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Eli Lilly & Company Business Information, Profile, and History

Lilly Corporate Center
Indianapolis, Indiana 46285

History of Eli Lilly & Company

Eli Lilly & Company discovers, develops, manufactures, and markets ethical drugs in 14 plants and facilities in the United States and in 25 plants in 19 countries around the world. The company's products are sold in more than 120 countries. Although Lilly was embroiled in controversy and became the target of numerous lawsuits related to its products in the early 1990s, the Indianapolis-based giant still ranked among the leaders in the pharmaceutical industry in the early 1990s. In 1993, for the first time in its history, Lilly was led by an executive who had not had a career with the venerable drug company. Chairperson and CEO Randall L. Tobias launched a strategic restructuring of the troubled company that year in the hopes of returning Lilly to its former glory.

Despite its huge domestic and international operations, Lilly continued to maintain a close allegiance to the American 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 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 the indigent 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 was known for its development of many important drugs. In the 1920s, the company developed insulin from a hormone extracted from the pancreas of pigs; Lilly would remain the leading manufacturer of insulin, commanding at least 75 percent of the American market in the early 1990s. Later 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.

Josiah Jr.'s presidency marked the last reign of a direct family descendant. Richard Wood, who advanced to the CEO position in 1973, was only the second of six presidents to be an "outsider." He was, of course, born and raised in Indiana and was a longtime Lilly employee.

Not only was the company's clannishness evident in the executive branch, it was also apparent in Lilly's management style. 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 foundation resisted making large disbursements, and it was not until the 1969 Tax Reform Act that the foundation was forced to loosen its 25 percent hold on stock. Still, in 1979 the foundation continued to hold 18.6 percent of company shares.

Lilly's conservative management paralleled its outspoken ideology. During the 1960s, 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 1970s, 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 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 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, 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.

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 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. 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 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. And 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 isn't an 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.

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, 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 midst of these legal wranglings, chairperson and CEO Richard Wood began 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. Intec Systems Inc., a manufacturer of cardiac defibrilators, was acquired in 1985. 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. 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. 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. And although Lilly's top two drugs, Ceclor (an antibiotic) and Prozac (an antidepressant) were highly profitable, the company's $1 billion annual investment in research and development did not yield any blockbuster new breakthroughs.

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 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 protegé 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-chairperson 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' 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 looked forward to releasing Lys-Pro, a new type of insulin for the treatment of diabetes, in 1995, and olanzapine, indicated for schizophrenia, in 1996.

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 & Company (Taiwan), Inc.; CBI Uniforms, Inc. (50%); ELCO Management Corp.; Eli Lilly S.A. (Switzerland).

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Company HistoryPharmaceuticals

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