy researcher Steven Findlay in Marketing Health Services in spring 2000. "They touch upon questions of public health, corporate responsibility, advertising ethics, and consumers' capacity to understand complex medical and pharmaceutical information."
In August 2001 Lilly lost U.S. patent protection for Prozac after a series of legal conflicts. At that point Barr Laboratories gained a six-month exclusive right to make a generic Prozac equivalent. Declining Prozac sales in the fourth quarter of 2001 led to a 14 percent reduction in company revenues. In January 2002 the U.S. Supreme Court rejected Lilly's final patent appeal without comment, which opened the door to several other companies making generic versions of the antidepressant drug. Thus ended a major chapter in Lilly's history.
The same month the federal government settled an investigation of Lilly violating its own privacy policies by releasing email addresses of over 600 Prozac patients. According to the New York Times, the "case is the first the Federal Trade Commission has pursued over suspected unintentional violation of a Web site's privacy policies."
Lilly reported $10.86 billion in net sales and $3.05 billion in net income in 2000, both figures up from $10.0 billion in net sales and $2.72 billion in net income the previous year. There was a significant change in the source of its income. In 1996 Prozac accounted for 34 percent of its net sales, but that declined to 24 percent in 2000. Meanwhile, its newer products (Zyprexa, Evista, Actos, Humalog, Gemzar, and ReoPro) increased to bring in 41 percent of all 2000 sales. Zyprexa, approved for schizophrenia and the acute manic phase of bipolar conditions, in the fourth quarter of 2000 surpassed Prozac as the company's number one selling product, with over $2 billion in 2000 sales. In 2000 the company listed 30 trademarked pharmaceuticals on its web site. A few of those were trademarked by other companies that Lilly worked with in joint operations.
In December 2001 Lilly had several new products that it planned to launch by 2004. They included Forteo to reverse osteoporosis, Cialis for male erectile dysfunction, Atomexetine to treat attention deficit disorder, Duloxetine for depression and urinary incontinence, an olanzipine and fluoxetine combination to fight depression, Alimta to treat a form of lung cancer called mesothelioma, and a PKC beta inhibitor to treat diabetic eye problems. Lilly expected that these and several other products in the pipeline would keep the company prosperous in the years to come.
Principal Subsidiaries: Eli Lilly International Corporation; Eli Lilly Interamrica, Inc.; Eli Lilly de Centro America, S.A. (Guatemala); Eli Lilly Compania de Mexico, S.A. de C.V.; Dista Mexicana, S.A. de C.V.; EPCO; Eli Lilly Industries, Inc.; Eli Lilly and Company (Taiwan), Inc.; CBI Uniforms, Inc. (50%); ELCO Management Corp.; Eli Lilly S.A. (Switzerland); Elanco Animal Health; Sphinx Pharmaceuticals Corporation; Control Diabetes SVC; Lilly ICOS LLC.
Principal Competitors: GlaxoSmithKline; Pfizer Inc.; Novo Nordisk.