Eli Lilly and Co. and Leadership Transition and Health Care Businesses and Health Care & Insurance

Taurel helped Lilly weather Prozac defeat, but he also stumbled

December 24, 2007

When Eli Lilly and Co. CEO Sidney Taurel announced his retirement Dec. 18, he said he was leaving the company in good shape. And he can cite plenty of evidence to support him.

But when Taurel steps down as CEO March 31, he also will leave a legacy of a languishing stock price and some costly mistakes that some think could have been avoided.

"The facts are the facts; I guess you can't ignore it. The stock price has been stuck for 10 years," said Dick Wood, who was Lilly's CEO from 1973 to 1991.

Lilly's shares have generated a negative-4.5-percent return, even when factoring in dividends, from the day before Taurel became CEO in 1998 until Dec. 17, the day before he announced his retirement. Only three out of 13 major pharmaceutical firms had a worse stock performance during that time.

"You have to define 'good shape,'" said Les Funtleyder, a health care business analyst at Miller Tabak & Co. in New York. He added of Lilly, "It isn't the strongest company in the industry right now."

Lilly President John C. Lechleiter will take the reins from Taurel as Lilly looks from its profitable present to a future clouded by patent expirations, increasing regulatory and pricing pressures, and a greater role of government in U.S. health care.

In interviews with former Lilly employees and pharmaceutical analysts, Taurel, 58, drew the most accolades for his ability to navigate the choppy waters--and even outright storms--that have buffeted Lilly the last 10 years.

Wood had almost all praise for Taurel and said he wished he was staying longer as CEO. He lauded him for adroitly dealing with many challenges during his tenure. But, he also acknowledged, some Lilly retirees question if some of the company's challenges could have been avoided in the first place.

For example, Lilly under Taurel had problems with manufacturing. Five years ago, the U.S. Food and Drug Administration put four of its Indianapolis plants out of commission for falling short of quality control standards. And early this year, Lilly abandoned a new insulin plant in Virginia--and wrote off $155 million--because it misjudged how much insulin it would need.

"Yeah, that's a whopper," Wood said of the insulin plant. "During his tenure, there was a whole series of large write-offs, for one thing or another." And yet, Wood said of Taurel, "He was able to do that without too much serious damage to the company."

Taurel's shining moment came at Lilly's worst: the sudden loss of patent protection on Prozac, the antidepressant blockbuster that had sustained Lilly throughout the 1990s. The news hit in August 2000 when a federal appeals court unexpectedly reversed a lower court's ruling and declared Lilly's Prozac patents invalid.

Generic versions of Prozac hit the market a year later. Lilly froze salaries and trimmed expenses, and Taurel took only $1 of pay for all of 2002.

The planning on the part of Lilly wowed the industry, which had never before seen a company lose its best-selling blockbuster yet remain independent.

"I'm proud of that fact that we remained an independent company," Taurel said at a press conference the day of his retirement announcement. Taurel said he also was proud of "globalizing" Lilly, pushing it into China and India. And he noted that the Indianapolis manufacturing plants that had problems five years ago are now used by the FDA to train its personnel.

Immediately after Prozac's patent ended, Taurel dealt with a follow-up disappointment: the launch of sepsis drug Xigris. Analysts were expecting Xigris to generate as much as $2 billion a year in sales, since no other drug exists to treat that condition, a form of internal infection.

But the FDA approved Xigris for only severe sepsis, which left doctors unsure about when exactly they could administer the drug. Xigris produced just $215 million in sales last year.

Lilly just kept launching new drugs--eight more in less than four years, an unprecedented string of success. One of those drugs, the antidepressant Cymbalta, is poised to hit $2 billion in sales this year and will become Lilly's top U.S. drug next year.

Lilly under Taurel greatly boosted sales of Zyprexa, particularly in international markets, and kept them high during a raft of litigation.

The drugmaker weathered U.S. patent challenges on the antipsychotic. It also paid $1.2 billion to settle 29,000 product liability cases, which claimed Zyprexa leads to weight gain and causes diabetes. Even now, the company is battling litigation from seven states over whether the company improperly marketed the drug.

In 2007, Lilly is on pace for profit of $4 billion on revenue of $18.3 billion. That works out to a profit margin of 22 percent, which is even better than Lilly posted in 1997, the year before Taurel became CEO.

"I've been very, very proud of Sidney. I think he's done an extraordinary job under very difficult circumstances," said Randall Tobias, who chose Taurel to succeed him as CEO when he stepped down in 1998.

Taurel deserves as much credit for Lilly's strong stock performance in the 1990s as he does, Tobias said. The two worked side by side throughout Tobias' tenure, especially after Taurel became Lilly's president in 1996.

The pharmaceutical industry remains one of the most profitable around, said Tony Butler, an analyst at Lehman Brothers in New York. What's changed, he said, is that investors now perceive far higher risks, and that's hurt companies' stock prices.

The FDA has become more strict in its approvals, even scuttling one of Lilly's recent drug applications. Health insurers have taken a harder line on expensive new drugs and have pushed generic versions harder than before. Generic firms sue ever earlier to try to break drugmakers' patents on their pills.

Even without patent lawsuits, Lilly and its peers face numerous patent expirations on their most lucrative drugs in the next decade. Lilly will lose exclusivity on Zyprexa's patent in 2011, threatening that drug's $4.4 billion in annual sales. By 2014, Lilly will lose its patents on four other drugs that represent another $5.1 billion in sales.

"Those are things that people don't understand," Butler said. "So people say, 'Why don't I go buy Google?'"

Despite Lilly's disappointing stock performance, former Lilly chemist Charles Paget thinks highly of Taurel, calling him "more down to earth" than previous Lilly CEOs. Paget, who lives in Indianapolis, retired from Lilly in 1994.

"What you've got to realize is, since Sidney took over in '98, it's been a very different scenario," Paget said. "I don't envy him."

At the Dec. 18 press conference, Taurel said he wanted to leave now, not only because he felt the company is in good shape, but also because the CEO's job "takes a little bit of a toll." He also said he wanted to give Lechleiter "enough runway to have some success before the company faces patent expirations."

Lechleiter said Taurel has been a mentor to him the last 10 years. He has taught Lechleiter to ask "that one last question" and to "look one or two steps ahead" before making business decisions.

Tobias, however, thinks Taurel's biggest legacy is teaching the Lilly organization that it must embrace change.

"He has kept focus on the fact that the pharmaceutical industry is changing and change has to become a way of life for the people and the organizations that are going to be successful," Tobias said. "That was particularly difficult for Lilly because Lilly was so successful over such a long period of time."

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