Lilly, Indianapolis feeling down, anxious 

Fran Quigley
Illustrations by Joe Le

Illustrations by Joe Lee
Antidepressant, anyone? It has not been a good year for Eli Lilly and Company, international pharmaceutical giant and cornerstone of Indianapolis" corporate economy. Lilly"s sales, profits and stock prices have all dropped, while lawsuits and regulatory problems seem to be on the rise. Last month, a widely published rumor identified Lilly as the target of a corporate takeover that would likely move the company"s headquarters out of Indianapolis.
Lilly"s leaders insist that the company is in good shape and will emerge from this difficult period still independent and profitable. But there have been plenty of recent occasions for Lilly-dependent Indianapolis residents to have concern about the company"s health. Events in recent months include: The company"s July second-quarter report showed a net income drop of 20 percent, and sales decreased by 9 percent compared to the same quarter last year. The stock price has decreased markedly, with both Merrill Lynch and Lehman Brothers lowering their rating of Lilly"s shares. The company has been the subject of two high-profile privacy infringement cases, the first involving the accidental sharing of depression patients" names in group e-mail messages, and the second involving a Florida scheme where free samples of Lilly"s Prozac Weekly were mailed unsolicited to patients taking antidepressants. The Food and Drug Administration has cited Lilly for hundreds of manufacturing and quality-control deficiencies in the past year and a half, leading to company embarrassment and delays in the introductions of new drugs. Lilly has been named as a defendant in several high-profile lawsuits, including a claim that the company is partially responsible for failing to stop the dilution of cancer medication by a Kansas City pharmacist. The company also faces dozens of suits claiming that cases of autism were caused by thimerosal, a mercury-based preservative in childhood vaccines that was sold by Lilly for a half-century before the company discontinued it in 1991. The July announcement that Pfizer was proposing a buy-out of its pharmaceutical rival Pharmacia led to rumors that international drug giant GlaxoSmithKline would respond by targeting Lilly for takeover. It is hard to overstate Lilly"s importance to the local economy. The company employs a whopping 16,000 workers in the state of Indiana, about 13,000 of them working out of the company"s Indianapolis facilities. Lilly pays over a billion dollars in annual salaries to its Indianapolis-based employees alone. Even with generous tax breaks, the company still pays an estimated $24 million in local property taxes each year. Many Indianapolis area residents own Lilly stock, benefit from the company"s Indianapolis-centered philanthropy or have family and friends who work for the company. "Lilly is sort of like the Green Bay Packers of Indianapolis," says Morton Marcus, economics professor at the IU Kelley School of Business and executive director of the Indiana Business Research Center. "We root for this home team." A clog in the pipeline The home team is doing fine, insists Lilly spokesperson Rob Smith. Smith says the sales and profit drops were expected due to the large chunk of market share taken by Prozac"s generic competitors after Lilly lost the antidepressant"s patent protection one year ago this month. Excluding Prozac, Lilly sales increased 11 percent last quarter. The company hopes to compensate for the reduced Prozac revenue with 10 new medicines they expect to bring to market by 2005, including new treatments for cancer, depression, diabetes complications and erectile dysfunction. Last week, Lilly announced it had received tentative approval for one of those drugs, a treatment for attention deficit disorder, and expects to introduce it early next year. Those 10 drugs are in what Lilly calls its "late stage pipeline." But Lilly has to satisfy the Food and Drug Administration before their drugs can emerge from that pipeline into the public market. In response to the agency"s multiple citations for quality control deficiencies, Lilly has made widespread personnel and system changes. "Needless to say, that is our No. 1 priority, and we"ve been working diligently to address the issues the FDA has raised," Smith says. The delays in obtaining approval for the new drugs have already cost the company dearly. When Merrill Lynch lowered its investment rating on Lilly shares from "buy" to "neutral" last month, its analysts cited the manufacturing delays as a key reason for the downgrade. "The FDA issues are an immense problem for Lilly, because they made a tremendous investment in these medicines and now they have this waiting time before they can get a return on this investment," IU"s Marcus says. "Every day, every week, every month they have to wait to bring these drugs to market is a costly proposition." Greed disease? For a company that carefully nurtures an image of a trusted partner in the healing of sick people, Lilly is more than a little embarrassed by its involvement in highly publicized violations of patients" privacy. In the incident where 670 e-mail addresses were visible in a message sent to subscribers to a alert service, six state attorneys general forced Lilly to pay a six-figure fine and agree to tighten internal privacy protections. In the unsolicited Prozac Weekly mailings case - in which a letter stating, "Congratulations on being one step toward full recovery," accompanied a sample of the still-patented weekly version of the antidepressant - the company publicly apologized and then disciplined eight employees connected to the mailing. Joy Pritts, senior counsel for the Health Privacy Project, says the broader and more troubling issue in the Prozac mailing case is the direct marketing by a manufacturer to consumers of prescription medicine. "This Florida situation was more than a little out of line, but generally, Lilly is doing just what everybody else in the industry is doing, and that is direct marketing to consumers," Pritts says. "When people go to a pharmacy, they expect their health information to be used only for their treatment and not to be delivered back to the manufacturer so it can be used for marketing." Some critics of the pharmaceutical industry"s marketing practices allege advertising by companies like Lilly actually create in some consumers the suggestion of illness - and hence a market for prescriptions - where maladies did not previously exist. One of those critics is Stephen Sheller, a Philadelphia attorney who recently filed a class-action suit against Lilly on behalf of the Florida patients who received the Prozac Weekly mailer. Sheller links drug companies" quest for profits to controversial promotions for medicine to address previously unheralded ailments like male menopause. "A lot of prescriptions are just not necessary," Sheller says. "Why don"t we follow the trend and give the drug marketing situation a disease name? Maybe greed disease?" Lilly has been largely penitent about the privacy breaches, promising to reform its internal protections in the e-mail case and quickly condemning the actions of the employees involved in the Florida Prozac mailing. In contrast, the company vigorously denies any responsibility for either the Kansas City drug-dilution or the autism claims, and vows to fight them in court. Staying put Ö for now The recent drop in Lilly"s stock price has certainly been precipitous, with shares that traded for $80 as recently as March going for less than $60 last week. But that decline has also been pretty much in line with the slump experienced by the broader market and the rest of the pharmaceutical industry. There is certainly no reason for Conseco-like concern about Lilly. Even so, a sequence of troubling news items made things a little anxious on the company"s Southside campus this July. The announcement that Pfizer was proposing a buy-out of its pharmaceutical rival Pharmacia was followed by Lilly"s disappointing second quarter profit report. Days later, news reports spread the rumor that GlaxoSmithKline, the world"s second largest pharmaceutical industry behind Pfizer, was considering targeting Lilly for acquisition. This wasn"t the first Lilly takeover rumor to be circulated, but every new one is sure to cause a lot of nervous hand-wringing around Indianapolis. "There are three different scenarios for Lilly: It could remain independent, merge with another company or be acquired," IU"s Marcus says. "Lilly being acquired would probably mean that we lose the headquarter facilities and some of the research facilities, and that would be very, very bad for Indiana." A takeover of Lilly does not appear to be imminent. Relatively low pharmaceutical stock prices make it harder for any other drug maker to raise the funds to acquire a manufacturer as large as Lilly. Also, Indianapolis-anchored Lilly Endowment is Lilly"s largest single stockholder, and most observers consider it unlikely the Endowment would surrender its 14.1 percent of the company to an outside buyer. Even though Lilly officials admit to continually re-evaluating their position on merger possibilities, they insist that, for the foreseeable future, the company is remaining independent and staying in Indianapolis. Lilly is certainly putting its money where that commitment is. The company is on track to fulfill a promise to create 7,500 new Indiana jobs this decade and spend $1 billion on construction projects over the same period. All those Lilly jobs and all those Lilly buildings are cause for Indianapolis residents to appreciate the benefits of having the company headquartered here. But they can also remind us how depressing it would be if Lilly ever left.

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