IBJNews

Lilly asks shareholders to lower takeover barrier

Back to TopCommentsE-mailPrintBookmark and Share

Eli Lilly and Co. is sailing into a storm of patent expirations that some predict will cause a swoon in its profit and stock price.

So you might think the fiercely independent drugmaker would batten down the hatches to fend off any unwanted takeovers.

Instead, the directors of the Indianapolis-based company have reversed 25 years of policy by recommending that shareholders throw overboard its most potent protection of all: an 80-percent supermajority vote threshold for any shareholder mutiny to succeed.

lillyThe supermajority vote applies not only to outright takeover bids, but also to measures used to achieve them, such as removing directors before their terms end or expanding the size of the board. The board wants to require a bare majority of votes to approve such actions in the future.

“While it is important to the company’s long-term success for the board to maintain appropriate defenses against inadequate takeover bids, it is also important for the board to maintain shareholder confidence by demonstrating that it is responsive and accountable to shareholders,” reads a statement from Lilly’s board in the company’s preliminary proxy statement.

If the proposal passes at Lilly’s annual shareholder meeting April 19—and it will need 80-percent approval to do so—it would make Lilly more vulnerable to a buyout at a time consolidation is sweeping through the pharmaceutical industry.

“This does seem to increase the risk of a hostile takeover,” said Frank Lichtenberg, a business professor at Columbia University whose research has focused on mergers and acquisitions and the pharmaceutical industry. “You do have to admire the board for endorsing this proposal which could put their own incumbency at jeopardy.”

Some investors also applauded the move, although they don’t think a takeover of Lilly is likely in the next five years.

“Sometimes management tends to get too comfortable when there are an array of poison pills that protect poor management and prevent a takeover,” wrote Rich Foran, vice president of research at Symons Capital Management, a Pittsburgh investment firm that holds Lilly stock, in an e-mail.

Merger mania

After 2009 saw three mega-mergers in the pharmaceutical industry, “everyone is a takeover target,” said Les Funtleyder, a health care analyst at Miller Tabak & Co. in New York. But he expects Lilly to be an attractive acquisition target only if its pipeline of experimental drugs proves itself.

Right now, it hasn’t. And that’s why Lilly’s stock trades for about $35 per share—a 20-percent discount to Lilly’s pharmaceutical peers, when each company’s stock price is calculated as a multiple of earnings per share.

Still, if Lilly doesn’t get a break soon, or make an acquisition itself, its stock price could plunge to a level that would make the company cheap to buy—possibly tempting a suitor to bet that something in its 60-drug pipeline will pan out.

Bearish analysts on Wall Street predict Lilly’s profits could fall 25 percent in the next five years. Its stock price could plummet more than 40 percent to nearly $20 per share, according to some analysts.

“Eli Lilly scores well below average on 2010-2014 patent exposure, pipeline strength, and average on company-specific factors, in our view,” wrote Hapoalim Securities analyst Jon LeCroy, in a Jan. 29 research note.

Beginning this year and running until 2014, Lilly will lose patent protection in the United States and Europe on five blockbuster drugs, which today represent nearly 60 percent of its revenue.

For four of those drugs—Zyprexa, Cymbalta, Evista and Gemzar—Lilly will lose more than 80 percent of their sales as patients switch to cheaper generic versions of the drugs. The fifth drug, Humalog, is a biotech insulin that would face generic competition in this country only if Congress creates a system for the approval of generic biotech drugs.

But even if Humalog sales hang on, as most analysts expect, Lilly will face generic competition in 2016 on its rising star, the lung cancer drug Alimta. It rang up sales growth of 48 percent last year, reaching $1.7 billion.

The problem for Lilly is that it has few experimental drugs on the cusp of market approval. And its recent attempts to launch new drugs have either failed in late-stage tests or, in the case of its new blood thinner Effient, posted anemic sales.

“LLY’s strategy hinges on achieving a level of late-stage R&D success well above current industry norms and its own recent track record,” wrote Deutsche Bank analyst Barbara Ryan in a research note, referring to Lilly by its ticker symbol.

By 2016, she added, “LLY will either have established a new paradigm in R&D or may have completely broken down.”

Outside pressure

As Lilly’s stock price has lost 40 percent of its value in the past decade, some investors have increasingly tried to pressure the company to liberalize its corporate governance structure.

The giant pension fund CalPERS has twice in the past four years placed Lilly on its “underperforming” list. It has repeatedly advanced proposals to allow a majority vote of shareholders to change the company’s bylaws. Right now, only Lilly’s 13-member board can change bylaws.

Last year, that proposal received just 44 percent of the vote.

But efforts by other shareholders to remove the supermajority vote threshold have proven more popular, winning a majority of votes the past three years despite Lilly’s board and management's opposing the measure. Last year, the idea won 57-percent support.

The surpermajority requirement was put in place in 1985 amid a raft of takeovers that made household names out of Carl Icahn, T. Boone Pickens, Rupert Murdoch and others.

From 1983 to 1985, more than 1,000 corporations asked their shareholders for such protection, according to research published in the Journal of Business Ethics. But Lilly was in the minority of companies that succeeded in getting it passed.

If Lilly now jettisons its anti-takeover measures, it can still fall back on Indiana anti-takeover laws that are some of the most stringent in the country. Those laws, most of which were passed in 1986, survived a challenge in the U.S. Supreme Court, according to an article in the University of Pennsylvania Law Review.

Indiana’s laws have been mimicked by many other states, but remain among the 10 most stringent, said Diane Denis, a corporate mergers and governance expert at Purdue University’s Krannert School of Management.

The five key provisions of Indiana’s laws are:

• A shareholder that acquires a controlling stake must receive approval from the majority of other shareholders before exercising the full voting power of that stake.

• A bidder that acquires a controlling stake must wait several years before being allowed to enter a merger agreement with the company.

• Specific procedures must be followed to determine a fair price for the company’s shares.

• Corporate boards are allowed to consider the interests of non-shareholders, such as employees or the local community, in rejecting a takeover bid.

• Poison pills, which turn non-voting shares into voting shares when a hostile bid is launched, are approved by state law.

The statement from Lilly’s board in the proxy specifically noted that Indiana law would help “to discourage a would-be acquirer from proceeding with a proposal that undervalues the company.”•

ADVERTISEMENT

  • awesome
    Hey, I read a lot of blogs on a daily basis and for the most part
    people lack substance but
    I just wanted to make a quick comment to say GREAT blog!â?¦..
    I'll be checking in on a regularly nowâ?¦.
    Keep up the good work!
    Nike outlet
  • Lilly hiring questioned
    Considering the great scientific breakthroughs marking Lilly milestones, one wonders if the qualifications were changed for researchers. Is is time to re-examine the value of great minds working together underroof versus oursourcing or acquiring billion-dollar companies just for their "Brains" (Pipelines) ?

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
 
Subscribe to IBJ
  1. Why not take some time to do some research before traveling to that Indiana town or city, and find the ones that are no smoking either inside, or have a patio? People like yourself are just being selfish, and unnecessarily trying to take away all indoor venues that smokers can enjoy themselves at. Last time I checked, it is still a free country, and businesses do respond to market pressure and will ban smoking, if there's enough demand by customers for it(i.e. Linebacker Lounge in South Bend, and Rack and Helen's in New Haven, IN, outside of Fort Wayne). Indiana law already unnecessarily forced restaurants with a bar area to be no smoking, so why not support those restaurants that were forced to ban smoking against their will? Also, I'm always surprised at the number of bars that chose to ban smoking on their own, in non-ban parts of Indiana I'll sometimes travel into. Whiting, IN(just southeast of Chicago) has at least a few bars that went no smoking on their own accord, and despite no selfish government ban forcing those bars to make that move against their will! I'd much rather have a balance of both smoking and non-smoking bars, rather than a complete bar smoking ban that'll only force more bars to close their doors. And besides IMO, there are much worser things to worry about, than cigarette smoke inside a bar. If you feel a bar is too smoky, then simply walk out and take your business to a different bar!

  2. As other states are realizing the harm in jailing offenders of marijuana...Indiana steps backwards into the script of Reefer Madness. Well...you guys voted for your Gov...up to you to vote him out. Signed, Citizen of Florida...the next state to have medical marijuana.

  3. It's empowering for this niche community to know that they have an advocate on their side in case things go awry. http://www.youtube.com/watch?v=Lrst9VXVKfE

  4. Apparently the settlement over Angie's List "bundling" charges hasn't stopped the practice! My membership is up for renewal, and I'm on my third email trying to get a "basic" membership rather than the "bundled" version they're trying to charge me for. Frustrating!!

  5. Well....as a vendor to both of these builders I guess I have the right to comment. Davis closed his doors with integrity.He paid me every penny he owed me. Estridge,STILL owes me thousands and thousands of dollars. The last few years of my life have been spent working 2 jobs, paying off the suppliers I used to work on Estridge jobs and just struggling to survive. Shame on you Paul...and shame on you IBJ! Maybe you should have contacted the hundreds of vendors that Paul stiffed. I'm sure your "rises from the ashes" spin on reporting would have contained true stories of real people who have struggled to find work and pay of their debts (something that Paul didn't even attempt to do).

ADVERTISEMENT